<PAGE>
As filed with the Securities and Exchange Commission on March 9, 1994
Securities Act File No.
Investment Company Act File No.
==========================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
Form N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 /x/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. --- / /
-----------------
EMERGING AMERICA FUND, INC.
(Exact name of registrant as specified in charter)
-----------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(609) 282-2000
(Registrant's Telephone Number, including Area Code)
Arthur Zeikel
Emerging America Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address, Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
------------------------
Copies to:
Michael J. Hennewinkel, Esq. Thomas R. Smith, Jr., Esq.
Fund Asset Management Douglas A. Sgarro, Esq.
Box 9011 Brown & Wood
Princeton, New Jersey 08543 One World Trade Center
New York, New York 10048-0557
Approximate date of proposed offering: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following./ /
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Being Price Per Offering Registration
Title of Securities Being Registered(1) Unit Price(1) Fee
Registered
<S> <C> <C> <C> <C>
Common Stock (par value 66,667 $15.00 $1,000,005 $344.83
$.10 per share) . . . . .
(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
the Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
=========================================================================
<PAGE>
EMERGING AMERICA FUND, INC.
----------------------
CROSS REFERENCE SHEET
Pursuant to Rule 404(c)
Item Number, Form N-2 Caption in Prospectus
--------------------- ---------------------
Part A - INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page . . . . . . . . Cover Page
2. Inside Front and Outside Back Cover
Pages . . . . . . . . . . . . . . . . . Cover Page, Underwriting
3. Fee Table and Synopsis . . . . . . . . . Fee Table and Prospectus
Summary
4. Financial Highlights . . . . . . . . . . Not Applicable
5. Plan of Distribution . . . . . . . . . . Underwriting
6. Selling Shareholders . . . . . . . . . . Not Applicable
7. Use of Proceeds . . . . . . . . . . . . Use of Proceeds
8. General Description of the Registrant . The Fund; Investment
Objective and Policies;
Other Investment
Policies and Practices
9. Management . . . . . . . . . . . . . . . Directors and Officers;
Investment Advisory and
Management Arrangements
10. Capital Stock, Long-Term Debt and Other
Securities . . . . . . . . . . . . . . . Description of Shares
11. Defaults and Arrears on Senior
Securities . . . . . . . . . . . . . . . Not Applicable
12. Legal Proceedings . . . . . . . . . . . Not Applicable
13. Table of Contents of the Statement of
Additional Information . . . . . . . . . Not Applicable
Part B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page . . . . . . . . . . Not Applicable
15. Table of Contents . . . . . . Not Applicable
16. General Information and History
Not Applicable
17. Investment Objectives and
Policies . . . . . . . . . . Investment Objective and
Policies; Other Investment
Policies and Practices;
Investment Restrictions
18. Management . . . . . . . . . . Directors and Officers;
Investment Advisory and
Management Arrangements
19. Control Persons and Principal
Holders of Securities . . . Investment Advisory and
Management Arrangements
20. Investment Advisory and Other
Services . . . . . . . . . . Investment Advisory and
Management Arrangements;
Underwriting; Transfer Agent,
Dividend Disbursing Agent and
Registrar, Custodian; Experts
21. Brokerage Allocation and Other
Practices . . . . . . . . . Portfolio Transactions
22. Tax Status . . . . . . . . . . Taxes
23. Financial Statements . . . . . Statement of Assets, Liabilities
and Capital
Part C - OTHER INFORMATION
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED --------------
PROSPECTUS
----------
--------------- Shares
EMERGING AMERICA FUND, INC.
Common Stock
-------------------
Emerging America Fund, Inc. is a non-diversified, closed-end
management investment company seeking long-term capital appreciation by
investing primarily in equity and, to a lesser extent, debt securities
of corporate and governmental issuers in designated emerging market
countries located in Central and South America and the Caribbean
("emerging America countries"). For purposes of its investment
objective, the emerging America countries in which the Fund may invest
shall consist of all countries in Central and South America and the
Caribbean. Under current market conditions, the Fund intends to
emphasize investments in corporate and governmental issuers in
Argentina, Brazil, Chile and Venezuela. The investment objective of the
Fund reflects the belief that the securities markets of the emerging
America countries present attractive investment opportunities. A number
of such countries have been instituting economic, financial and
political reforms encouraging greater market orientation and less
government intervention in economic affairs. The Fund believes that
these measures have the potential to offer long-term benefits to the
securities markets of such countries. Under normal market conditions at
least 65% of the Fund's total assets will be invested in securities of
corporate and governmental issuers in emerging America countries. There
can be no assurance that the Fund's investment objective will be
achieved.
Investments in securities of issuers in emerging America countries
involve special considerations and risks which are not typically present
in investments in the securities of U.S. issuers. In addition, the Fund
may invest in debt securities that are in the lower rating categories or
unrated and may be in default as to payment of principal and/or interest
at the time of acquisition by the Fund. Such securities generally
involve greater volatility of price and risks to principal and income
than securities in the higher rating categories. The Fund may invest
without limitation in securities that are not readily marketable.
Because the Fund is newly organized, its shares have no history of
public trading. Shares of closed-end investment companies frequently
trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively
short period after completion of the public offering. See "Risk Factors
and Special Considerations."
Prior to this offering, there has been no public market for the
Common Stock of the Fund. The Fund's shares of Common Stock have been
approved for listing on the ------------ Stock Exchange under the symbol
"------------". However, during an initial period which is not expected
to exceed four weeks from the date of this Prospectus, the Fund's shares
will not be listed on any securities exchange. During such period,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
does not intend to make a market in the Fund's shares. Consequently, it
is anticipated that an investment in the Fund will be illiquid during
such period. The Investment Adviser of the Fund is Fund Asset
Management, L.P., an affiliate of Merrill Lynch Asset Management, L.P.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing and should be read
and retained for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION> Maximum Maximum Proceeds to
Price Sales the Fund(3)
to Public(1) Load(1)(2)
<S> <C> <C> <C>
Per Share . . . . . . $15.00 $ $
Total(4) . . . . . . $ $ $
</TABLE>
(footnotes on next page)
----------------------------------
The shares are offered by Merrill Lynch, subject to prior sale,
when, as and if issued by the Fund and accepted by Merrill Lynch,
subject to approval of certain legal matters by counsel for Merrill
Lynch and certain other conditions. Merrill Lynch reserves the right to
withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares will be made in New
York, New York on or about --------------, 1994.
-----------------------------------
Merrill Lynch & Co.
-----------------------------------
The date of this Prospectus is ----------------, 1994
<PAGE>
(Continued from cover page)
(1) The "Maximum Price to Public" and "Maximum Sales Load" per share
will be reduced to $------------ for purchases in single
transactions of between ------- and ------- shares and to $--------
for purchases in single transactions of ---------- or more shares.
See "Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify
Merrill Lynch against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(3) Before deducting organizational and offering costs payable by the
Fund estimated at $----------.
(4) The Fund has granted Merrill Lynch an option, exercisable for 45
days after the date hereof, to purchase up to an additional -------
--- shares to cover over-allotments. If all such shares are
purchased, the total Maximum Price to Public, Maximum Sales Load
and Proceeds to the Fund will be $--------, $-------- and $-------,
respectively. See "Underwriting."
The Fund is designed primarily for long-term investors and should
not be considered a vehicle for trading purposes. The address of the
Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2000.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
FUND'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN OVER-THE-COUNTER MARKETS OR OTHERWISE. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with the more
detailed information appearing elsewhere in this Prospectus.
The Fund Emerging America Fund, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management
investment company investing primarily in equity
and, to a lesser extent, debt securities of
corporate and governmental issuers in designated
emerging America countries. See "The Fund."
Conversion to The Fund's Articles of Incorporation require the Board
Open-End Status of Directors to submit a proposal to convert the Fund
to an open-end investment company to the Fund's
shareholders during the second quarter of 1996.
However, if in the Board's discretion conversion at
that time would not be in the best interests of the
shareholders of the Fund, the Board retains the
right to withhold the proposal until such time
as the Board deems conversion to be in the best
interests of the shareholders. Conversion to
an open-end investment company would make the
Common Stock redeemable in cash upon demand by
shareholders at the next determined net asset
value. So as not to force the Fund to
liquidate portfolio securities at a
disadvantageous time, in order to meet requests
for redemption, the Fund is authorized to
borrow up to 20% of its total asset value for
the purpose of redeeming its shares. If
shareholder approval of conversion to an open-
end investment company is not obtained, the
Fund will continue as a closed-end investment
company. See "The 1996 Vote to Convert to
Open-End Status."
The Offering The Fund is offering --------------- shares of
Common Stock at a maximum initial offering price of
$15.00 per share, except that the price will be
reduced to $------ for purchases in single
transactions of between ------- and -------- shares
and to --------- for purchases in single
transactions of --------- or more shares. The
shares are being offered by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch").
Merrill Lynch has been granted an option,
exercisable for 45 days from the date of this
Prospectus, to purchase up to -------------
additional shares of Common Stock to cover over-
allotments. See "Underwriting."
Investment The investment objective of the Fund is to seek long-
Objective and term capital appreciation and Policies by investing
Policies primarily in equity and, to a lesser extent, debt
securities of corporate and governmental issuers in
designated emerging market countries located in
Central and South America and the Caribbean
("emerging America countries"). For purposes of its
investment objective, the emerging America countries
in which the Fund may invest shall consist of all
countries in Central and South America and the
Caribbean. Under current market conditions, the
Fund intends to emphasize investments in corporate
and governmental issuers in Argentina, Brazil, Chile
and Venezuela. It is not expected that Mexico will
be a significant focus of the Fund's investment
activities. The government and government-related
debt securities or obligations are referred to
herein as "sovereign debt securities".
The investment objective of the Fund reflects the
belief that the securities markets of the emerging
America countries present attractive investment
opportunities. A number of such countries have been
instituting economic, financial and political
reforms encouraging greater market orientation and
less
3
<PAGE>
government intervention in economic affairs. The
Fund believes that these measures have the potential
to offer long-term benefits to the securities
markets of such countries. There can be no
assurance that the Fund's investment objective will
be achieved. See "Investment Objective and
Policies."
In recent years, there has been a significant trend
in emerging America countries towards democracy and
market-oriented economic reform. While there have
been distinct differences in the approaches taken by
the various countries and the degrees of success in
accomplishing the economic objectives, the countries
have generally sought to reduce the government's
role in economic affairs and implement policy
initiatives designed to control inflation, reduce
financial deficits and external debt, establish
stable currency exchange rates, liberalize trade
restrictions, increase foreign investment, privatize
state-owned companies and develop and modernize the
securities markets. While considerable difficulties
remain, the economies of certain emerging America
countries have improved, and these improvements have
been reflected in the performance of the securities
markets and improved credit fundamentals for the
sovereign and corporate debt securities issued in
such markets.
In addition to making equity investments, the Fund
will seek capital appreciation through investment in
sovereign and corporate debt securities of issuers
in emerging America countries. Such debt securities
may be lower rated or unrated obligations of
sovereign or corporate issuers. The Fund's
investments in sovereign debt will consist of debt
securities or obligations issued or guaranteed by
foreign governments, their agencies,
instrumentalities and political subdivisions and by
entities controlled or sponsored by such
governments. The Fund may also invest in interests
in entities organized and operated for the purpose
of restructuring the investment characteristics of
sovereign debt. The restructured sovereign debt
will include Brady Bonds, which are debt securities
issued under the framework of the Brady Plan, an
initiative established in 1989 as a mechanism for
debtor nations to restructure their outstanding
external commercial bank indebtedness.
Since such debt securities frequently trade in the
secondary markets at substantial discounts, there is
opportunity for capital appreciation to the extent
there is a favorable change in the market perception
of the creditworthiness of the issuer. Capital
appreciation in debt securities may also arise as a
result of a favorable change in relative foreign
exchange rates or in relative interest rate levels.
In accordance with its investment objective, the
Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates.
The receipt of income from such debt securities is
incidental to the Fund's objective of long-term
capital appreciation. The Fund may, from time to
time, invest in debt securities with relatively high
yields (as compared to other debt securities meeting
the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such
securities will experience substantial capital
appreciation. Such income can be used, however, to
offset the operating expenses of the Fund.
Further, the Fund may invest in debt securities that
are in default as to payments of principal and/or
interest at the time of acquisition by the Fund
("Distressed Securities"). The Fund will invest
in Distressed Securities only when the Investment
Adviser believes it is reasonably likely that the
issuer of the securities
4
<PAGE>
will make an exchange offer or will be the
subject of a plan of reorganization. The Fund
is authorized to employ a variety of investment
techniques to hedge against market and currency
risk, although at the present time suitable hedging
instruments may not be available with respect to
securities of corporate and governmental issuers in
emerging America countries on a timely basis and on
acceptable terms. Furthermore, even if hedging
techniques are available, the Fund will only engage
in hedging activities from time to time and may not
necessarily be engaging in hedging activities when
market or currency movements occur.
Benefits of Investment in shares of Common Stock of the Fund offers
Investment several benefits. Many investors, particularly
in the Fund individuals, lack the information or capability to
invest in emerging America countries. It also may
not be permissible for such investors to invest
directly in the capital markets of certain emerging
America countries. The Fund offers investors the
possibility of obtaining capital appreciation
through a diversified portfolio comprised of
securities of emerging America issuers. In managing
such portfolio, the Investment Adviser will provide
the Fund and its shareholders with professional
analysis of investment opportunities and the use of
professional money management techniques. In
addition, unlike many intermediary investment
vehicles, such as closed-end investment companies
that are limited to investment in a single country,
the Fund has the ability to diversify investment
risk among the capital markets of a number of
countries.
Listing Prior to this offering, there has been no public
market for Common Stock of the Fund. The Fund's
shares of Common Stock have been approved for
listing on the ___________ Stock Exchange. However,
during an initial period which is not expected to
exceed four weeks from the date of this Prospectus,
the Fund's shares will not be listed on any
securities exchange. During such period, Merrill
Lynch does not intend to make a market in the Fund's
shares. Consequently, it is anticipated that an
investment in the Fund will be illiquid during such
period. See "Underwriting."
Investment Adviser Fund Asset Management, L.P. is the Fund's investment
adviser (the "Investment Adviser") and is
responsible for the management of the Fund's
investment portfolio and for providing
administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a
monthly fee at the annual rate of 1.00% of the
Fund's average weekly net assets. The Investment
Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and
controlled by Merrill Lynch & Co., Inc. ("ML &
Co."). The Investment Adviser, or MLAM, acts as the
investment adviser for over 90 other registered
management investment companies. The Investment
Adviser also offers portfolio management and
portfolio analysis services to individuals and
institutions. As of -----------------, 1994, the
Investment Adviser and MLAM had a total of
approximately $---------- billion in investment
company and other portfolio assets under management,
including accounts of certain affiliates of the
Investment Adviser. See "Investment Advisory and
Management Arrangements."
5
<PAGE>
Dividends and It is the Fund's intention to distribute all of its net
Distributions investment income. Dividends from such net investment
income are paid at least annually. All
net realized long-term and short-term capital
gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Dividends and
Distributions."
Automatic Dividend All dividends and capital gains distributions
Reinvestment automatically will be reinvested in additional
Plan shares of the Fund unless a shareholder
elects to receive cash. Shareholders whose shares
are held in the name of a broker or nominee should
contact such broker or nominee to confirm that they
may participate in the Fund's dividend reinvestment
plan. See "Automatic Dividend Reinvestment Plan."
Mutual Fund Purchasers of shares of the Fund in this offering will
Investment Option have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares
(the "Original Shares") in Class A initial sales
charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class A Shares") at
their net asset value, without the imposition of the
initial sales charge, if the conditions set forth
below are satisfied. First, the sale of the
Original Shares must be made through Merrill Lynch,
and the net proceeds therefrom must be reinvested
immediately in Eligible Class A Shares. Second, the
Original Shares must have either been acquired in
this offering or be shares representing reinvested
dividends from shares acquired in this offering.
Third, the Original Shares must have been maintained
continuously in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option. Class A
shares of certain of the mutual funds may be subject
to an account maintenance fee at an annual rate of
up to 0.25% of the average daily net asset value of
such mutual fund. See "Mutual Fund Investment
Option."
Custodian ---------- will act as custodian for the Fund's
assets and will employ foreign sub-custodians
approved by the Fund's Board of Directors in
accordance with regulations of the Securities and
Exchange Commission. See "Custodian."
Transfer Agent, ________ will act as transfer agent, dividend disbursing
Dividend agent and registrar for the Fund. See "Transfer Agent,
Disbursing Agent Dividend Disbursing Agent and Registrar."
and Registrar
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
General
The Fund is a newly organized, non-diversified, closed-end
management investment company and has no operating history. As described
under "Listing" above, it is anticipated that an investment in the Fund
will be illiquid prior to the listing of the Fund's shares of Common
Stock on the ------------ Stock Exchange. Shares of closed-end
investment companies frequently trade at a discount from their net asset
value. This risk may be greater for investors expecting to sell their
shares in a relatively short period after completion of the public
offering. Accordingly, the Common Stock of the Fund is designed
primarily for long-term investors and should not be considered a vehicle
for trading purposes.
Because the Fund intends to invest primarily in equity and, to a
lesser extent, debt securities of corporate and governmental issuers in
emerging America countries, an investor in the Fund should be aware of
certain risk factors and special considerations relating to investing in
such securities. More generally, the investor should also be aware of
risks and considerations related to international investing and
investing in smaller capital markets, each of which may involve risks
which are not typically associated with investments in securities of
U.S. issuers. Consequently, an investment in the Fund should not be
considered a balanced investment program.
Investing on an International Basis and in Countries with Smaller
Capital Markets
Investing on an international basis and in countries with smaller
capital markets involves certain risks not involved in domestic
investments, including fluctuations in foreign exchange rates, future
political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions.
Since the Fund will invest heavily in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the portfolio and
the unrealized appreciation or depreciation of investments. In
addition, with respect to certain foreign countries, there is the
possibility of expropriation of assets, confiscatory taxation, economic,
political or social instability or diplomatic developments which could
affect investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rates of inflation,
capital reinvestment, resources, self-sufficiency and balance of
payments position. Certain foreign investments may also be subject to
foreign withholding taxes. These risks are often heightened for
investments in smaller capital markets and emerging America countries.
Most of the securities held by the Fund will not be registered with
the Securities and Exchange Commission, nor will the issuers thereof be
subject to the reporting requirements of such agency. Accordingly,
there may be less publicly available information about foreign issuers
than about U.S. issuers, and such foreign issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of U.S. issuers. As a result, traditional
investment measurements, such as price/earnings ratios, as used in the
United States, may not be applicable to certain smaller capital markets.
Foreign issuers, and issuers in smaller capital markets in particular,
are not generally subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to domestic companies.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays
in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems
could cause the Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems
could result either in losses to the Fund due to subsequent declines
in the value of such portfolio security or, if the Fund has entered into
a contract to sell the security, could result in possible liability to
the purchaser.
7
<PAGE>
There is generally less government supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the
United States. Further, brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the
United States.
Risks Relating to Investment in Emerging America Countries
Certain of the risks associated with international investments are
heightened for investments in emerging America countries. The
securities markets of emerging America countries are not as large as the
U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity with high price volatility. Certain
markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as
well as a high concentration of investors and financial intermediaries.
Brokers in emerging America countries typically are fewer in number and
less capitalized than brokers in the United States. Also, the Fund may
not invest more than 25% of its total assets in the sovereign debt
securities of any one emerging America country. These factors, combined
with other U.S. regulatory requirements for closed-end companies and the
restrictions on foreign investment discussed below, result in
potentially fewer investment opportunities for the Fund, limit the
degree to which the Fund may diversify among securities, industries and
countries and may have an adverse impact on the investment performance
of the Fund.
The investment objective of the Fund reflects the belief that the
securities markets of the emerging America countries present attractive
investment opportunities. A number of such countries have been
instituting economic, financial and political reforms encouraging
greater market orientation and less government intervention in economic
affairs. The Fund believes that these measures have the potential to
offer long-term benefits to the securities markets of such countries.
The economies of certain emerging America countries have experienced
considerable difficulties in the past decade. Although there have been
significant improvements in recent years, the economies of certain
emerging America countries continue to experience significant problems,
including high inflation rates and high interest rates. The continued
development of the economies and securities markets of emerging America
countries will require continued economic and fiscal discipline which
has been lacking at times in the past, as well as stable political and
social conditions. Recovery may also be influenced by international
economic conditions, particularly those in the U.S., and by world prices
for oil and other commodities. There is no assurance that the economic
initiatives will be successful.
Emerging economies present certain risks that do not exist in more
established economies; especially significant is that political and
social uncertainties exist for many of the emerging America countries.
Many of the emerging America 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. In addition,
governments of many emerging America 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 America countries, which could affect
private sector companies and the Fund, as well as the value of
securities in the Fund's portfolio.
The legal systems in certain emerging America 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 America countries. Similarly, the rights of investors in
emerging America 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 America country.
In addition to the relative lack of publicly available information
about emerging America issuers and the possibility that such issuers may
not be subject to the same accounting, auditing and financial reporting
standards
8
<PAGE>
as U.S. issuers, inflation accounting rules in some emerging
America countries require, for issuers that keep accounting records in
the local currency, for both tax and accounting purposes, that certain
assets and liabilities be restated on the issuer'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 America issuers.
Satisfactory custodial services for investment securities may not
be available in some emerging America countries, which may result in the
Fund incurring additional costs and delays in providing transportation
and custody services for such securities outside such countries.
As a result, management of the Fund may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular emerging America
country. The Fund may invest in countries in which foreign investors,
including management of the Fund, have had no or limited prior
experience.
Restrictions on Foreign Investments
Some emerging America 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 issuer or limit the investment by foreign persons to
only a specific class of securities of an issuer which may have less
advantageous terms (including price) than securities of the issuer
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. See "Selected Economic and Market
Data".
Substantial limitations may exist in certain countries with respect
to the Fund's ability to repatriate investment income, capital or
proceeds of sales of securities by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
A number of publicly traded closed-end investment companies have
been organized to facilitate indirect foreign investment in emerging
America countries, and certain of such countries including Brazil and
Chile, have specifically authorized such funds. There also are
investment opportunities in certain of such countries in pooled vehicles
that resemble open-end investment companies. Under the Investment
Company Act, the Fund may invest up to 10% of its total assets in shares
of other investment companies and up to 5% of its total assets in any
one investment company, provided that the investment does not represent
more than 3% of the voting stock of the related acquired investment
company. This restriction on investments in securities of investment
companies may limit opportunities for the Fund to invest indirectly in
certain emerging America 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.
Sovereign Debt
Certain emerging America countries are among the highest debtors to
commercial banks and foreign governments. Investment in sovereign debt
securities involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to
repay the principal and/or interest when due in accordance with the
terms of such debt. A governmental entity's willingness or ability to
repay principal and pay
9
<PAGE>
interest when due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on
the date a payment is due, the relative size of the debt service burden
to the economy as a whole, the governmental entity's policy towards the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments,
multinational agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due
may result in the cancellation of such third parties' commitments to
lend funds to the governmental entity, which may further impair such
debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt securities, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy
proceeding by which sovereign debt securities on which a governmental
entity has defaulted may be collected in whole or in part.
The sovereign debt securities instruments in which the Fund may
invest involve great risk and are deemed to be the equivalent in terms
of quality to high yield/high risk securities discussed below and are
subject to many of the same risks as such securities. Similarly, the
Fund may have difficulty disposing of certain sovereign debt securities
obligations because there may be a thin trading market for such
securities.
No Rating Criteria for Debt Securities
The Fund has established no rating criteria for the debt securities
in which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating
categories of nationally recognized statistical rating organizations,
such as Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's"), and unrated securities of comparable quality
(such lower rated and unrated securities are referred to herein as "high
yield/high risk securities") are speculative with respect to the
capacity to pay interest and repay principal in accordance with the
terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. See "Appendix A--
Ratings of Fixed Income Securities-- Appendix A". These securities are
commonly referred to as "junk" bonds. In purchasing such securities,
the Fund will rely on the Investment Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer of such
securities. The Investment Adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of
the issuer's management and regulatory matters.
The market values of high yield/high risk securities tend to
reflect individual issuer developments to a greater extent than do
higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Issuers of high yield/high risk
securities may be highly leveraged and may not have available to them
more traditional methods of financing. Therefore, the risk associated
with acquiring the securities of such issuers generally is greater than
is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates,
issuers of high yield/high risk securities may be more likely to
experience financial stress especially if such issuers are highly
leveraged. During such periods, service of debt obligations also may be
adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to
default by the issuer is significantly greater for the holders of
high yield/high risk securities because such securities may be unsecured
and may be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption
features which would permit an issuer to repurchase the securities from
the Fund. If a call were exercised by the issuer during a period of
declining interest rates, the
10
<PAGE>
Fund likely would have to replace such called securities with
lower yielding securities, thus decreasing the net investment
income to the Fund and dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high
risk securities because there may be a thin trading market for such
securities. To the extent that a secondary trading market for high
yield/high risk securities does exist, it is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet
the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. Reduced
secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield/high risk
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers of prices for actual sales. The
Fund's Directors, or the Investment Adviser will carefully consider the
factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or
illiquid and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based
on fundamental analysis, also may decrease the value and liquidity of
high yield/high risk securities, particularly in a thinly traded market.
Factors adversely affecting the market value of high yield/high risk
securities are likely to adversely affect the Fund's net asset value.
In addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligations.
Distressed Securities
Investment in Distressed Securities is speculative and involves
significant risk. The Fund only will make such investments when the
Investment Adviser believes it is reasonably likely that the issuer of
the securities will make an exchange offer or will be the subject of a
plan of reorganization; however, there can be no assurance that such an
exchange offer will be made or that such a plan of reorganization will
be adopted. In addition, a significant period of time may pass between
the time at which the Fund makes its investment in Distressed Securities
and the time that any such exchange offer or plan of reorganization is
completed. During this period, it is unlikely that the Fund will
receive any interest payments on the Distressed Securities, the Fund
will be subject to significant uncertainty as to whether or not the
exchange offer or plan of reorganization will be completed, and the Fund
may be required to bear certain expenses to protect its interest in the
course of negotiations surrounding any potential exchange offer or plan
of reorganization. In addition, even if an exchange offer is made or a
plan of reorganization is adopted with respect to Distressed Securities
held by the Fund, there can be no assurance that the securities or other
assets received by the Fund in connection with such exchange offer or
plan of reorganization will not have a lower value or income potential
than anticipated when the investment was made. Moreover, any securities
received by the Fund upon completion of an exchange offer or plan of
reorganization may be restricted as to resale. In addition, as a result
of the Fund's participation in negotiations with respect to any exchange
offer or plan of reorganization with respect to an issuer of Distressed
Securities, the Fund may be precluded from disposing of such securities.
Derivatives Investments
In order to seek to hedge various portfolio positions, the Fund may
invest in certain instruments which may be characterized as derivatives.
Investments in indexed securities, including inverse securities, subject
the Fund to the risks associated with changes in the particular indices,
which may include reduced or eliminated interest payments and losses of
invested principal. Interest rate transactions involve the risk of an
imperfect correlation between the index used in the hedging transactions
and that pertaining to the securities which are the subject of such
transactions. Similarly, utilization of options and futures transactions
involve the risk of imperfect correlation inmovements in the price of options
and futures and movements in the price of the securities or interest rates
which are the subject of the hedge. For a further discussion of the
risks associated with these investments, see "Investment
11
<PAGE>
Objective and Policies -- Other Investments," "Other Investment Policies
and Practices -- Portfolio Strategies Involving Options and Futures" and
"Appendix B--Options and Futures Transactions."
Illiquid Investments
The Fund may invest in illiquid securities. Investment of the
Fund's assets in relatively illiquid securities may restrict the ability
of the Fund to dispose of its investments in a timely fashion and for a
fair price as well as its ability to take advantage of market
opportunities. The risks associated with illiquidity will be
particularly acute in situations in which the Fund's operations require
cash, such as when the Fund repurchases shares or pays dividends or
distributions, and could result in the Fund borrowing to meet short-term
cash requirements or incurring capital losses on the sale of illiquid
investments. Further, issuers whose securities are not publicly traded
are not subject to the disclosure and other investor protection
requirements which would be applicable if their securities were publicly
traded. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's
ability to conduct portfolio transactions in such securities. In
addition, the Fund may invest in privately placed securities which may
or may not have registration rights. Such securities may not be sold
unless registered under applicable securities laws or sold in a
transaction exempt from registration.
Withholding and Other Taxes
Income and capital gains on securities held by the Fund may be
subject to withholding and other taxes imposed by emerging America
countries, which would reduce the return to the Fund on those
securities. The Fund intends, unless ineligible, to elect to "pass-
through" to the Fund's shareholders, as a deduction or credit, the
amount of foreign taxes paid by the Fund. The taxes passed through to
shareholders will be included in each shareholder's income. Certain
shareholders, including non-U.S. shareholders, will not be entitled to
the benefit of a deduction or credit with respect to foreign taxes paid
by the Fund. Other taxes, such as transfer taxes, may be imposed on the
Fund, but would not give rise to a credit, or be eligible to be passed
through to shareholders.
Foreign Subcustodians and Securities Depositories
Rules adopted under the Investment Company Act permit the Fund to
maintain its foreign securities and cash in the custody of certain
eligible non-U.S. banks and securities depositories. Certain banks in
foreign countries may not be eligible subcustodians for the Fund, in
which event the Fund may be precluded from purchasing securities in
certain emerging America countries in which it otherwise would invest or
which may result in the Fund's incurring additional costs and delays in
providing transportation and custody services for such securities
outside of such countries. Other banks that are eligible foreign
subcustodians may be recently organized or otherwise lack extensive
operating experience. In addition, in certain countries there may be
legal restrictions or limitations on the ability of the Fund to recover
assets held in custody by foreign subcustodians in the event of the
bankruptcy of the subcustodian.
Borrowings to Meet Redemptions
In the event it converts to an open-end investment company, the
Fund is authorized to borrow up to 20% of its total assets in order to
meet redemptions so as not to force the Fund to liquidate securities at
a disadvantageous time. Any such borrowing will create expenses for
the Fund and may increase the potential for volatility of the net asset
value of the Fund.
Net Asset Value Discount
The Fund is a newly organized company with no prior operating
history. Prior to this offering, there has been no public market for
the Fund's Common Stock. Shares of closed-end investment companies have
in the past frequently traded at a discount from their net asset values
and initial offering price. This characteristic of shares of a closed-
end fund is a risk separate and distinct from the risk that a fund's net
asset value will decrease. The
12
<PAGE>
Fund cannot predict whether its own shares will trade at, below or
above net asset value. This risk of loss associated with purchasing
shares of a closed-end investment company is more pronounced for
investors who purchase in the initial public offering and who
wish to sell their shares in a relatively short period of time.
Non-Diversification
The Fund is classified as a non-diversified investment company
under the Investment Company Act, which means that the Fund is not
limited by the Investment Company Act in the proportion of its assets
that may be invested in the obligations of a single issuer. The Fund,
however, intends to comply with the diversification requirements imposed
by the Code for qualification as a regulated investment company. Thus,
the Fund may invest a greater proportion of its assets in the securities
of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. See
"Taxes" and "Investment Restrictions."
Conversion to Open-End Status
The Fund's Articles of Incorporation require the Board of Directors
to submit a proposal to shareholders to convert the Fund to an open-end
investment company during the second quarter of 1996, unless the Board
of Directors determines that conversion at that time would not be in the
best interest of shareholders. Conversion to open-end status would
require possibly disadvantageous changes to the Fund's investment
policies and could have an adverse effect on the management of the
Fund's investment portfolio. See "The 1996 Vote to Convert to Open-End
Status."
Anti-Takeover Provisions
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of limiting the ability of other
persons to acquire control of the Fund. In certain circumstances, these
provisions might also inhibit the ability of holders of Common Stock to
sell their shares at a premium over prevailing market prices. The
Fund's Board of Directors has determined that these provisions are in
the best interests of shareholders. See "Description of Shares--Certain
Provisions of the Articles of Incorporation."
Operating Expenses
The Fund's estimated annual operating expenses are higher than
those of many other investment companies investing exclusively in the
securities of U.S. issuers. The operating expenses are, however,
believed by the Investment Adviser to be comparable to expenses of other
closed-end management investment companies that invest primarily in the
securities of issuers in emerging America countries with investment
objectives similar to the investment objective of the Fund.
13
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Maximum Sales Load (as a percentage of offering price)........ . %(a)
Dividend Reinvestment and Cash Purchase Plan Fees............. None
Annual Expenses (as a percentage of net assets attributable to
Common Stock)(b)
Management Fees(c)............................................ . %(b)
Interest Payments on Borrowed Funds........................... None
Other Expenses................................................ . %
----------
Total Annual Expenses............................................ . %
==========
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment, including the
maximum front-end sales load of $ $ $ $
$------- and assuming (1) total
annual expenses of ---% and (2)
a 5% annual return throughout
the periods:
--------------
(a) Reduced to -------% for purchases in single transactions of between
-------- and ------- shares and to -----% for purchases in single
transactions of ------- or more shares. See the cover page of this
Prospectus and "Underwriting."
(b) See "Investment Advisory and Management Arrangements."
</TABLE>
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The expenses set forth under "Other
Expenses" in the Fee Table above are based on estimated amounts through
the end of the Fund's first fiscal year on an annualized basis. The
Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. The Example should not
be considered a representation of future expenses or annual rates of
return, and actual expenses or annual rates of return may be more or
less than those assumed for purposes of the Example.
14
<PAGE>
THE FUND
Emerging America Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on February 25,
1994, and has registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). See "Description of Shares."
The Fund's principal office is located at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and its telephone number is (609) 282-
2000.
THE 1996 VOTE TO CONVERT TO OPEN-END STATUS
The Fund's Articles of Incorporation require the Board of Directors
to submit a proposal to convert the Fund to an open-end investment
company to shareholders during the second quarter of 1996. However, if
in the Board's discretion, conversion at that time would not be in the
best interest of shareholders of the Fund, the Board of Directors
retains the right to withhold such proposal until such time as the Board
deems conversion to be in the best interest of the shareholders.
Approval of such a proposal would require the affirmative vote of a
majority of the outstanding shares entitled to be voted thereon.
Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by the Investment Company Act) at the next determined net
asset value of such shares, less such redemption charges, if any, as
might be in effect at the time of redemption. Accordingly, open-end
investment companies are subject to continuous asset in-flows and out-
flows that can complicate portfolio management. All redemptions will be
made in cash. If shareholders vote to convert the Fund to open-end
status it is anticipated that redemption of shares of the Fund will be
subject to a redemption charge of up to 2%, and may be subject to an
ongoing account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of the Fund.
In considering whether to submit such proposal to the Fund's
shareholders, the Fund's Board of Directors will consider a number of
factors, including the effect on the Fund's investment policies and
portfolio management and whether shares of the Fund have historically,
and continue to, trade at a discount from their net asset value. For
example, in light of the position of the Securities and Exchange
Commission (the "Commission") that illiquid securities and certain
securities subject to legal or contractual limitations on resale not
exceed 15% of the total assets of a registered open-end investment
company, any attempt to convert the Fund to an open-end company will
have to take into account the percentage of such securities in the
Fund's portfolio at the time, and other relevant factors. The Fund
cannot predict whether, on this basis, it would be able to effect any
such conversion or whether, if relief from the Commission's position
were required, it could be obtained. The conversion of the Fund to
open-end status will require a change to the Fund's fundamental
objective and policies to the extent such fundamental objective and
policies are inconsistent with those permissible for an open-end
investment company.
If the Fund is converted to an open-end investment company, it
could be required to liquidate portfolio securities to meet requests for
redemption and the shares would no longer be listed on the ------------
Stock Exchange. If a large volume of shares is offered for redemption
at one time the Fund could be forced to liquidate portfolio securities
at a disadvantageous, time causing a loss to the Fund. To prevent such
a loss, the Fund is authorized to borrow up to 20% of its net asset
value for purposes of redeeming shares of the Fund. The Fund is not
otherwise authorized to borrow or issue senior securities. The
necessity to liquidate portfolio securities could affect the Fund's
ability to meet its investment objective or to use investment policies
and techniques that are more appropriate for a fixed portfolio than a
portfolio subject to cash in-flows and out-flows. If the Fund converts
to open-end status, it may commence a continuous offering of its shares
as is the case with most mutual funds.
In the event shareholder approval of the proposal to convert to an
open-end fund is not obtained, the Fund will continue as a closed-end
investment company.
15
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering will be approximately $------------
(or approximately $----------- assuming Merrill Lynch exercises
the over-allotment option in full) after payment of the sales load and
organizational and offering costs.
The net proceeds of the offering will be invested in accordance
with the Fund's investment objective and policies between approximately
six and nine months after completion of the offering of the shares of
Common Stock, depending on market conditions and the availability of
appropriate securities. Pending such investment, it is anticipated that
the proceeds will be invested in U.S. Government securities or high
grade corporate debt securities. See "Investment Objective and
Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity and, to a lesser extent,
debt securities of corporate and governmental issuers in designated
emerging market countries located in Central and South America and the
Caribbean ("emerging America countries"). For purposes of its
investment objective, the emerging America countries in which the Fund
may invest shall consist of all countries in Central and South America
and the Caribbean. Under normal market conditions at least 65% of the
Fund's total assets will be invested in equity and debt securities of
companies and governments of emerging America 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.
Under current market conditions, the Fund intends to emphasize
investments in companies in Argentina, Brazil, Chile and Venezuela. It
is not expected that Mexico will be a significant focus of the Fund's
investment activities. The Fund is authorized to employ a variety of
investment techniques to hedge against market and currency risk,
although suitable hedging instruments may not be available on a timely
basis and on acceptable terms. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund seeks to benefit from economic and other developments in
emerging America countries. The investment objective of the Fund
reflects the belief that the securities markets of emerging America
countries present attractive investment opportunities. A number of such
countries have been instituting economic, financial and political
reforms encouraging greater market orientation and less government
intervention in economic affairs. The Fund believes that these measures
have the potential to offer long-term benefits to the securities markets
of such countries.
In recent years, there has been a significant trend in emerging
America countries towards democracy and market-oriented economic reform.
While there have been distinct differences in the approaches taken by
the various countries and the degrees of success in accomplishing the
economic objectives, the countries have generally sought to reduce the
government's role in economic affairs and implement policy initiatives
designed to control inflation, reduce financial deficits and external
debt, establish stable currency exchange rates, liberalize trade
restrictions, increase foreign investment, privatize state-owned
companies and develop and modernize the securities markets.
In addition to making equity investments, the Fund will seek
capital appreciation through investment in sovereign and corporate debt
securities of issuers in emerging America countries. Such debt
securities may be lower rated or unrated obligations of sovereign or
corporate issuers. The Fund's investments in sovereign debt will
consist of debt securities or obligations issued or guaranteed by
foreign governments, their agencies, instrumentalities and political
subdivisions and by entities controlled or sponsored by such
governments. The Fund may also invest in interests in entities
organized and operated for the purpose of restructuring the investment
characteristics of sovereign debt. The restructured sovereign debt
securities will include Brady Bonds, which are debt securities issued
under the framework of the Brady Plan, an initiative established in 1989
as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness.
16
<PAGE>
Since such debt securities frequently trade in the secondary
markets at substantial discounts, there is opportunity for capital
appreciation to the extent there is a favorable change in the market
perception of the creditworthiness of the issuer. Capital appreciation
in debt securities may also arise as a result of a favorable change in
relative foreign exchange rates or in relative interest rate levels. In
accordance with its investment objective, the Fund will not seek to
benefit from anticipated short-term fluctuations in currency exchange
rates. The receipt of income from such debt securities is incidental to
the Fund's objective of long-term capital appreciation. The Fund may,
from time to time, invest in debt securities with relatively high yields
(as compared to other debt securities meeting the Fund's investment
criteria), notwithstanding that the Fund may not anticipate that such
securities will experience substantial capital appreciation. Such
income can be used, however, to offset the operating expenses of the
Fund.
The Fund's investments in high yield securities will include debt
securities, preferred stocks and convertible securities which are rated
in the lower rating categories of the established rating services ("Baa"
or lower by Moody's Investors Service, Inc. ("Moody's") and "BBB" or
lower by Standard & Poor's Corporation ("S&P")), or in unrated U.S. and
non-U.S. securities considered by the Investment Adviser to be of
comparable quality. Securities rated below "Baa" by Moody's or below
"BBB" by S&P, and unrated securities of comparable quality, are commonly
known as "junk bonds."
Further, the Fund may invest in debt securities that are in default
as to the payment of interest and/or principal at the time of
acquisition by the Fund ("Distressed Securities"). The Fund will invest
in Distressed Securities only when the Investment Adviser believes it is
reasonably likely that the issuer of the securities will make an
exchange offer or will be the subject of a plan of reorganization.
Capital appreciation in debt securities may arise as a result of a
favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. The
receipt of income from such debt securities is incidental to the Fund's
objective of long-term capital appreciation.
Investment in shares of Common Stock of the Fund offers several
benefits. Many investors, particularly individuals, lack the
information or capability to invest in emerging America countries. It
also may not be permissible for such investors to invest directly in the
capital markets of certain emerging American countries. The Fund offers
investors the possibility of obtaining capital appreciation through a
diversified portfolio comprised of securities of emerging America
issuers. In managing such portfolio, the Investment Adviser will
provide the Fund and its shareholders with professional analysis of
investment opportunities and the use of professional money management
techniques. In addition, unlike many intermediary investment vehicles,
such as closed-end investment companies that are limited to investment
in a single country, the Fund has the ability to diversify investment
risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments among
emerging America countries and 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 America countries
will be determined by the Investment Adviser. Under current market
conditions, the Fund intends to emphasize investments in corporate and
governmental issuers in Argentina, Brazil, Chile, and Venezuela. Under
certain adverse investment conditions, the Fund may restrict the
emerging America markets in which its assets are invested.
A company ordinarily will be considered to be in an emerging
America country when it is organized in, or the primary trading market
of its securities is located in, an emerging America country. The Fund
may consider a company to be in an emerging America 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 or governments of emerging America
countries that are denominated in currencies other than an emerging
America currency. The Fund also may consider a debt security that is
denominated in an emerging America currency to be a security of an
issuer in an emerging America country without reference to the principal
trading market of the security or to the location of its issuer. The
Fund may consider investment companies or other pooled investment
vehicles to be located in the country or countries in which they
primarily make their portfolio investments.
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The Fund may invest in debt securities ("sovereign debt
securities") issued or guaranteed by emerging America governments
(including emerging America countries, provinces and municipalities) or
their agencies and instrumentalities ("governmental entities"), or 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"). Supranational
entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development
and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction
and Development (the "World Bank") and the Inter-American Development
Bank. The governmental members or "stockholders" 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.
Equity investments of the Fund include, but are not limited to,
stocks, preferred stocks, American Depository Receipts ("ADRs"), Global
Depository Receipts ("GDRs"), International Depository Receipts
("IDRs"), debt securities convertible into common stock, warrants, joint
venture interests, equity securities of other investment companies and
venture capital funds, limited partnership interests and other
securities ordinarily considered to be equity securities. The equity
securities in which the Fund may invest include direct investments.
Such securities are not listed on an exchange and do not have any active
trading market. The Fund may invest in unsponsored ADRs. The issuers
of unsponsored ADRs are not obligated to disclose material information
in the United States, and therefore, there may not be a correlation
between such information and the market value of such ADRs. The Fund
may also invest in venture capital investments and illiquid privately
placed securities.
The Fund reserves the right, as a temporary defensive measure or in
anticipation of investment in emerging America countries, to hold cash
or cash equivalents (in U.S. dollars or foreign currencies) and short-
term securities including money market securities denominated in U.S.
dollars or foreign currencies ("Temporary Investments").)
Description of Certain Investments
Brady Bonds. Brady Bonds are debt obligations which are created
through the exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with debt restructuring under
a plan introduced in 1989 by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in seven countries, including Venezuela,
Argentina, Uruguay and Costa Rica. Brazil has reached agreement with
its lending banks with respect to Brady Plan restructuring and Brazil's
Brady Plan restructuring is being implemented. To date, Brady Bonds
aggregating approximately $90 billion have been issued, based on current
estimates, with the largest proportion of Brady Bonds having been issued
by Mexico (where the Fund does not expect to focus its investment
activities), Argentina and Venezuela. Brazil has announced plans to
issue Brady Bonds in respect of approximately $44 billion of bank debt.
It is expected that other countries will undertake Brady Plan debt
restructuring in the future, including Peru, Ecuador and Panama. The
Fund anticipates that it will invest in bank loans (through
participations or assignments) that may be restructured as Brady Bond
obligations.
Brady Bonds have been issued relatively recently and, accordingly,
do not have a long payment history. They may be collateralized and
issued in various currencies (although most are U.S. dollar-denominated)
and they are actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon
bonds which have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year
or longer rolling-forward basis by cash or securities in an amount that,
in the case of fixed rate bonds, is equal to at least one year of
interest payments or, in the case of floating rate bonds, initially is
equal to at least one year's interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized.
For example, some Venezuelan Brady
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Bonds include attached value recovery options which increase interest
payments if oil revenues rise. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history
of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds
are considered speculative.
A significant portion of the Venezuelan Brady Bonds and the
Argentine Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month
(for Argentina) rolling-forward basis by securities held by the Federal
Reserve Bank of New York as collateral agent.
Warrants. The Fund may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other
securities. Warrants do not carry with them the right to dividends or
voting rights with respect to the securities that they entitle their
holders to purchase, and they do not represent any rights in the assets
of the issuer. As a result, an investment in warrants may be considered
more speculative than certain other types of investments. In addition,
the value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
Distressed Securities. The Fund may invest in Distressed
Securities, that are securities which are currently in default or in
risk of default at the time of acquisition. Such investment involves
significant risk. The Fund only will make such investments when the
Investment Adviser believes it is reasonably likely that the issuer of
the securities will make an exchange offer or will be the subject of a
plan of reorganization; however, there can be no assurance that such an
exchange offer will be made or that such a plan of reorganization will
be adopted. A significant period of time may pass between the time at
which the Fund makes its investment in Distressed Securities and the
time that any such exchange offer or plan of reorganization is
completed. During this period, it is unlikely that the Fund will
receive any interest payments on the Distressed Securities. In
addition, as a result of the Fund's participation in negotiations with
respect to any exchange offer or plan of reorganization with respect to
an issuer of Distressed Securities, the Fund may be precluded from
disposing of such securities.
Convertible Securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or
a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive
interest generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have several unique
investment characteristics such as (1) higher yields than common stocks,
but lower yields than comparable nonconvertible securities, (2) a lesser
degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital
appreciation if the market price of the underlying common stock
increases. A convertible security might be subject to redemption at the
option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the
Fund is called for redemption, the Fund may be required to permit the
issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
Illiquid Securities. The Fund may invest in securities that lack
an established secondary trading market or otherwise are considered
illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of
the security, which may be less than a comparable more liquid security.
Illiquid sovereign debt and corporate fixed income securities may trade
at a discount from comparable, more liquid investments. In addition,
the Fund may invest in privately placed securities which may or may not
be freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. See "Private Placements"
below.
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Private Placements. The Fund may invest in securities of companies
or governments of emerging America countries that are sold in private
placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities will be subject to
contractual or legal restrictions on transfer. As a result of the
absence of a public trading market, privately placed securities may in
turn be less liquid or illiquid and more difficult to value than
publicly traded securities. To the extent that privately placed
securities may be resold in privately negotiated transactions, the
prices realized from the sales could, due to illiquidity, be less than
those originally paid by the Fund or less than their fair value. In
addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements
that may be applicable if their securities were publicly traded. If any
privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before
being resold, the Fund may be required to bear the expenses of
registration. Certain of the Fund's investments in private placements
may consist of direct investments and may include investments in
smaller, less-seasoned 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. Further, in the
event the Fund sells such securities, any capital gains realized on such
transactions may be subject to higher rates of taxation than taxes
payable on the sale of listed securities. 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.
Indexed and Inverse Securities. The Fund may invest in securities
whose potential return is based on the change in particular measurements
of value or rate (an "index"). As an illustration, the Fund may invest
in a security that pays interest and returns principal based on the
change in an index of interest rates or of the value on a precious or
industrial metal. Interest and principal payable on a security may also
be based on relative changes among particular indices. In addition, the
Fund may invest in securities whose potential investment return is
inversely based on the change in particular indices. For example, the
Fund may invest in securities that pay a higher rate of interest and
principal when a particular index decreases and pay a lower rate of
interest and principal when the value of the index increases. To the
extent that the Fund invests in such types of securities, it will be
subject to the risks associated with changes in the particular indices,
which may include reduced or eliminated interest payments and losses of
invested principal. Examples of such types of securities are indexed or
inverse securities issued with respect to a stock market index in a
particular emerging America country.
Certain indexed securities, including certain inverse securities,
may have the effect of providing a degree of investment leverage,
because they may increase or decrease in value at a rate that is a
multiple of the changes in applicable indices. As a result, the market
value of such securities will generally be more volatile than the market
values of fixed-rate securities. The Fund believes that indexed
securities, including inverse securities, represent flexible portfolio
management instruments that may allow the Fund to seek potential
investment rewards, hedge other portfolio positions, or vary the degree
of portfolio leverage relatively efficiently under different market
conditions.
Investment in Other Investment Companies and Venture Capital Funds.
The Fund may invest in other investment companies and venture capital
funds whose investment objectives and policies are consistent with those
of the Fund. In accordance with the Investment Company Act, the Fund
may invest up to 10% of its total assets in securities of other
investment companies. In addition, under the Investment Company Act the
Fund may not own more than 3% of the total outstanding voting stock of
any investment company and not more than 5% of the value of the Fund's
total assets may be invested in the securities of any investment
company. If the Fund acquires shares in investment companies or venture
capital funds, shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and,
indirectly, the expenses of such investment companies or venture capital
funds (including management and advisory fees). Investment in such
venture capital funds involves substantial risk of loss to the Fund of
its entire investment.
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OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options and Futures
The Fund is authorized to engage in various portfolio strategies to
hedge its portfolio against adverse movements in equity, debt and
currency markets. The Fund has authority to write (i.e., sell) covered
put and call options on its portfolio securities, purchase put and call
options on securities and engage in transactions in stock index options,
stock index futures and financial futures, and related options on such
futures. The Fund may also deal in forward foreign exchange
transactions and foreign currency options and futures, and related
options on such futures. Each of these portfolio strategies is
described below. Although certain risks are involved in options and
futures transactions (as discussed in "Risk Factors and Special
Considerations-Hedging"), the Investment Adviser believes that, because
the Fund will engage in options and futures transactions only for
hedging purposes, the options and futures portfolio strategies of the
Fund will not subject the Fund to the risks frequently associated with
the speculative use of options and futures transactions. While the
Fund's use of hedging strategies is intended to reduce volatility, the
net asset value of Fund shares will fluctuate.
There can be no assurance that the Fund's hedging transactions will
be effective. Suitable hedging instruments may not be available with
respect to securities of issuers in emerging America countries on a
timely basis and on acceptable terms. Furthermore, the Fund will only
engage in hedging activities from time to time and will not necessarily
engage in hedging transactions when movements in any particular equity,
debt and currency markets occur.
Set forth below are descriptions of certain hedging strategies in
which the Fund is authorized to engage.
Writing Covered Options. The Fund is authorized to write (i.e.,
sell) covered call options on the securities in which it may invest and
to enter into closing purchase transactions with respect to certain of
such options. A covered call option is an option where the Fund in
return for a premium gives another party a right to buy specified
securities owned by the Fund at a specified future date and price set at
the time of the contract. The principal reason for writing options is
to attempt to realize, through the receipt of premiums, a greater return
than would be realized on the securities alone. By writing covered call
options the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security
above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A
closing purchase transaction cancels out the Fund's position as the
writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the
option the right to sell the underlying security to the Fund at the
stated exercise price. The Fund will receive a premium for writing a
put option which increases the Fund's return. The Fund writes only
covered put options, which means that so long as the Fund is obligated
as the writer of the option it will, through its custodian, have
deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a
value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase
the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option
is outstanding. The Fund may engage in closing transactions in order to
terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying the put
options shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options
to hedge against a decline in the market value of its securities. By
buying a put option the Fund has a right to sell the underlying security
at the exercise price, thus limiting the Fund's risk of loss through a
decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for
the put option and any related transaction costs. Prior to its
expiration, a
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put option may be sold in a closing sale transaction and profit or loss
from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as
the purchaser of an option by means of any offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on
securities held in its portfolio on which it has written call options or
on securities which it intends to purchase. The Fund will not purchase
options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding
options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures
and financial futures, and related options on such futures. The Fund
may purchase or write put and call options on stock indices to hedge
against the risks of marketwide stock price movement in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the
contract pay or receive an amount of cash equal to the difference
between the closing value of the index and the exercise price of the
option times a specified multiple. The Fund may invest in stock index
options based on a broad market index or based on a narrow index
representing an industry or market segment.
The Fund may also purchase and sell stock index futures contracts
and financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as
described below. A futures contract is an agreement between two parties
which obligates the purchaser of the futures contract to buy and the
seller of a futures contract to sell a security for a set price on a
future date. Unlike most other futures contracts, a stock index futures
contract does not require actual delivery of securities but results in
cash settlement based upon the difference in value of the index between
the time the contract was entered into and the time of this settlement.
The Fund may effect transactions in stock index futures contracts in
connection with the equity securities in which it invests and in
financial futures contracts in connection with the debt securities in
which it invests. Transactions by the Fund in stock index futures and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions".
The Fund may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund
is not fully invested in the securities markets and anticipates a
significant market advance, it may purchase futures in order to gain
rapid market exposure that may in part or entirely offset increases in
the cost of securities that the Fund intends to purchase. As such
purchases are made, an equivalent amount of futures contracts will be
terminated by offsetting sales. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase such securities
upon termination of the long futures position, whether the long position
is the purchase of a futures contract or the purchase of a call option
or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of
redemptions or there is a change in market conditions), a long futures
position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put
options on futures contracts and stock indices in connection with its
hedging activities. Generally, these strategies are utilized under the
same market and market sector conditions (i.e., conditions relating to
specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options
on futures contracts and stock indices rather than selling the
underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options,
or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the
increased cost resulting from an increase in the market value of
securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and
foreign exchanges and in options in the over-the-counter markets ("OTC
options"). Exchange-traded contracts are third-party contracts (i.e.,
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performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) which, in general, have standardized strike prices
and expiration dates. OTC options transactions are two-party contracts
with prices and terms negotiated by the buyer and seller.
Foreign Currency Hedging. The Fund has authority to deal in
forward exchange among currencies of the different countries in which it
will invest and multinational currency units as a hedge against possible
variations in the foreign exchange rates among these currencies. This
is accomplished through contractual agreements to purchase or sell a
specified currency at a specified future date (up to one year) and price
set at the time of the contract. The Fund's dealings in forward foreign
exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by
the Fund. Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated or quoted in such
foreign currency. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Such transac-
tions also preclude the opportunity for gain if the value of the hedged
currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates. Investors should be aware that in certain
emerging America countries no forward market for foreign currencies
currently exists or such market may be closed to investment by the Fund.
The Fund is also authorized to purchase or sell listed or over-the-
counter foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-U.S. dollar denominated
securities owned by the Fund, sold by the Fund but not yet delivered, or
committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value
in U.S. dollars of an investment in a Brazilian cruzeiro-denominated
security. In such circumstances, for example, the Fund may purchase a
foreign currency put option enabling it to sell a specified amount of
cruzeiros for dollars at a specified price by a future date. To the
extent the hedge is successful, a loss in the value of the cruzeiro
relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of
acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of cruzeiros for
dollars at a specified price by a future date (a technique called a
"straddle"). By selling such a call option in this illustration, the
Fund gives up the opportunity to profit without limit from increases in
the relative value of the cruzeiro to the dollar. The Investment
Adviser believes that "straddles" of the type which may be utilized by
the Fund constitute hedging transactions and are consistent with the
policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the
right to buy or sell a currency at a fixed price on a future date. A
futures contract on a foreign currency is an agreement between two
parties to buy and sell a specified amount of currency for a set price
on a future date. Futures contracts and options on futures contracts
are traded on boards of trade or futures exchanges. The Fund will not
speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess
of the market value of the securities which it has committed or
anticipates to purchase which are denominated in such currency and, in
the case of securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. The Fund
may not incur potential net liabilities of more than 20% of its total
assets from foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of
the Commodity Futures Trading Commission applicable to the Fund provide
that the futures trading activities described herein will not result in
the Fund being deemed a "commodity pool" under such regulations if the
Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona
fide hedging purposes, and (ii) for non-hedging purposes, if the
aggregate initial margin and premiums required to establish positions in
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such contracts and options does not exceed 5% of the liquidation value
of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract, or writes a put option
or purchases a call option thereon, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's
custodian so that the amount so segregated, plus the amount of initial
and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of
such futures contract is unleveraged.
Other Investment Policies and Practices
Standby Commitment Agreements. The Fund may from time to time
enter into standby commitment agreements. Such agreements commit the
Fund, for a stated period of time, to purchase a stated amount of a
fixed income security which may be issued and sold to the Fund at the
option of the issuer. The price and coupon of the security is fixed at
the time of commitment. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment
at a yield and price that is considered advantageous to the Fund. The
Fund will at all times maintain a segregated account with its custodian
of cash, cash equivalents, U.S. Government securities or other high
grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on
the delivery date may be more or less than its purchase price. Because
of the issuance of the security underlying the commitment is at the
option of the issuer, the Fund may bear the risk of a decline in the
value of such security and may not benefit from an appreciation in the
value of the security during the commitment period.
The purchase of a security subject to a standby commitment
agreement and the related commitment fee will be recorded on the date
which the security can reasonably be expected to be issued, and the
value of the security will thereafter be reflected in the calculation of
the Fund's net asset value. The cost basis of the security will be
adjusted by the amount of the commitment fee. In the event the security
is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
When-Issued and Forward Commitment Securities. The Fund may
purchase securities on a "when-issued" basis. When such transactions are
negotiated, the price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering
the securities, as the case may be. If the Fund disposes of the right
to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it can
incur a gain or loss. At the time the Fund enters into a transaction on
a when-issued or forward commitment basis, it will segregate with the
custodian cash or other liquid high grade debt securities with a value
of not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure
that their marked-to-market value will at all times exceed the
corresponding obligations of the Fund. There is always a risk that the
securities may not be delivered, and the Fund may incur a loss.
Settlements in the ordinary course, which may take substantially more
than five business days, are not treated by the Fund as when-issued or
forward commitment transactions and accordingly are not subject to the
foregoing restrictions.
Repurchase Agreements and Purchase and Sale Contracts. The Fund
may invest in securities pursuant to repurchase agreements or purchase
and sale contracts. Repurchase agreements may be entered into only with
a member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities. Purchase and sale contracts may be entered into
only with financial institutions which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of
at least $50 million. Under such agreements, the other party agrees, upon
entering into the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results
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in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the
case of repurchase agreements, the prices at which the trades are
conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the
prices take into account accrued interest. Such agreements usually
cover short periods, often less than one week. Repurchase agreements
may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the
case of a repurchase agreement, as a purchaser, the Fund will require
the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term
of the repurchase agreement; the Fund does not have the right to seek
additional collateral in the case of purchase and sale contracts. In
the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not
owned by the Fund but constitute only collateral for the seller's
obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs
from a repurchase agreement in that the contract arrangements stipulate
that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate of return, the rate of return to
the Fund shall be dependent upon intervening fluctuations of the market
values of such securities and the accrued interest on the securities.
In such event, the Fund would have rights against the seller for breach
of contract with respect to any losses resulting from market
fluctuations following the failure of the seller to perform. While the
substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued
interest and additional collateral, management believes that the
purchase and sale contracts are not repurchase agreements as such term
is understood in the banking and brokerage community.
Short Sales. The Fund may make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline.
The Fund expects to make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order
to maintain portfolio flexibility. When the Fund makes a short
sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash,
U.S. Government securities or other high grade liquid securities similar
to those borrowed. The Fund will also be required to deposit similar
collateral with its custodian to the extent, if any, necessary so that
the value of both collateral deposits in the aggregate is at all times
equal to at least 100% of the current market value of the security sold
short. Depending on arrangements made with the broker-dealer from which
it borrowed the security regarding payment over of any payments received
by the Fund on such security, the Fund may not receive any payments
(including interest) on its collateral deposited with such broker-
dealer. If the price of the security sold short increases between the
time of the short sale and the time the Fund replaces the borrowed
security, the Fund will incur a loss; conversely, if the price declines,
the Fund will realize a gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. Although the
Fund's gain is limited to the price at which it sold the security short,
its potential loss is theoretically unlimited.
Lending Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 331/3% of its
total assets, to banks, brokers and other financial institutions and
receive collateral in cash or securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities which will be
maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The purpose of such
loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are
delivered to the Fund as collateral, the Fund and the borrower negotiate
a rate for the loan premium to be received by the Fund for lending its
portfolio securities. In either event, the total yield on the Fund's
portfolio is increased by loans of its portfolio securities. The Fund
will have the right to regain record ownership of loaned securities
to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or
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other distributions. Such loans are terminable at any time. The Fund
may pay reasonable finder's, administrative and custodial fees in
connection with such loans.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies
relating to the investment of its assets and its activities, which are
fundamental policies and may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. Invest more than 25% of its 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 or real estate mortgage
loans, except that 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, loan participation and assignments or other
corporate debt securities and investment in government obligations,
or participation or assignments therein, short-term commercial
paper, certificates of deposit, bankers' acceptances and repurchase
agreements and purchase and sale contracts and similar instruments
shall not be deemed to be the making of a loan, and except further
that the Fund may lend its portfolio securities as set forth in (5)
below.
5. Lend its portfolio securities, other than in accordance
with applicable law and the guidelines set forth in this Prospectus.
6. Issue senior securities to the extent such issuance would
violate applicable law.
7. Borrow money or pledge 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. The Fund will not
purchase securities while borrowings exceed 5% (taken at market
value) of its total assets, except to honor prior commitments.
8. Underwrite securities of other issuers except insofar as
the Fund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
9. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, except that the Fund may
invest in securities issued by companies or governments that engage
in oil, gas or other mineral exploration or development activities.
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10. Purchase or sell commodities or contracts on commodities,
except to the extent the Fund may do so in accordance with
applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
Notwithstanding the provisions of investment restriction (7) above,
the Fund currently does not intend to purchase any securities on margin.
The deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or the related options, if applicable,
shall not be considered the purchase of a security on margin.
Non-Diversified Status
The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such
Act in the proportion of its assets that it may invest in securities of
a single issuer. The Fund's investments will be limited, however, in
order to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxes".
To qualify, the Fund will comply with certain requirements, including
limiting its investments so that at the close of each quarter of the
taxable year (i) not more than 25% of the market value of the Fund's
total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets will be invested in
the securities of a single issuer, and the Fund will not own more than
10% of the outstanding voting securities of a single issuer. A fund
which elects to be classified as "diversified" under the Investment
Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes
large positions in the securities of a small number of issuers, the
Fund's net asset value may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or
in the market's assessment of the issuers, and the Fund may be more
susceptible to any single economic, political or regulatory occurrence
than a diversified company.
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, partners or employees, acting as
principal, unless pursuant to a rule or exemptive order under the
Investment Company Act. If a percentage restriction on investment
policies or the use of assets set forth above is adhered to at the time
a transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
Because of the affiliation of the Investment Adviser with the Fund,
the Fund is prohibited from engaging in certain transactions involving
the Investment Adviser's affiliate, Merrill Lynch or its affiliates,
except for brokerage transactions permitted under the Investment Company
Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See
"Portfolio Transactions". Without such an exemptive order, the Fund
would be prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the
Securities Act in which such firms or any of their affiliates
participate as an underwriter or dealer.
(SELECTED ECONOMIC AND MARKET DATA)
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their
principal occupations during the last five years are set forth below.
Unless otherwise noted, the address of each Director and executive
officer is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
ARTHUR ZEIKEL (1)(2) -- President and Chief Investment Officer of
the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM"); President and Director of Princeton Services, Inc. since 1993;
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Executive Vice President of Merrill Lynch & Co., Inc. since 1990;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD").
(to be completed by Amendment)
TERRY K. GLENN -- Executive Vice President (1)(2) -- Executive Vice
President of the Investment Adviser and of MLAM since 1983; President of
MLFD since 1986 and a Director thereof since 1991.
---------------
(1) Interested person, as defined in the Investment Company Act, of the
Fund.
(2) Such Director or officer is a director, trustee or officer of one
or more other investment companies for which the Investment Adviser
or MLAM acts as investment adviser.
The Fund pays each Director not affiliated with the Investment
Adviser a fee of $------- per year plus $----------- per meeting
attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members
of its audit committee, which consists of all of the Directors not
affiliated with the Investment Adviser, an annual fee of $-------------;
the chairman of the audit committee receives an additional annual fee of
$---------.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, which is owned and
controlled by Merrill Lynch & Co., Inc. ("ML & Co."). The Investment
Adviser will provide the Fund with investment advisory and management
services. The Investment Adviser or MLAM acts as the investment adviser
for over 90 other registered investment companies. The Investment
Adviser also offers portfolio management and portfolio analysis services
to individuals and institutions. As of ------------------, 1994, the
Investment Adviser and MLAM had a total of approximately $------ billion
in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser. In
addition to such assets under management, as of that date ML & Co. and
its subsidiaries held assets aggregating over $500 billion on behalf of
their customers. The principal business address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The investment advisory agreement between the Fund and the
Investment Adviser (the "Investment Advisory Agreement") provides that,
subject to the direction of the Board of Directors of the Fund, the
Investment Adviser is responsible for the actual management of the
Fund's portfolio. The responsibility for making decisions to buy, sell
or hold a particular security rests with the Investment Adviser, subject
to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the
Fund. Such portfolio management will consider analyses from various
sources (including brokerage firms with which the Fund does business),
make the necessary investment decisions, and place orders for
transactions accordingly. The Investment Adviser also will be
responsible for the performance of certain administrative and management
services for the Fund.
For the services rendered, the facilities furnished and the
expenses assumed by the Investment Adviser under the Investment Advisory
Agreement, the Fund will pay a monthly fee at the annual rate of 1.00%
of the Fund's average weekly net assets ("average weekly net assets"
means the average weekly value of the total assets
28
<PAGE>
of the Fund minus the sum of (i) accrued liabilities of the Fund and (ii)
any accrued and unpaid interest on outstanding borrowings). For purposes
of this calculation, average weekly net assets are determined at the end
of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging the net assets at the last business day of a week with the net
assets at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser
to provide investment advisory services and to pay all compensation of
and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the compensation of all Directors of
the Fund who are affiliated persons of the Investment Adviser or any of
its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal
and auditing services, taxes, costs of printing proxies, stock
certificates and shareholder reports, listing fees, charges of the
custodian and the transfer agent, dividend disbursing agent and
registrar, Securities and Exchange Commission fees, fees and expenses of
unaffiliated Directors, accounting and pricing costs, insurance,
interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses, mailing and other expenses properly payable by
the Fund. Accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for
its costs in connection with such services.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or MLAM
acts as an adviser or by investment advisory clients of MLAM. Because
of different investment objectives or other factors, a particular
security may be bought for one or more clients when one or more clients
are selling the same security. If purchases or sales of securities for
the Fund or other funds for which the Investment Adviser or MLAM acts as
investment adviser or for their advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or MLAM during the same
period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Unless earlier terminated as described below, the Investment
Advisory Agreement will remain in effect until ---------------, 1996,
and from year to year thereafter if approved annually (a) by the Board
of Directors of the Fund or by a majority of the outstanding shares of
the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contract is not assignable and may
be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of the shareholders of the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is primarily responsible for the execution
of the Fund's portfolio transactions. In executing such transactions,
the Investment Adviser seeks to obtain the best results for the Fund,
taking into account such factors as price (including the applicable fee,
commission or spread), size of order, difficulty of execution and
operational facilities of the firm involved, the firm's risk in
positioning a block of securities and the provision of supplemental
investment research by the firm. While the Investment Adviser generally
seeks reasonably competitive fees, commissions or spreads, the Fund does
not necessarily pay the lowest fee, commission or spread available.
The Fund has no obligation to deal with any broker or dealer in
execution of transactions in portfolio securities. Subject to obtaining
the best price and execution, securities firms which provide
supplemental investment research to the Investment Adviser, including
Merrill Lynch, may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the
services required to be performed by the
29
<PAGE>
Investment Adviser under the Investment Advisory Agreement and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The Fund anticipates that its brokerage transactions involving
securities of issuers domiciled in countries other than the United
States generally will be conducted primarily on the principal stock
exchanges of such countries. Brokerage commissions and other
transaction costs on foreign stock exchange transactions are generally
higher than in the United States, although the Fund will endeavor to
achieve the best net results in effecting its portfolio transactions.
There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund will invest in certain securities traded in
over-the-counter markets. Debt securities in which the Fund may invest
are primarily traded in over-the-counter markets. Where possible, the
Fund intends to deal directly with the dealers who make markets in the
securities involved, except in those circumstances where better prices
and execution are available elsewhere. Under the Investment Company
Act, except as permitted by exemptive order, persons affiliated with the
Fund are prohibited from dealing with the Fund as principals in the
purchase and sale of securities. Since transactions in over-the-counter
markets usually involve transactions with dealers acting as principals
for their own account, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
principal transactions. In addition, the Fund may not purchase
securities during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member except pursuant to
procedures approved by the Board of Directors of the Fund which comply
with rules adopted by the Securities and Exchange Commission. To the
extent Merrill Lynch is active in distributions of securities of issuers
in emerging America countries, the Fund may be disadvantaged in that it
may not purchase securities in such distributions. An affiliated person
of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis.
The Fund's ability and decisions to purchase and sell portfolio
securities may be affected by foreign laws and regulations relating to
the convertibility and repatriation of assets.
Portfolio Turnover
Generally, the Fund does not purchase securities for short-term
trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such actions, for defensive
or other reasons, appear advisable to the Investment Adviser. While it
is not possible to predict turnover rates with any certainty, at present
it is anticipated that the Fund's annual portfolio turnover rate, under
normal circumstances, will be less than 100%. (The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this
rate, all securities whose maturities at the time of acquisition are one
year or less are excluded.)
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its
net investment income. Dividends from such net investment income are
paid at least annually. All net realized long-term or short-term
capital gains, if any, are
distributed at least annually to holders of Common Stock. From time to
time, the Fund may declare a special distribution at or about the end of
the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital
gains be distributed during the calendar year.
See "Automatic Dividend Reinvestment Plan" for information
concerning the manner in which dividends and distributions to holders of
Common Stock may be reinvested automatically in shares of Common Stock of the
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Fund. Dividends and distributions may be taxable to shareholders
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Fund intends to elect and to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so
qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net
realized capital gains which it distributes to shareholders. The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and
distributions of the Fund's net realized short-term capital gains
(together referred to hereafter as "ordinary income dividends") are
taxable to shareholders as ordinary income. Distributions made from the
Fund's net realized long-term capital gains ("capital gain dividends")
are taxable to shareholders as long-term capital gains, regardless of
the length of time the shareholder has owned Fund shares. Distributions
in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder.
Dividends are taxable to shareholders even though they are
reinvested in additional shares of the Fund. Not later than 60 days
after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any
ordinary income or capital gain dividends. Distributions by the Fund,
whether from ordinary income or capital gains, generally will not be
eligible for the dividends received deduction allowed to corporations
under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend
will be treated for tax purposes as being paid by the Fund and received
by its shareholders on December 31 of year in which such dividend was
declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or
a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax advisers
concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on certain ordinary income dividends
and capital gain dividends and on redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding
will be those for whom no certified taxpayer identification number is on
file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that
such investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce
or eliminate such taxes. Shareholders may be able to claim U.S. foreign
tax credits with respect to such taxes, subject to certain conditions
and limitations contained in the Code. For example, certain retirement
accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's
total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be
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<PAGE>
required to include their proportionate shares of such withholding taxes
in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in
computing their taxable incomes or, alternatively, use them as foreign
tax credits against their U.S. income taxes. No deductions
for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to
U.S. withholding tax on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having
been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of
its ordinary income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. While the Fund
intends to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund's taxable income and
capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an
investment company (or similar investment entity) organized under
foreign law, the Fund will be treated as owning shares in a passive
foreign investment company ("PFIC") for U.S. Federal income tax
purposes. The Fund may be subject to U.S. Federal income tax, and an
additional tax in the nature of interest (the "interest charge"), on a
portion of distributions from such company and on gain from the
disposition of the shares of such company (collectively referred to as
"excess distributions"), even if such excess distributions are paid by
the Fund as a dividend to its shareholders. The Fund may be eligible to
make an election with respect to certain PFICs in which it owns shares
that will allow it to avoid the taxes on excess distributions. However,
such election may cause the Fund to recognize income in a particular
year in excess of the distributions received from such PFICs.
Alternatively, under proposed regulations the Fund may be able to elect
to "mark to market" at the end of each taxable year all shares that it
holds in PFICs. If it makes this election, the Fund will recognize as
ordinary income any increase in the value of such shares. Unrealized
losses, however, will not be recognized. By making the mark-to-market
election, the Fund can avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year may
be required to recognize income in excess of the distributions it
receives from PFICs and its proceeds from dispositions of PFIC stock.
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions
The Fund may write, purchase or sell options, futures and forward
foreign exchange contracts. Options 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 non-equity
option or a regulated futures contract for a non-U.S. currency and the
Fund elects to have gain or loss in connection with the contract treated
as ordinary gain or loss under Code Section 988 (as described below),
gain or loss attributable to Section 1256 contracts will be 60% long-
term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract
will be marked to market, as described above. However, the character of
gain or loss from such a contract will generally be ordinary under Code
Section 988. The Fund may, nonetheless, elect to treat the gain or loss
from certain forward foreign exchange contracts as capital. In this
case, gain or loss realized in connection with a forward foreign
exchange contract that is a Section 1256 contract will be characterized
as 60% long-term and 40% short-term capital gain or loss.
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Code Section 1092, which applies to certain "straddles", may affect
the taxation of the Fund's options, futures and interest rate transactions
and its short sales of securities. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain closing transactions in options and futures contracts, interest rate
swaps and certain short sales of securities.
One of the requirements for qualification as a RIC is that less
than 30% of the Fund's gross income may be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in effecting closing
transactions within three months after entering into an option or
futures contract.
Special Rules for Certain Foreign Currency Transactions. In
general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will
be qualifying income for purposes of determining whether the Fund
qualifies as a RIC. It is currently unclear, however, who will be
treated as the issuer of a foreign currency instrument or how foreign
currency options, foreign currency futures and forward foreign currency
contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund may request a private
letter ruling from the Internal Revenue Service on some or all of these
issues.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other
than the U.S. dollar). In general, foreign currency gains or losses
from certain debt instruments, from certain forward contracts, from
futures contracts that are not "regulated futures contracts" and from
unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain
or loss treatment for such transactions. Regulated futures contracts,
as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of
the Fund's investment company taxable income available to be distributed
to shareholders as ordinary income. Additionally, if Code Section 988
losses exceed other investment company taxable income during a taxable
year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares. These rules and the mark-to-market rules
described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with
respect to its investments.
The Treasury Department has authority to issue regulations
concerning the recharacterization of principal and interest payments
with respect to debt obligations issued in hyperinflationary currencies,
which may include the currencies of certain emerging America countries
in which the Fund intends to invest. No such regulations have been
issued.
--------------------
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations presently in
effect. For the complete provisions, reference should be made to the
pertinent Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to change
by legislative or administrative action either prospectively or
retroactively.
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by
RICs that are derived from interest on U.S. Government obligations.
State law varies as to whether dividend income attributed to U.S.
Government obligations is exempt from state income tax.
33
<PAGE>
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes.
Foreign investors should consider applicable foreign taxes in their
evaluations of an investment in the Fund.
---------------------
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the
"Plan"), unless a shareholder otherwise elects, all dividend and capital
gains distributions will be reinvested automatically by -------------,
as agent for shareholders in administering the Plan (the "Plan Agent"),
in additional shares of Common Stock of the Fund. Shareholders who
elect not to participate in the Plan will receive all distributions in
cash paid by check mailed directly to the shareholder of record (or, if
the shares are held in street or other nominee name, then to such
nominee) by --------, as dividend paying agent. Such participants may
elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to -
---------------, as dividend paying agent, at the address set forth
below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend
record date; otherwise such termination will be effective with respect
to any subsequently declared dividend or distribution.
Whenever the Fund declares an ordinary income dividend or a capital
gain dividend (collectively referred to as "dividends") payable either
in shares or in cash, non-participants in the Plan will receive cash,
and participants in the Plan will receive the equivalent in shares of
Common Stock. The shares will be acquired by the Plan Agent for the
participant's account, depending upon the circumstances described below,
either (i) through receipt of additional unissued but authorized shares
of Common Stock from the Fund ("newly issued shares") or (ii) by
purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere.
If on the payment date for the dividend, the net asset value per share
of the Common Stock is equal to or less than the market price per share
of the Common Stock plus estimated brokerage commissions (such condition
being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be
credited to the participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per share on the
date the shares are issued, provided that the maximum discount from the
then current market price per share on the date of issuance may not
exceed 5%. If on the dividend payment date the net asset value per
share is greater than the market value (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend
amount in shares acquired on behalf of the participant in open-market
purchases. Prior to the time the shares of Common Stock commence
trading on the New York Stock Exchange, participants in the Plan will
receive any dividends in newly issued shares. In addition, if the Fund
is converted to an open-end fund, its shares will no longer be listed on
any stock exchange and participants in the Plan will receive any
dividends in newly issued shares at their net asset value.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next date on
which the shares trade on an "ex-dividend" basis or in no event more
than 30 days after the dividend payment date (the "last purchase date")
to invest the dividend amount in shares acquired in open-market
purchases. If, before the Plan Agent has completed its open-market
purchases, the market price of a share of Common Stock exceeds the net
asset value per share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares,
resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because
of the foregoing difficulty with respect to open-market purchases, the
Plan provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period or
if the market discount shifts to a market premium during the purchase
period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued
shares at the close of business on the last purchase date.
34
<PAGE>
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts,
including information needed by shareholders for tax records. Shares in
the account of each Plan participant will be held by the Plan Agent on
behalf of the Plan participant, and each shareholder's proxy will
include those shares purchased or received pursuant to the Plan. The
Plan Agent will forward all proxy solicitation materials to participants
and vote proxies for shares held pursuant to the Plan in accordance with
the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares
certified from time to time by the record shareholders as representing
the total amount registered in the record shareholder's name and held
for the account of beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open-market purchases in connection
with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the market
price plus commissions of the Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Fund at less
than they could otherwise purchase them and will have shares with a cash
value greater than the value of any cash distribution they would have
received on their shares. If the market price plus commissions is below
the net asset value, participants will receive distributions in shares
with a net asset value greater than the value of any cash distribution
they would have received on their shares. However, there may be
insufficient shares available in the market to make distributions in
shares at prices below the net asset value. Also, since the Fund does
not redeem its shares, the price on resale may be more or less than the
net asset value. See "Taxes" for a discussion of tax consequences of
the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
There is no direct service charge to participants in the Plan; however,
the Fund reserves the right to amend the Plan to include a service
charge payable by the participants.
All correspondence concerning the Plan should be directed to the
Plan Agent at --------------------.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of the Fund in this offering will have an
investment option consisting of the right to reinvest the net proceeds
from a sale of such shares (the "Original Shares") in Class A initial
sales charge shares of certain Merrill Lynch- sponsored open-end mutual
funds ("Eligible Class A Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth
below are satisfied. First, the sale of the Original Shares must be
made through Merrill Lynch, and the net proceeds therefrom must be
reinvested immediately in Eligible Class A Shares. Second, the Original
Shares must either have been acquired in this offering or be shares
representing reinvested dividends from shares acquired in this offering.
Third, the Original Shares must have been maintained continuously in a
Merrill Lynch securities account. Fourth, there must be a minimum
purchase of $250 to be eligible for the investment option. Class A
shares of certain of the mutual funds may be subject to an account
maintenance fee at an annual rate of up to 0.25% of the average
daily net asset value of such mutual fund. The Eligible Class A
Shares may be redeemed at any time at the next determined net asset
value, subject in certain cases to a redemption fee. Prior to the
time the shares commence trading on the New York Stock
35
<PAGE>
Exchange, the distributor for the mutual funds will advise Merrill
Lynch financial consultants as to those mutual funds which offer the
investment option described above.
NET ASSET VALUE
Net asset value per share is determined at 4:15 P.M., New York
time, on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of
the securities held by the Fund plus any cash or other assets (including
interest accrued but not yet received) minus all liabilities (including
accrued expenses) is divided by the total number of shares of Common
Stock outstanding at such time. Expenses, including the fees payable to
the Investment Adviser, are accrued daily.
The Fund determines and makes available for publication the net
asset value of its shares weekly. Currently, the net asset values of
shares of publicly traded, closed-end investment companies are published
in Barron's and in the Monday editions of The Wall Street Journal and
The New York Times.
Portfolio securities which are traded on stock exchanges are valued
at the last sale price as of the close of business on the day the
securities are being valued, or, lacking any sales, at the last
available bid price. Securities traded in over-the-counter markets are
valued at the last available bid prices obtained from one or more
dealers in over-the-counter markets prior to the time of valuation.
Portfolio securities which are traded both in over-the-counter markets
and on a stock exchange are valued according to the broadest and most
representative market. Other investments, including futures contracts
and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board
of Directors of the Fund.
Certain portfolio securities (other than short-term obligations but
including listed issues) may be valued on the basis of prices furnished
by one or more pricing services which determine prices for normal,
institutional-size trading units of such securities using market
information, transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders. Rights or warrants to acquire stock, or stock
acquired pursuant to the exercise of a right or warrant, may be valued
taking into account various factors such as original cost to the Fund,
earnings and net worth of the issuer, market prices for securities of
similar issuers, assessment of the issuer's future prosperity,
liquidation value or third party transactions involving the issuer's
securities. Securities for which there exist no price quotations or
valuations and all other assets are valued at fair value as determined
in good faith by or on behalf of the Board of Directors of the Fund.
DESCRIPTION OF SHARES
The Fund is authorized to issue 200,000,000 shares of capital
stock, par value $.10 per share, all of which shares initially are
classified as Common Stock. The Board of Directors is authorized,
however, to classify and reclassify any unissued shares of capital stock
by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption. The Fund may reclassify an amount
of unissued capital stock into one or more additional or other classes
or series in accordance with limitations set forth in the Investment
Company Act.
Shares of Common Stock, when issued and outstanding, will be fully
paid and non-assessable. Shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to shareholders
upon liquidation of the Fund. Shareholders are entitled to one vote for
each share held.
The Fund will send unaudited reports at least semi-annually and
audited annual financial statements to all of its shareholders.
36
<PAGE>
As of ----------- --, 1994, there were -------- shares issued and
outstanding, all of which were owned by the Investment Adviser.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation require the Board of Directors
to submit a proposal to convert the Fund to an open-end investment
company to shareholders during the third quarter of 1996, unless the
Board of Directors determines that conversion at that time would not be
in the best interests of shareholders. See "The 1996 Vote to Convert to
Open-End Status."
The Fund's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Directors and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of
the Fund. A Director may be removed from office with or without cause
but only by vote of the holders of at least 662/3% of the shares
entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable
vote of the holders of at least 66-2/3% of the Fund's shares of capital
stock, then entitled to be voted, voting as a single class, to approve,
adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of
the Fund with any other corporation,
(ii) a sale of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's
investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the
affirmative vote of at least two-thirds of the total number of Directors
fixed in accordance with the by-laws of the Fund, in which case the
affirmative vote of a majority of the Fund's shares of capital stock is
required.
In addition, conversion of the Fund to an open-end investment
company would require an amendment to the Fund's Articles of
Incorporation. The amendment would have to be determined to be in the
best interest of the shareholders of the Fund by the Board of Directors
prior to its submission to shareholders. Such an amendment would
require the favorable vote of the holders of at least a majority of the
Fund's outstanding shares entitled to be voted on the matter. Such a vote
also would satisfy a separate requirement in the Investment Company Act
that the change be approved by the shareholders. Shareholders of an open-
end investment company may require the company to redeem their shares of
common stock at any time (except in certain circumstances as authorized
by or under the Investment Company Act) at their net asset value, less
such redemption charge, if any, as might be in effect at the time of a
redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption and the
shares no longer would be listed on a stock exchange. Conversion
to an open-end investment company also would require changes in certain
of the Fund's investment policies and restrictions, such as those
relating to the borrowing of money and the purchase of illiquid
securities.
The Board of Directors has determined that the 66-2/3% voting
requirements described above, which are greater than the minimum
requirements under Maryland law or the Investment Company Act, are in
the best interests of shareholders generally. Reference should be made
to the Articles of Incorporation on file with the Securities and
Exchange Commission for the full text of these provisions.
37
<PAGE>
CUSTODIAN
------------------- will act as the custodian for the Fund's assets
and will employ foreign sub-custodians approved by the Fund's Board of
Directors in accordance with regulations of the Securities and Exchange
Commission.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") has agreed, subject to the terms and conditions of a Purchase
Agreement with the Fund and the Investment Adviser, to purchase shares
of Common Stock from the Fund. Merrill Lynch is committed to purchase
all of such shares if any are purchased.
Merrill Lynch has advised the Fund that it proposes initially to
offer the shares to the pubic at the public offering price set forth on
the cover page of this Prospectus, except that the price will be reduced
to $---- per share for purchases in single transactions of between -----
------- and ------- shares ($---- for purchases in single
transactions of ---- or more shares). Merrill Lynch also has advised
the Fund that it may offer shares to certain dealers at the initial
offering price set forth in the preceding sentence less a concession not
in excess of $-------- per share ($----- per share for purchases in
single transactions of between ---- and ---- shares and $------ for
purchases in single transactions of ----------- or more shares).
Merrill Lynch may allow, and such dealers may reallow, a discount on
sales to certain other dealers not in excess of $---------- per share.
After the initial public offering, the public offering price, concession
and discount may be changed. Investors must pay for any shares of
Common Stock purchased in the initial public offering on or before -----
----, 1994. The maximum sales load of $---------- per share is equal to
----%, the sales load of $------------per share is equal to ------% and
the sales load of $-------- per share is equal to ------% of the
respective initial public offering prices. Investors must pay for any
shares of Common Stock purchased in the initial public offering on or
before --------------, 1994.
The Fund has granted Merrill Lynch an option, exercisable for 45
days after the date hereof, to purchase up to -------- additional shares
of Common Stock to cover over-allotments, if any, at the initial
offering price less the sales load. If such shares are purchased, the
total maximum price to public, maximum sales load and proceeds to the
Fund will be $----------, $----------- and $----------, respectively.
Prior to this offering, there has been no public market for the
Common Stock of the Fund. The Fund's shares of Common Stock have been
approved for listing on the ----------- Stock Exchange. However, during
an initial period which is not expected to exceed four weeks from the
date of this Prospectus, the Fund's shares will not be listed on any
securities exchange. Additionally, during such period, Merrill Lynch
does not intend to make a market in the Fund's shares, although a
limited market may develop. Consequently, it is anticipated that an
investment in the Fund will be illiquid during such period. In order to
meet the requirements for listing, Merrill Lynch has undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that Merrill Lynch from time to time may act
as a broker in connection with the execution of the Fund's portfolio
transactions. See "Portfolio Transactions."
Merrill Lynch is an affiliate of the Investment Adviser of the
Fund. Merrill Lynch's principal business address is Merrill Lynch World
Headquarters, World Financial Center, North Tower, New York, New York
10281-1305.
The Fund and the Investment Adviser have agreed to indemnify
Merrill Lynch against certain liabilities including liabilities under
the Securities Act of 1933.
38
<PAGE>
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
shares of the Fund is ---------------------.
LEGAL OPINIONS
Certain legal matters in connection with the shares offered hereby
will be passed upon for the Fund and Merrill Lynch by Brown & Wood, New
York, New York. Brown & Wood will rely as to matters of Maryland law on
the opinion of Ginsburg, Feldman and Bress, Chartered, Washington, D.C.
EXPERTS
The statement of assets, liabilities and capital of the Fund
included in this Prospectus has been so included in reliance on the
report of Deloitte & Touche, independent auditors, and on their
authority as experts in auditing and accounting.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
EMERGING AMERICA FUND, INC.
We have audited the accompanying statement of assets, liabilities
and capital of Emerging America Fund, Inc. as of ------------, 1994.
This financial statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, such statement of assets, liabilities and capital
presents fairly, in all material respects, the financial position of
Emerging America Fund, Inc. as of ---------, 1994, in conformity with
generally accepted accounting principles.
-----------, 1994
40
<PAGE>
EMERGING AMERICA FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
-----------, 1994
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred organization and offering
costs (Note 1) . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . .
LIABILITIES
Deferred organization and offering
costs (Note 1) . . . . . . . . . . . . . . . . . . . .
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $
=====
CAPITAL
Common Stock, par value $.10 per share;
200,000,000 shares authorized; 7,055
shares issued and outstanding (Note 1) . . . . . . . . $
Paid in Capital in excess of par . . . . . . . . . . . . ------
Total Capital-Equivalent of $
net asset value per share of
Common Stock (Note 1) . . . . . . . . . . . . . . $
======
Notes to Statement of Assets, Liabilities and Capital
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland
on February --, 1994, as a closed-end, non-diversified management
investment company and has had no operations other than the sale to Fund
Asset Management, L.P. (the "Investment Adviser") of an aggregate of ---
shares for $------- on ----------, 1994.
Deferred organization costs will be amortized on a straight-line
basis over a five-year period beginning with the commencement of
operations of the Fund. Direct costs relating to the public offering of
the Fund's shares will be charged to capital at the time of issuance.
Note 2. Management Arrangements
The Fund has engaged the Investment Adviser to provide investment
advisory and management services to the Fund. The Investment Adviser
will receive a monthly fee at the annual rate of 1.00% of the Fund's
average weekly net assets plus the proceeds of any outstanding
borrowings used for leverage.
41
<PAGE>
Note 3. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" and
as such (and by complying with the applicable provisions of the Internal
Revenue Code of 1986, as amended) will not be subject to Federal income
tax on taxable income (including realized capital gains) that is
distributed to shareholders.
42
<PAGE>
APPENDIX A
RATINGS OF FIXED INCOME SECURITIES
Description of Corporate Bond Ratings of Moody's Investors
Service, Inc. ("Moody's"):
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and generally are
referred to as "gilt-edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what
generally are known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as
with Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than with Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3, in each
generic rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the bond ranks in the
higher end of
<PAGE>
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its rating category.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is used in the quality
ranking of preferred stocks. The symbols, presented below, are designed
to avoid comparison with bond quality in absolute terms. It always
should be borne in mind that preferred stocks occupy a junior position
to bonds within a particular capital structure and that these securities
are rated within the universe of preferred stocks.
Preferred stock rating symbols and their definitions are as
follows:
aaa An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is
reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classifications,
earnings and assets protection, nevertheless, are expected to
be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not
well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payment.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each
rating classification from "aa" through "b" in its preferred stock
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
A-2
<PAGE>
Description of Corporate Bond Ratings of Standard & Poor's Corporation
("Standard & Poor's"):
AAA Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher-rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher-rated categories.
BB,B,
CCC,CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest payments and
principal repayments. The BB rating also is used for bonds
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions likely will impair capacity or willingness to pay
interest or repay principal. The B rating category also is
used for bonds subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
CCC Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal. The CCC
rating also is used for bonds subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC The rating CC typically is applied to bonds subordinated to
senior debt that is assigned an actual or implied CCC rating.
C The rating C typically is applied to bonds subordinated to
senior debt that is assigned an actual or implied CCC- rating.
The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments
are continued.
CI The C rating is reserved for income bonds on which no interest
is being paid.
A-3
<PAGE>
D Bonds rated D are in payment default. The D rating is used
when interest payments or principal repayments are not made on
the date due even if the applicable grace period has not
expired, unless
Standard & Poor's believes that such payments will be made
during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments
are jeopardized.
NR Not rated.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends
and any applicable sinking fund obligations. A preferred stock rating
differs from a bond rating inasmuch as it is assigned to an equity
issue, which issue is intrinsically different from, and subordinated to,
a debt issue. Therefore, to reflect this difference, the preferred
stock rating symbol normally will not be higher than the bond rating
symbol assigned to, or that would be assigned to, the senior debt of the
same issuer.
The preferred stock ratings are based on the following
considerations:
I. Likelihood of payment -- capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation;
II. Nature of, and provisions of, the issue; and
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for
issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this
category than for issues in "A" Category.
BB,B,
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay preferred stock obligations. "BB" indicates the
lowest degree of speculation and "CCC" the highest degree of
speculation. While such issues likely will have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
A-4
<PAGE>
CC The rating "CC" is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer
in default on debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-): To provide more detailed indications of
preferred stock quality, the ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell
or hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard &
Poor's does not perform an audit in connection with any rating and, on
occasion, may rely on unaudited financial information. The ratings may
be changed, suspended,or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
A-5
<PAGE>
APPENDIX B
OPTIONS AND FUTURES TRANSACTIONS
Reference is made to the discussion under the caption "Other
Investment Policies and Practices--Portfolio Strategies Involving
Options and Futures" above for information with respect to various
portfolio strategies involving such portfolio strategies.
Writing Covered Options
The writer of a covered call option has no control over when he may
be required to sell his securities since he may be assigned an exercise
notice at any time prior to the termination of his obligation as a
writer. If an option expires unexercised, the writer realizes a gain in
the amount of the premium. Such a gain, of course, may be offset by a
decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer realizes a gain or
loss from the sale of the underlying security.
Put Options on Portfolio Securities
The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through
its custodian, have deposited and maintained cash, cash equivalents,
U.S. government securities or other high grade liquid debt with the
Fund's custodian with a value equal to or greater than the exercise
price of the underlying securities. By writing a put, the Fund will be
obligated to purchase the underlying security at a price that may be
higher than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has
written.
Options Markets
The options in which the Fund invests may be options issued by The
Options Clearing Corporation (the "Clearing Corporation") which are
currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange, New York
Stock Exchange or Midwest Stock Exchange. An option position may be
closed out only on an exchange which provides a secondary market for an
option of the same series. If a secondary market does not exist, it
might not be possible to effect closing transactions in particular
options, with the result, in the case of a covered call option, that the
Fund will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons
for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on
an exchange; (v) the facilities of an exchange or the Clearing
Corporations may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options on
that exchange that had been issued by the Clearing Corporation as a
result of trade on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may also enter into OTC options, which are two-party
contracts with price and terms negotiated between the buyer and seller.
The staff of the Commission has taken the position that OTC options and
the assets used as cover for written OTC options are illiquid
securities. However, if the OTC option is sold by the Fund to a primary
U.S. government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund
<PAGE>
has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying security minus the
option's strike price). The repurchase price with the primary dealers
is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option
is "in-the-money." This Policy is not a fundamental policy of the Fund
and may be amended by the Directors of the Fund without the approval of
the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff
of its position.
Financial Futures and Options Thereon
The purchase or sale of a futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the
broker and the relevant contract market, which varies, but is generally
about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith"
deposit assuring the performance of both the purchaser and seller under
the futures contract. Subsequent payments to and from the broker,
called "variation margin," are required to be made on a daily basis as
the price of the futures contracts fluctuates making the long and short
positions in the futures contracts more or less valuable, a process
known as "mark to the market." At any time prior to the settlement date
of the futures contract, the position may be closed out by taking an
opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the
broker and the purchaser realizes a loss or gain. In addition, a
nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Commission exempting it
from the provisions of Section 17(f) of the Investment Company Act in
connection with its strategy of investing in futures contracts. Section
17(f) relates to the custody of securities and other assets of an
investment company and may be deemed to prohibit certain arrangements
between the Fund and commodities brokers with respect to initial and
variation margin.
Risk Factors in Options and Futures Transactions
In the case of a futures position or an option on a futures
position written by the Fund, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the
securities underlying futures contracts it holds. The inability to
close options and futures positions also could have an adverse impact on
the Fund's ability to hedge effectively its portfolio.
The exchanges on which the Fund intends to conduct its options
transactions have generally established limitations governing the
maximum number of call or put options on the same underlying security
(whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held
or written on one or more accounts or through one or more brokers).
"Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order
the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Investment
Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the
Fund's portfolio.
B-2
<PAGE>
============================== ==============================
No person has been
authorized to give any
information or to make any
representations not contained
in this Prospectus and, if
given or made, such --------- Shares
information or representations
must not be relied upon as
having been authorized. This
Prospectus does not constitute
an offering of any securities EMERGING AMERICA FUND, INC.
other than the registered
securities to which it relates
or an offer to any person in
any State or jurisdiction of
the United States or any
country where such offer would
be unlawful. Common Stock
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . .
Risk Factors and Special
Considerations . . . . . .
Fee Table . . . . . . . . .
The Fund . . . . . . . . . .
Use of Proceeds . . . . . . ------------------
The 1996 Vote to Convert to
Open-End Status . . . . . . . PROSPECTUS
Investment Objective and ------------------
Policies . . . . . . . . .
Other Investment Policies and
Practices . . . . . . . .
Investment Restrictions . .
Selected Economic and Market
Data . . . . . . . . . . .
Directors and Officers . . .
Investment Advisory and
Management Arrangements . .
Portfolio Transactions . . .
Dividends and Distributions
Taxes . . . . . . . . . .
Automatic Dividend
Reinvestment Plan . . . .
Mutual Fund Investment
Option . . . . . . . . . .
Net Asset Value . . . . . .
Description of Shares
Custodian . . . . . . . . .
Underwriting . . . . . . . .
Transfer Agent, Dividend
Disbursing Agent
and Registrar . . . . . .
Legal Opinions . . . . . . .
Experts . . . . . . . . . .
Independent Auditors'
Report . . . . . . . . . .
Statement of Assets,
Liabilities and Capital . .
Appendix A . . . . . . . . .
Appendix B . . . . . . . . . Merrill Lynch & Co.
------------------
Until --------------, 1994
(90 days after the
commencement of the offering),
all dealers effecting
transactions in the Common
Stock, whether or not ------------, 1994
participating in this
distribution, may be required
to deliver a Prospectus. This
delivery requirement is in
addition to the obligation
of dealers to deliver a
Prospectus when acting as
underwriters and with respect
to their unsold allotments or
subscriptions.
============================== ==============================
Code # -----
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of
-----------, 1994
(2) Exhibits:
(a) -- Articles of Incorporation*
(b) -- Form of By-Laws*
(c) -- Not applicable
(d)(1) --Specimen certificate for Common Stock*
(d)(2) --Portions of the Articles of Incorporation
and the By-Laws of the Registrant defining
the rights of holders of shares of the
Registrant.*
(e) --Form of Dividend Reinvestment Plan*
(f) --Not applicable
(g) --Form of Investment Advisory Agreement
between the Fund and Fund Asset
Management, L.P.*
(h)(1) --Form of Purchase Agreement*
(2) --Merrill Lynch Standard Dealer Agreement*
(i) --Not applicable
(j) --Custodian Contract between the Fund and *
(k) --Registrar, Transfer Agency and Service
Agreement between the Fund and
*
(l) --Opinion and Consent of Brown & Wood, counsel
to the Fund*
(m) --Not applicable
(n) --Consent of -------, independent auditors for
the Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
------------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Item 25. Marketing Arrangements.
See Exhibit (h).
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this Registration
Statement:
Registration Fees . . . . . . . . . . . . . . . . . . . . . $ *
Stock Exchange listing fee . . . . . . . . . . . . . . . . *
Printing (other than stock certificates) . . . . . . . . . *
Engraving and printing stock certificates . . . . . . . . . *
Fees and expenses of qualifications under state
securities laws (including fees of counsel) . . . . . . . *
Legal fees and expenses . . . . . . . . . . . . . . . . . . *
Accounting fees and expenses *
NASD fees . . . . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . *
-----
Total . . . . . . . . . . . . . . . . . . . . . . . . $ *
=====
-----------------
* To be provided by amendment.
Item 27. Persons Controlled by or Under Common Control with Registrant.
The information in the Prospectus under the caption "Investment
Advisory and Management Arrangements" and in Note l to the Statement of
Assets, Liabilities and Capital is incorporated herein by reference.
Item 28. Number of Holders of Securities.
There will be one record holder of the Common Stock, par value $.10
per share, as of the effective date of this Registration Statement.
Item 29. Indemnification.
Section 2-18 of the General Corporation Law of the State of
Maryland, Article VI of the Fund's Articles of Incorporation, Article VI
of the Fund's By-Laws and the Investment Advisory Agreement to be filed
as Exhibit (g) provide for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Fund of expenses incurred or paid by a
director, officer or controlling person of the Fund in connection with
any successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Fund will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
C-2
<PAGE>
Reference is made to Section Six of the Purchase Agreement, a form
of which is filed as Exhibit (h) (l) hereto, for provisions relating to
the indemnification of the underwriter.
Item 30. Business and Other Connections of the Investment Adviser.
Fund Asset Management, L.P., (the "Investment Adviser") acts as
investment adviser for the following registered investment companies:
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series
Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Institutional Tax-Exempt Fund,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured
Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured
Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc. MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc. and
Taurus MuniNewYork Holdings, Inc., Worldwide Dollarvest Fund, Inc. The
address of each of these investment companies is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Tax-Exempt Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser and its affiliate, Merrill Lynch
Asset Management, L.P. ("MLAM"), also, is Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML &
Co.") is North Tower, World Financial Center, 250 Vesey Street, New
York, New York 10281-1213.
Set forth below is a list of each 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 for the past two years for his own account or in the
capacity of director, officer, employee, partner or trustee. In
addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr.
Glenn is Executive Vice President of all or substantially all of the
investment companies described in the preceding paragraph and also hold
the same positions with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the
Investment Adviser. Messrs. Durnin, Giordano, Harvey, Hewitt and
Monagle are directors or officers of one or more of such companies.
C-3
<PAGE>
Officers and Partners of FAM are set forth below as follows:
<TABLE>
<CAPTION>
Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------- ----------------------
<S> <C> <C>
ML & Co. . . . . . . . Limited Partner Financial Services
Holding Company
Fund Asset Limited Partner Investment Advisory
Management, Inc. . . . Services
Princeton Services,
Inc. ("Princeton
Services") . . . . . General Partner General Partner of MLAM
Arthur Zeikel . . . . President President of MLAM;
President and Director
of Princeton Services;
Director of Merrill
Lynch Funds Distributor,
Inc. ("MLFD"); Executive
Vice President of ML &
Co.; Executive Vice
President of Merrill
Lynch
Terry K. Glenn . . . . Executive Vice Executive Vice President
President of MLAM; President and
Director of MLFD;
Director of Princeton
Services; President of
Princeton Administrators
Bernard J. Durnin . . . 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 Griffin . . . Senior Vice President Senior Vice President of
MLAM
Norman R. Harvey . . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
N. John Hewitt . . . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein . . Senior Vice President, Senior Vice President,
General Counsel and General Counsel and
Secretary Secretary of MLAM;
Senior Vice President,
General Counsel,
Director and Secretary
of Princeton Services;
Director of MLFD
Ronald M. Kloss . . . . Senior Vice President Senior Vice President
and Controller and Controller of MLAM;
Senior Vice President
and Controller of
Princeton Services
Joseph T. Monagle . . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
C-4
<PAGE>
Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------- ----------------------
Gerald M. Richard . . . Senior Vice President Senior Vice President
and Treasurer and Treasurer of MLAM;
Senior Vice President
and Treasurer of
Princeton Services; Vice
President and Treasurer
of MLFD; Vice President
and Treasurer of MLFD
Richard L. Rufener . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services; Vice President
of MLFD
Ronald L. Welburn . . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Anthony Wiseman . . . . Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
</TABLE>
Item 31. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
by Section 31 (a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are maintained at the offices of the Registrant
(800 Scudders Mill Road, Plainsboro, New Jersey 08536), its investment
adviser (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
custodian and transfer agent ( ).
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(a) Registrant undertakes to suspend offering of the shares of
Common Stock covered hereby until it amends its Prospectus contained
herein if (1) subsequent to the effective date of this Registration
Statement, its net asset value per share of Common Stock declines more
than 10 percent from its net asset value per share of Common Stock as of
the effective date of this Registration Statement, or (2) its net asset
value per share of Common Stock increases to an amount greater than its
net proceeds as stated in the Prospectus contained herein.
(b) Registrant undertakes that:
(1) For the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 497(h) under the Securities Act shall
be deemed to be part of the registration statement as of the time
it was declared effective.
C-5
<PAGE>
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Plainsboro and State of New
Jersey, on the 28th day of February, 1994.
EMERGING AMERICA FUND, INC.
(Registrant)
By: /s/ Mark B. Goldfus
---------------------------
(Mark B. Goldfus, President)
Each person whose signature appears below hereby authorizes Mark B.
Goldfus, Robert Harris and Michael J. Hennewinkel or any of them, as
attorney-in-fact, to sign on his behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
Signatures Title Date
---------- ----- -----
/s/ Mark B. Goldfus
-------------------
(Mark B. Goldfus) President (Principal Executive February 28, 1994
Officer) and Director
/s/ Robert Harris Treasurer (Principal Financial February 28, 1994
------------------- and Accounting Officer) and
(Robert Harris) Director
/s/ Michael J. Hennewinkel Secretary and Director February 28, 1994
--------------------------
(Michael J. Hennewinkel)
C-7
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
------- ----
C-8
