<PAGE>
As filed with the Securities and Exchange Commission on March 21,
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 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. / /
------------------------
EMERGING FREEDOM 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 Freedom 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, L.P. Frank P. Bruno, 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 THE 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 Registered(1) Unit Price(1) Fee(2)
<S> <C> <C> <C> <C>
Common Stock (par value $.10 per share) 66,667 $15.00 $1,000,005 $344.83
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Payment has been made by wire transfer to the Commission's designated lockbox in Pittsburgh, Pennsylvania.
</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 FREEDOM 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 Cover Page, Underwriting
Back Cover Pages ...........
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 The Fund; Investment Objective
Registrant ................. and Policies; Other Investment
Policies and Practices
9. Management ................. Directors and Officers;
Investment Advisory and
Management Arrangements
Description of Shares
Not Applicable
10. Capital Stock, Long-Term
Debt and Other Securities .. Not Applicable
11. Defaults and Arrears on
Senior Securities ..........
12. Legal Proceedings .......... Not Applicable
13. Table of Contents of the
Statement of Additional
Information.................
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 MARCH 21, 1994
PROSPECTUS
----------
Shares
EMERGING FREEDOM FUND, INC.
Common Stock
-----------
Emerging Freedom Fund, Inc. (the "Fund") is a non-
diversified, closed-end management investment company seeking
long-term capital appreciation by investing primarily in equity
and debt securities of corporate and governmental issuers in
countries located in Africa and the Middle East ("African/Middle
Eastern countries"). For purposes of its investment objective,
the Fund may invest in the securities of issuers in all countries
in Africa and the Middle East. The Fund only will invest in
securities of issuers in African/Middle Eastern countries that
offer satisfactory market accessibility and custodial
arrangements. Presently, such countries include, among others,
South Africa, Morocco, Zimbabwe, Israel, Jordan and Turkey. The
investment objective of the Fund reflects the belief that the
securities markets of African/Middle Eastern countries present
attractive investment opportunities as a result of the potential
economic development in such regions. Under normal market
conditions, at least 65% of the Fund's total assets will be
invested in equity or debt securities of corporate and
governmental issuers in African/Middle Eastern countries. There
can be no assurance that the Fund's investment objective will be
achieved.
Investments in securities of issuers in African/Middle
Eastern countries involve special considerations and risks which
typically are not present in investments in the securities of
U.S. issuers. The Fund may invest without limitation 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
also 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 Price Maximum Proceeds to
to the Public(1) Sales Load(1)(2) the Fund(3)
<S> <C> <C> <C>
Per Share................. $15.00 $ $
Total(4).................. $ $ $
(footnotes on next page)
</TABLE>
----------------------------
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
(Continued from cover page)
<PAGE>
(1) The "Maximum Price to the Public" and "Maximum Sales Load" per
share will be reduced to $------- and $---------,
respectively, for purchases in single transactions of
between ----- and ----- shares and to $----- and $------,
respectively, 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
the 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 -------- 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 is qualified in its entirety by
reference to the more detailed information included elsewhere in
this Prospectus.
The Fund Emerging Freedom Fund, Inc. (the "Fund") is
a newly organized, non-diversified, closed-
end management investment company investing
primarily in equity and debt securities of
corporate and governmental issuers in
countries located in Africa and the Middle
East ("African/Middle Eastern countries").
See "The Fund."
Conversion to
Open-End Status The Fund's Articles of Incorporation require
the Board of Directors to submit a proposal
to convert the Fund to an open-end
investment company to 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 Objective
and Policies The investment objective of the Fund is to
seek long-term capital appreciation by
investing primarily in equity and debt
securities of corporate and governmental
issuers in African/Middle Eastern countries.
For purposes of its investment objective,
the Fund may invest in the securities of
issuers in all countries in Africa and the
Middle East. The Fund only will invest in
securities of issuers in African/Middle
Eastern countries that offer satisfactory
market accessibility and custodial
arrangements. Presently, such countries
include, among others, South Africa,
Morocco, Zimbabwe, Israel, Jordan and
Turkey. The government and government-
related debt securities or obligations in
which the Fund may invest are referred to
herein as "sovereign debt securities". The
investment objective of the Fund reflects
the belief that the securities markets of
African/Middle Eastern countries present
attractive investment opportunities as a
result of the potential economic development
in such regions. Under normal market
conditions, at least 65% of the Fund's total
assets will be invested in
3
<PAGE>
equity or debt securities of corporate and
governmental issuers in African/Middle
Eastern countries.
The Investment Adviser believes that the
quickening pace of political, social and
economic change in certain African/Middle
Eastern countries creates the potential for
rapid economic growth which will be
reflected in the prices of securities of
issuers in such countries. The Investment
Adviser also believes that regional growth
may result from governmental policies
directed toward market oriented economic
reform. In addition, certain African/Middle
Eastern countries have been introducing
deregulatory reforms to encourage
development of their securities markets and,
in varying degrees, to permit foreign
investment. While investments in
African/Middle Eastern countries are subject
to considerable risks (see "Risk Factors and
Special Considerations"), the Investment
Adviser believes that the developments in
the region referred to above present
attractive investment opportunities.
In addition to making equity investments,
the Fund will seek capital appreciation
through investment in sovereign and
corporate debt securities of issuers in
African/Middle Eastern 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. 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 also may
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, from
time to time, may invest in debt securities
with relatively high yields (as compared
with 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
will make an exchange offer or will be the
subject of a plan of reorganization.
Investment in Distressed Securities is
speculative and involves significant risk.
See "Risk Factors and Special
Considerations--Distressed Securities".
A company ordinarily will be considered to
be in an African/Middle Eastern country when
it is organized in, or the primary trading
market of its securities is located in, an
African/Middle Eastern country. The Fund
may consider a company to be in an
African/Middle Eastern country, without
reference to such company's domicile or to
the primary trading market of its
securities, when at
4
<PAGE>
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 in African/Middle Eastern
countries that are denominated in currencies
other than an African/Middle Eastern
country's currency. The Fund also may
consider a debt security that is denominated
in an African/Middle Eastern country's
currency to be a security of an issuer in an
African/Middle Eastern country without
reference to the principal trading market of
the security or to the location of its
issuer. Additionally, the Fund may consider
a derivative product tied to securities or
issuers located in African/Middle Eastern
countries to be the security of an
African/Middle Eastern 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.
The Fund is authorized to employ a variety
of investment techniques to hedge against
market and currency risks, although at the
present time suitable hedging instruments
may not be available with respect to
securities of companies or governments in
African/Middle Eastern countries on a timely
basis and on acceptable terms. Furthermore,
even if hedging techniques are available,
the Fund only will engage in hedging
activities from time to time and may not
necessarily be engaging in hedging
activities when market or currency movements
occur. There are certain risks associated
with the use of futures and options to hedge
investment portfolios. See Appendix B--
"Futures and Options Transactions--Risk
Factors in Futures and Options
Transactions."
Potential Benefits
of Investment in
the Fund Investment in shares of Common Stock of the
Fund potentially offers several benefits.
Many investors, particularly individuals,
lack the information or capability to invest
in African/Middle Eastern countries. It
also may not be permissible for such
investors to invest directly in the capital
markets of certain African/Middle Eastern
countries. The Fund offers investors the
possibility of obtaining capital
appreciation through a portfolio comprised
of securities of African/Middle Eastern
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. However, until additional
African/Middle Eastern countries become more
readily accessible to investment by foreign
entities, the Fund will not be able to
realize fully the potential benefits of such
diversification.
Listing 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. During
such period, Merrill Lynch does not intend
to make a market in the Fund's shares.
5
<PAGE>
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 -----% 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."
Dividends and
Distributions It is the Fund's intention to distribute
substantially all of its net investment
income. Dividends from such net investment
income are paid at least annually. All net
realized long-term and short-term capital
gains, if any, will be distributed to the
Fund's shareholders at least annually. See
"Dividends and Distributions."
Automatic Dividend
Reinvestment Plan All dividends and capital gains
distributions automatically will be
reinvested in additional shares of the Fund
unless a shareholder elects to receive cash.
Shareholders whose shares are held in the
name of a broker or nominee should contact
such broker or nominee to confirm that they
may participate in the Fund's dividend
reinvestment plan. See "Automatic Dividend
Reinvestment Plan."
Mutual Fund
Investment 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. See "Mutual Fund
Investment Option."
6
<PAGE>
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,
Dividend Disbursing
Agent and
Registrar --------------- will act as transfer agent,
dividend disbursing agent and registrar for
the Fund. See "Transfer Agent, Dividend
Disbursing Agent and Registrar."
7
<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 "Prospectus Summary--Listing" above, it is
anticipated that an investment in the Fund will be illiquid prior
to the listing of the Fund's shares on the ------------ 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
debt securities of issuers in African/Middle Eastern 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 also should be aware of
risks and considerations related to international investing and
investing in securities of issuers in smaller, emerging capital
markets, each of which may involve risks which typically are not
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
Investing on an international basis 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, difficulty in obtaining or enforcing a
court judgment, 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 also may be subject to
foreign withholding taxes. These risks often are heightened for
investments in smaller, emerging capital markets, such as those
in African/Middle Eastern 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 a foreign issuer than about a U.S. issuer 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, emerging
foreign capital markets. Foreign issuers, and issuers in
smaller, emerging capital markets in particular, generally are
not subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable
to those applicable to domestic issuers.
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 or the risk of
intermediary counter party failures 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.
8
<PAGE>
There generally is less governmental supervision and
regulation of exchanges, brokers and issuers in foreign countries
than there is in the United States. For example, there may be no
comparable provisions under certain foreign laws to insider
trading and similar securities laws that apply with respect to
securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on
foreign securities exchanges generally are higher than in the
United States.
Risks Relating to Investment in African/Middle Eastern Countries
Certain of the risks associated with international
investments are heightened for investments in African/Middle
Eastern countries. The securities markets of African/Middle
Eastern countries are significantly smaller than 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
African/Middle Eastern countries typically are fewer in number
and less capitalized than brokers in the United States. The Fund
may not invest more than 25% of its total assets in the sovereign
debt securities of any particular African/Middle Eastern country.
These factors, combined with other U.S. regulatory requirements
for closed-end investment 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.
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
African/Middle Eastern countries. Many of the African/Middle
Eastern countries may be subject to a greater degree of economic,
political and social instability than is the case in the United
States and Western European countries. Such instability may
result from, among other things: (i) authoritarian governments or
military involvement in political and economic decision-making,
including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved
political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection. For example,
South Africa currently is in transition from a system of
apartheid which disenfranchised a majority of the population to
one of racial equality and democracy with universal suffrage,
reflected in the schedule of general elections for April 26-28,
1994, the establishment of a multi-racial, multi-party
Transitional Executive Council (the "TEC") to oversee the
transition process and the adoption in December, 1993 of a new
interim Constitution scheduled to become effective on April 27,
1994, which guarantees fundamental individual rights and which
will apply until a permanent constitution is written by the
National Assembly, whose members will be elected in the general
elections. The path which this transition will follow and the
consequences of the steps taken and to be taken, however, involve
considerable uncertainty. While the two largest political
parties, the National Party (the party of the current white-
dominated government led by President F.W. de Klerk) and the
African National Congress (the "ANC") (the majority party led by
Nelson Mandela), support the major aspects of the transition thus
far, there are significant opponents to both the TEC and the
interim Constitution. The Inkatha Freedom Party (the "IFP"), a
political rival to the ANC, white Afrikaner separatists, white
supremacists and other minority groups have formed the Freedom
Alliance in opposition to the interim Constitution and thus far
have refused to participate in the TEC. These otherwise very
dissimilar groups each seek for themselves ethnic self-
determination and regional autonomy and share a common aversion
to the possibility of a strong central government dominated by
the ANC, the anticipated winner of the April, 1994 elections.
Members of the Freedom Alliance have indicated that they may
boycott and attempt to disrupt the elections unless their demands
are met. Furthermore, there is frequent civil violence,
especially between segments of the majority population, in
certain geographical areas. It is unclear whether and in what
manner political conflict may extend beyond the elections. The
negotiated and relatively rapid transition to majority rule
potentially could disrupt the stability of South Africa's
government and economy, since the majority of the population has
been denied self-rule since the institutionalization of
apartheid. By reason of apartheid, large segments of the
majority population also are relatively under-educated,
particularly at advanced levels, although significant steps are
being taken to reverse
9
<PAGE>
this situation. The current distribution of wealth is skewed
heavily to the disadvantage of the majority population, and there
is pressure to effect quickly a degree of redistribution. See
"Economic and Market Data--Africa."
Certain economies in African/Middle Eastern countries depend
to a significant degree upon exports of primary commodities such
as gold, silver, copper, diamonds and oil and, therefore, are
vulnerable to changes in commodity prices which, in turn, may be
affected by a variety of factors. In addition, governments of
many African/Middle Eastern 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, governmental actions in the future could have a
significant effect on economic conditions in African/Middle
Eastern 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 African/Middle Eastern
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 generally is
limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain African/Middle
Eastern countries. Similarly, the rights of investors in
African/Middle Eastern issuers 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
African/Middle Eastern country.
In addition to the relative lack of publicly available
information about African/Middle Eastern issuers and the
possibility that such issuers may not be subject to the same
accounting, auditing and financial reporting standards as U.S.
issuers, inflation accounting rules in some African/Middle
Eastern 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
indirectly may generate losses or profits for certain
African/Middle Eastern issuers.
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
African/Middle Eastern 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 African/Middle Eastern 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
African/Middle Eastern countries. There also are investment
opportunities in certain of such countries in pooled vehicles
that resemble open-end investment companies. Under the
Investment Company Act of 1940, as
10
<PAGE>
amended (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 African/Middle Eastern countries. Shares
of certain investment companies at times may 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 African/Middle Eastern 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 pay the interest when due in accordance with the terms of
such debt. A governmental entity's willingness or ability to
repay principal and pay 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 also may 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 pay interest when due may result in the cancellation
of such third parties' commitments to lend funds to the
governmental entity, which further may impair such debtor's
ability or willingness to service timely 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 on which a
governmental entity has defaulted may be collected in whole or in
part.
The sovereign debt securities 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 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". These
securities commonly are 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.
11
<PAGE>
The market values of high yield/high risk securities tend to
reflect individual issuer developments to a greater extent than
do higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Issuers of high
yield/high risk securities may be highly leveraged and may not
have available to them more traditional methods of financing.
Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high
yield/high risk securities may be more likely to experience
financial stress especially if such issuers are highly leveraged.
During such periods, service of debt obligations also may be
adversely affected by specific issuer developments, or the
issuer's inability to meet specific projected business forecasts,
or the unavailability of additional financing. The risk of loss
due to default by the issuer is significantly greater for the
holders of high yield/high risk securities because such
securities may be unsecured and may be subordinated to other
creditors of the issuer.
High yield/high risk securities may have call or redemption
features which would permit an issuer to repurchase the
securities from the Fund. If a call were exercised by the issuer
during a period of declining interest rates, the Fund likely
would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund
and dividends to shareholders.
The Fund may have difficulty disposing of certain high
yield/high risk securities because there may be a thin trading
market for such securities. To the extent that a secondary
trading market for high yield/high risk securities does exist, it
generally is 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 generally are 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 carefully will 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 readily are 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.
12
<PAGE>
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 futures and options
transactions involve the risk of imperfect correlation in
movements in the price of futures and options 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 Objective and
Policies--Other Investments", "Other Investment Policies and
Practices--Portfolio Strategies Involving Futures and Options"
and Appendix B--"Futures and Options 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
African/Middle Eastern 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 Sub-custodians and Securities Depositories
Rules adopted under the Investment Company Act permit the
Fund to maintain its foreign securities and cash in the custody
of certain eligible non-U.S. banks and securities depositories.
Certain banks in foreign countries may not be eligible sub-
custodians for the Fund, in which event the Fund may be precluded
from purchasing securities in certain foreign countries in which
it otherwise would invest or which may result in the Fund's
incurring additional costs and delays in providing transportation
and custody services for such securities outside of such
countries. Other banks that are eligible foreign sub-custodians
may be recently organized or otherwise lack extensive operating
experience. In addition, in certain countries there may be legal
restrictions or limitations on the ability of the Fund to recover
assets held in custody by foreign sub-custodians in the event of
the bankruptcy of the sub-custodian.
13
<PAGE>
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 asset
value 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 in the past frequently have traded at a
discount from their net asset value and initial offering price.
This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that a fund's net asset value
will decrease. The Fund cannot predict whether its own shares
will trade at, below or above net asset value. This risk of loss
associated with purchasing shares of a closed-end investment
company is more pronounced for investors who purchase in the
initial public offering and who wish to sell their shares in a
relatively short period of time.
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 the Fund's 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 interests
of the 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 also might 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 the 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, however, are 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
African/Middle Eastern countries with investment objectives
similar to the investment objective of the Fund.
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<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Maximum Sales Load (as a percentage
of the offering price) ........................ -.---%(a)
Dividend Reinvestment and
Cash Purchase Plan Fees ....................... None
Annual Expenses (as a percentage of net assets
attributable to Common Stock)
Management Fees(b) ............................ -----%
Interest Payments on Borrowed Funds None
Other Expenses
Transfer Agent Fees ................... ------
Custodian Fees ........................ ------
Miscellaneous ......................... ------
Total Other Expenses ............................... ------
Total Annual Expenses ............................... ===.==%
Example 1 year 3 years 5 years 10 years
------ ------- ------- --------
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 period: $ $ $ $
---------------
(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."
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.
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<PAGE>
THE FUND
Emerging Freedom 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 March 15, 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 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
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 interests 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 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
historically have traded, 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 must not
exceed 15% of the total assets of a registered open-end
investment company, any attempt to convert the Fund to an open-
end investment 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 total 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.
16
<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.
The Fund believes that, due to the relatively small size and low
trading volume of securities markets in African/Middle Eastern
countries generally, combined with certain investment
diversification requirements applicable to the Fund and the
Fund's desire to invest selectively in order to avoid adversely
influencing the prices paid by the Fund for its portfolio
securities, it may take up to one year from the date of
completion of the offering of the Common Stock, depending upon
market conditions and the availability of appropriate securities,
for the Fund to be fully invested in accordance with its
investment objective and policies. 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 debt
securities of corporate and governmental issuers in countries
located in Africa and the Middle East ("African/Middle Eastern
countries"). For purposes of its investment objective, the Fund
may invest in the securities of issuers in all countries in
Africa and the Middle East. Under normal market conditions, at
least 65% of the Fund's total assets will be invested in equity
or debt securities of corporate and governmental issuers in
African/Middle Eastern countries. This investment objective is a
fundamental policy of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act. The
Fund only will invest in securities of issuers in African/Middle
Eastern countries that offer satisfactory market accessibility
and custodial arrangements. Presently, such countries include,
among others, South Africa, Morocco, Zimbabwe, Israel, Jordan and
Turkey. The Fund is authorized to employ a variety of investment
techniques to hedge against market and currency risks, 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 Investment Adviser believes that the quickening pace of
political, social and economic change in certain African/Middle
Eastern countries creates the potential for rapid economic growth
which will be reflected in the prices of securities of issuers in
such countries. The Investment Adviser also believes that
regional growth may result from governmental policies directed
toward market oriented economic reform. In addition, certain
African/Middle Eastern countries have been introducing
deregulatory reforms to encourage development of their securities
markets and, in varying degrees, to permit foreign investment.
While investments in African/Middle Eastern countries are subject
to considerable risks (see "Risk Factors and Special
Considerations"), the Investment Adviser believes that the
developments in the region referred to above present attractive
investment opportunities.
In addition to making equity investments, the Fund will seek
capital appreciation through investment in sovereign and
corporate debt securities of issuers in African/Middle Eastern
countries. Such debt securities may be lower rated or unrated
obligations of corporate or sovereign 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. 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 also may 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, from time
to time, may invest
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in debt securities with relatively high yields (as compared with
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/high risk 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 potentially
offers several benefits. Many investors, particularly
individuals, lack the information or capability to invest in
African/Middle Eastern countries. It also may not be permissible
for such investors to invest directly in the capital markets of
certain African/Middle Eastern countries. The Fund offers
investors the possibility of obtaining capital appreciation
through a portfolio comprised of securities of African/Middle
Eastern 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. However,
until additional African/Middle Eastern countries become more
readily accessible to investment by foreign entities, the Fund
will not be able to realize fully the potential benefits of such
diversification.
The Fund will not necessarily seek to diversify investments
among African/Middle Eastern 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 African/Middle Eastern countries will be
determined by the Investment Adviser. Under certain adverse
investment conditions, the Fund may restrict the African/Middle
Eastern countries in which its assets are invested.
A company ordinarily will be considered to be in an
African/Middle Eastern country when it is organized in, or the
primary trading market of its securities is located in, an
African/Middle Eastern country. The Fund may consider a company
to be in an African/Middle Eastern 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 in African/Middle Eastern countries that are
denominated in currencies other than an African/Middle Eastern
country's currency. The Fund also may consider a debt security
that is denominated in an African/Middle Eastern country's
currency to be a security of an issuer in an African/Middle
Eastern country without reference to the principal trading market
of the security or to the location of its issuer. Additionally,
the Fund may consider a derivative product tied to securities or
issuers located in African/Middle Eastern countries to be the
security of an African/Middle Eastern 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.
The Fund may invest in debt securities ("sovereign debt
securities") issued or guaranteed by African/Middle Eastern
governments (including African/Middle Eastern countries,
provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities
issued or guaranteed by international organizations
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designated or supported by multiple foreign governmental entities
(which are not obligations of foreign governments) to promote
economic reconstruction or development ("supranational
entities"), debt securities issued by corporations or financial
institutions or debt securities issued by the U.S. Government or
an agency or instrumentality thereof. Sovereign debt securities
may take the form of 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. Presently, Nigeria is the only African/Middle
Eastern country which has issued Brady Bonds. 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 African 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 also may
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 African/Middle
Eastern countries, to hold cash or cash equivalents (in U.S.
dollars or foreign currencies) and short-term securities
including money market securities denominated in U.S. dollars or
foreign currencies ("Temporary Investments").
Description of Certain Investments
Warrants. The Fund may invest in warrants, which are
securities permitting, but not obligating, their holder to
subscribe for other securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they
do not represent any rights in the assets of the issuer. As a
result, an investment in warrants may be considered more
speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to its expiration date.
Distressed Securities. The Fund may invest in Distressed
Securities, which are securities that 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
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characteristics such as (i) higher yields than common stocks, but
lower yields than comparable nonconvertible securities, (ii) a
lesser degree of fluctuation in value than the underlying stock
since they have fixed income characteristics, and (iii) the
potential for capital appreciation if the market price of the
underlying common stock increases. A convertible security might
be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument.
If a convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to
redeem the security, convert it into the underlying common stock
or sell it to a third party.
Illiquid Securities. The Fund may invest 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
securities and corporate fixed income and equity 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.
Private Placements. The Fund may invest in securities of
issuers in African/Middle Eastern countries that are sold in
private placement transactions between the issuers and their
purchasers and that are neither listed on an exchange nor traded
in other established markets. In many cases, privately placed
securities will be subject to contractual or legal restrictions
on transfer. As a result of the absence of a public trading
market, privately placed securities in turn may be less liquid or
illiquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may
be resold in privately negotiated transactions, the prices
realized from the sales, due to illiquidity, could be less than
those originally paid by the Fund or less than their fair 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 in the value on a precious or industrial metal.
Interest and principal payable on a security also may be based on
relative changes among particular indices. In addition, the Fund
may invest in securities whose potential investment return is
inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate
of interest and principal when a particular index decreases and
pay a lower rate of interest and principal when the value of the
index increases. To the extent that the Fund invests in such
types of securities, it will be subject to the risks associated
with changes in the particular indices, which may include reduced
or eliminated interest payments and losses of invested principal.
Examples of such types of securities are indexed or inverse
securities issued with respect to a stock market index in a
particular African/Middle Eastern country.
Certain indexed securities, including certain inverse
securities, may have the effect of providing a degree of
investment leverage, because they may increase or decrease in
value at a rate that is a multiple of the changes in applicable
indices. As a result, the market value of such securities
generally will be more volatile than the market values of fixed-
rate securities. The Fund believes that indexed securities,
including inverse securities, represent flexible portfolio
management instruments that may allow the Fund to seek potential
investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under
different market conditions.
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Investment in Other Investment Companies and Venture Capital
Funds. The Fund may invest in other investment companies and
venture capital funds whose investment objectives and policies
are consistent with those of the Fund. In accordance with the
Investment Company Act, the Fund may invest up to 10% of its
total assets in securities of other investment companies. In
addition, under the Investment Company Act the Fund may not own
more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the
Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment
companies or venture capital funds, shareholders would bear both
their proportionate share of expenses in the Fund (including
management and advisory fees) and, indirectly, the expenses of
such investment companies or venture capital funds (including
management and advisory fees). Investment in such venture
capital funds involves substantial risk of loss to the Fund of
its entire investment.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Futures and Options
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 also may 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 futures and options transactions (as discussed in
Appendix B--"Futures and Options Transactions--Risk Factors in
Futures and Options Transactions"), the Investment Adviser
believes that, because the Fund will engage in futures and
options transactions only for hedging purposes, the futures and
options portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use
of futures and options transactions. 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
African/Middle Eastern countries on a timely basis and on
acceptable terms. Furthermore, the Fund only will 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 a decline in the price of the
underlying security.
The Fund also may write put options which give the holder of
the option the right to sell the underlying security to the Fund
at the stated exercise price. The Fund will receive a premium
for writing a put option which increases the Fund's return. The
Fund writes only covered put options, which means that so long as
the Fund is obligated as the writer of the option it will,
through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade
liquid debt securities denominated in U.S. dollars or
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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 option, the Fund will be obligated
to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise
for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it
has written. The Fund will not write put options if the
aggregate value of the obligations underlying the put options
shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put
options to hedge against a decline in the market value of its
securities. By buying a put option, the Fund has a right to sell
the underlying security at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any
appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put
option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid
for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund's position as the purchaser
of an option by means of any offsetting sale of an identical
option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options
on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund
will not purchase options on securities (including stock index
options discussed below) if as a result of such purchase, the
aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total
assets.
Stock Index Futures and Options and Financial Futures. The
Fund is authorized to engage in transactions in stock index
futures and options 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 also may 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 in an attempt to offset the decrease in
market value of the Fund's securities portfolio that otherwise
might 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.
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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
contracts 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 futures and options transactions on
U.S. and foreign exchanges and in options in over-the-counter
markets ("OTC options"). Exchange-traded contracts are third-
party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which, in
general, have standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and
terms negotiated by the buyer and seller.
Foreign Currency Hedging. The Fund has authority to deal in
forward exchange among currencies of the different countries in
which it will invest and multinational currency units as a hedge
against possible variations in the foreign exchange rates among
these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time
of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions
or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with
the purchase and sale of its portfolio securities, the sale and
redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of
forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The
Fund has no limitation on transaction hedging. The Fund will not
speculate in foreign forward exchange. Further, where the Fund
is hedging foreign forward exchange, the Fund will segregate at
its custodian cash or high grade liquid debt securities having a
current market value representing any subsequent decrease in the
market value of such hedged foreign forward exchange. Hedging
against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. Investors should be aware that in certain
African/Middle Eastern countries no forward market for foreign
currencies currently exists or such market may be closed to
investment by the Fund.
The Fund also is 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 South African rand-denominated
security. In such circumstances, for example, the Fund may
purchase a foreign currency put option enabling it to sell a
specified amount of South African rand for dollars at a specified
price by a future date. To the extent the hedge is successful, a
loss in the value of the South African rand 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 also may sell a call option
which, if exercised, requires it to sell a specified amount of
South African rand 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
South African rand 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 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
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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. Further, where the Fund is
hedging foreign currency instruments, the Fund will segregate at
its custodian cash or high grade liquid debt securities having a
current market value representing any subsequent decrease in the
market value of such hedged foreign currency instruments. The
Fund may not incur potential net liabilities of more than 20% of
its total assets from foreign currency options, futures or
related options.
Restrictions on the Use of Futures Transactions.
Regulations of the Commodity Futures Trading Commission
applicable to the Fund provide that the futures trading
activities described herein will not result in the Fund being
deemed a "commodity pool" under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for
bona fide hedging purposes, and (ii) for non-hedging purposes, if
the aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into
account unrealized profits and unrealized losses on any such
contracts and options.
When the Fund purchases a futures contract, or writes a put
option or purchases a call option thereon, an amount of cash and
cash equivalents will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the
amount of initial and variation margin held in the account of its
broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
Other Investment Policies and Practices
Standby Commitment Agreements. The Fund from time to time
may 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
at all times will 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 reasonably can be expected to be issued,
and the value of the security thereafter will be reflected in the
calculation of the Fund's net asset value. The cost basis of the
security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will
be recorded as income on the expiration date of the standby
commitment.
When-Issued and Forward Commitment Securities. The Fund may
purchase securities on a "when-issued" basis or through a forward
commitment. 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
transactions 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
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<PAGE>
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 at all times will 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 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 also will
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
25
<PAGE>
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 of Portfolio Securities. The Fund from time to time
may lend securities from its portfolio, with a value not
exceeding 33 1/3% of its total assets, to banks, brokers and
other financial institutions and receive collateral in cash or
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The purpose of such loans is to
permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral
is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect
of such investment is retained by the Fund. Alternatively, if
securities are delivered to the Fund as collateral, the Fund and
the borrower negotiate a rate for the loan premium to be received
by the Fund for lending its portfolio securities. In either
event, the total yield on the Fund's portfolio is increased by
loans of its portfolio securities. The Fund will have the right
to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. Such loans
are terminable at any time. The Fund may pay reasonable
finder's, administrative and custodial fees in connection with
such loans.
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 participations or
assignments or other corporate debt securities and
investment in government obligations or participations 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.
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<PAGE>
7. Borrow money or pledge its assets, except that the
Fund (a) may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions
in amounts not exceeding 20% (taken at market value) of its
total assets and pledge its assets to secure such
borrowings, (b) may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of
portfolio securities and (c) may purchase securities on
margin to the extent permitted by applicable law. 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.
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.
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.
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
27
<PAGE>
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.
SELECTED ECONOMIC AND MARKET DATA
Africa
(To be provided by amendment)
The Middle East
(To be provided by amendment)
DIRECTORS AND OFFICERS
The Directors of the Fund consist of --- individuals, ----
of whom are not "interested persons", as defined in the
Investment Company Act, of the Fund. The Directors are
responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of
investment companies by the Investment Company Act. The
Directors and executive officers of the Fund and their principal
occupations during the last five years are set forth below.
Unless otherwise noted, the address of each Director and
executive officer is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
ARTHUR ZEIKEL -- President (1)(2) -- President and Chief
Investment Officer of the Investment Adviser and of MLAM;
President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; Executive Vice President of ML & Co. 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
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<PAGE>
The Investment Adviser is an affiliate of MLAM, which is
owned and controlled by 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 ------% of the Fund's average weekly net assets ("average
weekly net assets" means the average weekly value of the total
assets of the Fund minus the sum of (i) accrued liabilities of
the Fund and (ii) any accrued and unpaid interest on outstanding
borrowings). For purposes of this calculation, average weekly
net assets are determined at the end of each month on the basis
of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by
averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and
employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well
as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its
affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing
proxies, stock certificates and 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.
29
<PAGE>
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 the execution of transactions in portfolio securities.
Subject to obtaining the best price and execution, securities
firms which provide supplemental investment research to the
Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory
Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such
supplemental information.
The Fund anticipates that its brokerage transactions
involving securities of issuers domiciled in countries other than
the United States generally will be conducted primarily on the
principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States,
although the Fund will endeavor to achieve the best net results
in effecting its portfolio transactions. There generally is less
governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
The Fund will invest in certain securities traded in
over-the-counter markets. Debt securities in which the Fund may
invest are traded primarily 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 African/Middle Eastern 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
30
<PAGE>
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 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 first will reduce the adjusted
tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon
the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent
of any capital gain dividends received by the shareholder.
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.
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<PAGE>
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 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 the
distributions from such company and on gain from the disposition
of the shares of such company (collectively referred to as
"excess distributions"), even if such excess distributions are
paid by the Fund as a dividend to its shareholders. The Fund may
be eligible to make an election with respect to certain PFICs in
which it owns shares that will allow it to avoid the taxes on
excess distributions. However, such election may cause the Fund
to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under
proposed regulations which, when finalized, are expected to apply
retroactively, the Fund may elect to "mark to market" at the end
of each taxable year all shares that it holds in PFICs. If it
makes this election, the Fund will recognize as ordinary income
any increase in the value of such shares. Unrealized losses,
however, will not be recognized. By making the mark-to-market
election, the Fund can avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any
particular year may be required to recognize income in excess of
the distributions it receives from PFICs and its proceeds from
dispositions of PFIC stock.
32
<PAGE>
Tax Treatment of Futures, Options and Forward Foreign Exchange
Transactions
The Fund may write, purchase or sell futures, options and
forward foreign exchange contracts. Futures, options or forward
foreign exchange contracts that are "Section 1256 contracts" will
be "marked-to-market" for Federal income tax purposes at the end
of each taxable year, i.e., each such futures, options or forward
foreign exchange contract will be treated as sold for its fair
market value on the last day of the taxable year. Unless such
contract is a non-equity option or a regulated futures contract
for a non-U.S. currency and the Fund elects to have gain or loss
in connection with the contract treated as ordinary gain or loss
under Code Section 988 (as described below), gain or loss
attributable to Section 1256 contracts will be 60% long-term and
40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions
entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256
contract will be marked to market, as described above. However,
the character of gain or loss from such a contract generally will
be ordinary under Code Section 988. The Fund, nonetheless, may
elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss
realized in connection with a forward foreign exchange contract
that is a Section 1256 contract will be characterized as 60%
long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may
affect the taxation of the Fund's futures, options 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 futures and options 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 a futures or options contract.
Special Rules for Certain Foreign Currency Transactions. In
general, gains from "foreign currencies" and from foreign
currency futures, foreign currency options 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 futures, foreign
currency options 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.
33
<PAGE>
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 African/Middle Eastern 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 also may be
subject to state and local taxes.
Certain states exempt from state income taxation dividends
paid by RICs that are derived from interest on U.S. Government
obligations. State law varies as to whether dividend income
attributed to U.S. Government obligations is exempt from state
income tax.
Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, foreign, state or
local taxes. Foreign investors should consider applicable
foreign taxes in their evaluations of an investment in the Fund.
----------------
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
34
<PAGE>
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.
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 of the Fund's shares plus commissions is above
the net asset value, participants in the Plan will receive shares
of the Fund at less than they otherwise could 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 ----------------------------.
35
<PAGE>
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 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.
37
<PAGE>
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 financial statements annually to all of its
shareholders.
As of -------- --, 1994, there were ---- shares issued and
outstanding, all of which were owned by the Investment Adviser.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation require the Board of
Directors to submit a proposal to convert the Fund to an open-end
investment company to the Fund's shareholders during the second
quarter of 1996, unless the Board of Directors determines that
conversion at that time would not be in the best interests of the
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, 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 interests of the shareholders of the
Fund by the Board of Directors prior to its submission to
shareholders. Such an amendment
37
<PAGE>
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 issuance of senior securities and the purchase of illiquid
securities.
The Board of Directors has determined that the 66 2/3%
voting requirements described above, which are greater than the
minimum requirements under Maryland law or the Investment Company
Act, are in the best interests of shareholders generally.
Reference should be made to the Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of
these provisions.
CUSTODIAN
------------------- will act as the custodian for the
Fund's assets and will employ foreign sub-custodians approved by
the Fund's Board of Directors in accordance with regulations of
the Securities and Exchange Commission.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") has agreed, subject to the terms and conditions of a
Purchase Agreement with the Fund and the Investment Adviser, to
purchase ------------- shares of Common Stock from the Fund.
Merrill Lynch is committed to purchase all of such shares if any
are purchased.
Merrill Lynch has advised the Fund that it proposes
initially to offer the shares to the public at the public
offering price set forth on the cover page of this Prospectus,
except that the price will be reduced to $---- per share for
purchases in single transactions of between ------- and -------
shares and to $ 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. 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.
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
39
<PAGE>
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.
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 ---------------------, 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 FREEDOM FUND, INC.
We have audited the accompanying statement of assets,
liabilities and capital of Emerging Freedom 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 Freedom Fund, Inc. as of -----------, 1994,
in conformity with generally accepted accounting principles.
-----------, 1994
40
<PAGE>
EMERGING FREEDOM 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 March 15, 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
FUTURES AND OPTIONS TRANSACTIONS
Reference is made to the discussion under the caption "Other
Investment Policies and Practices--Portfolio Strategies Involving
Futures and Options" 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,
through its custodian, will 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 currently are traded on the Chicago Board Options Exchange,
the American Stock Exchange, the Philadelphia Stock Exchange, the
Pacific Stock Exchange, the New York Stock Exchange or the
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 be
adequate at all times to handle current trading volume; or (vi)
one or more exchanges, for economic or other reasons, could
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 also may enter into OTC options, which are two-
party contracts with price and terms negotiated between the buyer
and seller. The staff of the Securities and Exchange Commission
has taken the position that OTC
<PAGE>
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 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
generally is 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 generally is 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 of 1940 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 Futures and Options 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
futures and options 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 generally have 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 ------- Shares
authorized to give any
information or to make any
representations not contained
in this Prospectus and, if
given or made, such
information or representations
must not be relied upon as
having been authorized. This
Prospectus does not constitute
an offering of any securities
other than the registered
securities to which it relates
or an offer to any person in EMERGING FREEDOM
any State or jurisdiction of FUND, INC.
the United States or any
country where such offer would
be unlawful.
____________
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . .
Risk Factors and Special
Considerations . . . . . . .
Fee Table . . . . . . . . .
The Fund . . . . . . . . . .
Use of Proceeds . . . . . . Common Stock
The 1996 Vote to Convert to
Open-End Status . . . . . .
Investment Objective and
Policies . . . . . . . . .
Other Investment Policies and
Practices . . . . . . . .
Investment Restrictions . . --------------
Selected Economic and
Market Data . . . . . . . . PROSPECTUS
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 . . . . .
Legal Opinions . . . . . . .
Experts . . . . . . . . . . .
Independent Auditors' Report.
Statement of Assets, Liabilities
and Capital . . . . . . . .
Appendix A . . . . . . . . .
Appendix B . . . . . . . . .
____________
Until -----------, 1994 (90
days after the commencement of
the offering), all dealers
effecting transactions in the
Common Stock, whether or not
participating in this
distribution, may be required
to deliver a Prospectus. This
delivery requirement is in
addition to the obligation of Merrill Lynch & Co.
dealers to deliver a
Prospectus when acting as
underwriters and with respect
to their unsold allotments or
subscriptions.
============================
-----------, 1994
==============================
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) --Form of 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 between the
Fund
and Fund Asset Management, L.P. and
Merrill Lynch, Pierce, Fenner & Smith
Incorporated*
(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.
** Reference is made to Article V, Article VI (sections 2, 3,
4, 5 and 6), Article VII, Article VIII, Article IX, Article X,
Article XI, Article XII and Article XIII of the Registrant's
Articles of Incorporation, filed herewith as Exhibit (a) to the
<PAGE>
Registration Statement; and to Article II, Article III (sections
1, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed herewith
as Exhibit (b) to the Registration Statement.
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 2-418 of the General Corporation Law of the State of
Maryland, Article VI of the Fund's Articles of Incorporation,
Article VI of the Fund's By-Laws and the Investment Advisory
Agreement filed herewith as Exhibit (g) provide for
indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") 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, therefore, is 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, unless in the opinion of its counsel the matter has been
settled by controlling precedent, will submit to a court of
appropriate jurisdiction the question whether such
C-2
<PAGE>
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
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., Taurus MuniNewYork
Holdings, Inc. and 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 during the
previous two years for his or her 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 the Investment Adviser are set
forth below as follows:
Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
____ __________________ ______________________
ML & Co. . . . . . . . Limited Partner Financial Services
Holding Company
Fund Asset Management, Limited Partner Investment Advisory
Inc. . . . . . . . . . Services
Princeton Services, Inc.
General Partner General Partner of
("Princeton MLAM
Services") . . . . . .
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 Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
Vincent R. Giordano . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
Elizabeth Griffin . . Senior Vice Senior Vice President
President of MLAM
Norman R. Harvey . . . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
N. John Hewitt . . . . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein . . Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of MLAM;
Secretary Senior Vice President,
General Counsel,
Director and Secretary
of Princeton Services;
Director of MLFD
Ronald M. Kloss . . . Senior Vice Senior Vice President
President and and Controller of
Controller MLAM; Senior Vice
President and
Controller of
Princeton Services
Joseph T. Monagle . . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
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Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
____ __________________ ______________________
Gerald M. Richard . . Senior Vice Senior Vice President
President and and Treasurer of MLAM;
Treasurer 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 Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services; Vice
President of MLFD
Ronald L. Welburn . . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
Anthony Wiseman . . . Senior Vice Senior Vice President
President of MLAM; Senior Vice
President of Princeton
Services
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 of 1933 shall be deemed to be part
of the registration statement as of the time it was declared
effective.
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(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.
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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 20th day of March,
1994.
EMERGING FREEDOM FUND, INC.
(Registrant)
By: /s/ PHILIP L. KIRSTEIN
-----------------------
(Philip L. Kirstein,
President)
Each person whose signature appears below hereby authorizes
Mark B. Goldfus, Michael J. Hennewinkel and Philip L. Kirstein 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/ PHILIP L. KIRSTEIN President (Principal March 20, 1994
---------------------- Executive Officer)
(Philip L. Kirstein) and Director
/s/ MARK B. GOLDFUS Treasurer (Principal March 20, 1994
------------------- Financial and Accounting
(Mark B. Goldfus) Officer) and Director
/s/ MICHAEL J. HENNEWINKEL Secretary and Director March 20, 1994
--------------------------
(Michael J. Hennewinkel)
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