As filed with the Securities and Exchange Commission on June 22, 1995
Securities Act File No. 33-55843
Investment Company Act File No. 811-07155
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[x]
Pre-Effective Amendment No.
[B]
Post-Effective Amendment No. 2
[x]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
[x]
Amendment No. 5
[x]
(Check appropriate box or boxes.)
(Exact name of Registrant as specified in charter)
Merrill Lynch Middle East/Africa Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
(Address of Principal Executive Offices)
08536
(Zip Code)
(Registrant's Telephone Number, including Area Code) (609) 282-2800
Arthur Zeikel
Merrill Lynch Middle East/Africa Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Copies to:
Counsel for the Fund:
Brown & Wood Philip L. Kirstein, Esq.
One World Trade Center Michael J. Hennewinkel, Esq.
New York, New York 10048-0557 Merrill Lynch Asset Management
Attention: Thomas R. Smith, Jr., Esq. P.O. Box 9011
Frank P. Bruno, Esq. Princeton, New Jersey 08543-9011
It is proposed that this filing will become effective (check appropriate box):
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has registered an indefinite number of shares of common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. No shares of common stock were sold pursuant to such Rule
during the Registrant's most recent fiscal year ended November 30, 1994 (prior
to commencement of the Registrant's operations). Therefore, pursuant to
paragraph (b)(2) of Rule 24f-2, the notice required by such Rule need not be
filed for such fiscal year.
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No. Location
<S> <C> <C>
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table; Prospectus Summary
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Prospectus Summary; Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund Fee Table; Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund Performance Not Applicable
Item 6. Capital Stock and Other Securities Cover Page; Purchase of Shares; Redemption of
Shares; Shareholder Services; Additional
Information
Item 7. Purchase of Securities Being Offered Cover Page; Fee Table; Prospectus Summary; Merrill
Lynch Select Pricing(SM) System; Purchase of Shares;
Shareholder Services; Additional Information; Inside
Back Cover Page
Item 8. Redemption or Repurchase Fee Table; Prospectus Summary; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares; Redemption
of Shares
Item 9. Pending Legal Proceedings Not Applicable
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Back Cover Page
Item 12. General Information and History Not Applicable
Item 13. Investment Objective and Policies Investment Objective and Policies
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities Management of the Fund; General Information--
Additional Information
Item 16. Investment Advisory and Other Services Management of the Fund; Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities Purchase of Shares; Redemption of Shares;
Shareholder Services; General Information--
Description of Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value; Shareholder
Services; General Information--Computation of
Offering Price Per Share
Item 20. Tax Status Taxes
Item 21. Underwriters Purchase of Shares
Item 22. Calculation of Performance Data Performance Data
Item 23. Financial Statements Independent Auditors' Report; Statement of
Assets and Liabilities (audited); Financial
Statements (unaudited)
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered,
in Part C to this Registration Statement
</TABLE>
<PAGE>
PROSPECTUS
June 22, 1995
Merrill Lynch Middle East/Africa Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 (bullet) Phone No. (609)
282-2800
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-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 the Middle East and
Africa ("Middle Eastern/African countries"). For purposes of its investment
objective, the Fund may invest in the securities of issuers in all countries in
the Middle East and Africa. The Fund expects initially to emphasize investments
in the securities of issuers in Morocco, South Africa, Turkey, Israel, Jordan
and Zimbabwe. 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 Middle Eastern/African countries. The Fund may employ a
variety of derivative investments and techniques to hedge against market and
currency risk. Also, the Fund may invest in certain derivative instruments,
such as indexed and inverse securities, to enhance its return. There can be no
assurance that the Fund's investment objective will be achieved. For more
information on the Fund's investment objective and policies, please see
"Investment Objective and Policies" on page 21.
Investments in securities of issuers in Middle Eastern/African countries
involve risks and special considerations not typically associated with
investments in 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 repayment of principal and/or payment of
interest at the time of acquisition by the Fund. These securities commonly are
referred to as "junk bonds". Such securities generally involve greater
volatility of price and risks to principal and income than securities in the
higher rating categories. See "Risk Factors and Special Considerations".
(Continued on next page)
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.
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated June 22, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
<PAGE>
(Continued from Cover Page)
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
See "Merrill Lynch Select Pricing(SM) System".
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except for retirement plans, where
the minimum initial purchase is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly
through Merrill Lynch Financial Data Services, Inc., the Fund's transfer agent
(the "Transfer Agent"), are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend Reinvest-
ments None None None None
Deferred Sales Charge (as a percentage of 4.0% during the first year
original purchase price or redemption decreasing 1.0% annually to 1% for
proceeds, whichever is lower) None(d) 0.0% after the fourth year one year None(d)
Redemption Fee Payable to the Fund (as a
percentage of amount redeemed)(e) 2.00% 2.00% 2.00% 2.00%
Annual Fund Operating Expenses
(as a percentage of average net assets):
Management Fees(f) 1.00% 1.00% 1.00% 1.00%
Rule 12b-l Fees(g):
Account Maintenance Fees None 0.25% 0.25% 0.25%
Distribution Fees None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after approximately
eight years and cease being subject to
distribution fees)
Other Expenses(h):
Custodial Fees 0.18% 0.18% 0.18% 0.18%
Shareholder Servicing Costs(i) 0.20% 0.25% 0.25% 0.20%
Miscellaneous 3.32% 3.32% 3.32% 3.32%
---- ---- ---- ----
Total Other Expenses 3.70% 3.75% 3.75% 3.70%
---- ---- ---- ----
Reimbursement of Expenses(j) (2.20)% (2.25)% (2.25)% (2.20)%
---- ---- ---- ----
Total Fund Operating Expenses 2.50% 3.50% 3.50% 2.75%
==== ==== ==== ====
</TABLE>
- -------------------------
(a) Class A shares are sold to a limited group of investors, including existing
Class A shareholders, certain retirement plans and certain investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares" on page 34.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares" on page 35.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more may not
be subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares" on page 34.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which may
not be subject to an initial sales charge instead may be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(e) Applies only to redemptions made within one year of purchase. See
"Redemption of Shares" on page 39.
(f) See "Management of the Fund--Management and Advisory Arrangements" on page
30.
(g) See "Purchase of Shares--Distribution Plans" on page 37.
(h) Information under "Other Expenses" is estimated for the Fund's first fiscal
year ending November 30, 1995.
(i) See "Management of the Fund--Transfer Agency Services" on page 31.
(j) Pursuant to state expense limitations imposed on the Fund for the period
ending November 30, 1995, the Manager would be required to reimburse its entire
management fee and voluntarily reimburse the Fund for a portion of other
expenses (excluding Rule 12b-1 fees).
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the
Period of:
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including, the maximum $52.50 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for each
class set forth above, (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A $95* $126 $179 $321
Class B $95* $127 $182 $361**
Class C $65* $107 $182 $377
Class D $98* $133 $190 $344
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A $76 $126 $179 $321
Class B $35 $107 $182 $361**
Class C $35 $107 $182 $377
Class D $79 $133 $190 $344
</TABLE>
* Reflects the 2.0% redemption fee payable to the Fund charged on redemptions
made within one year of purchase.
** Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" 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 past or future expenses or annual rates of
return, and actual expenses or annual rates of return may be more or less than
those assumed for purposes of the Example. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Transfer Agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
The Fund
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company investing primarily in
equity and debt securities of corporate and governmental issuers in countries
located in the Middle East and Africa ("Middle Eastern/African countries").
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 Middle Eastern/African countries. For purposes of
its investment objective, the Fund may invest in the securities of issuers in
all countries in the Middle East and Africa. The Fund initially expects to
emphasize investments in the securities of issuers in Morocco, South Africa,
Turkey, Israel, Jordan and Zimbabwe. 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 Middle Eastern/African countries. For
purposes of the Fund's investment objective and policies, the term "Middle
Eastern countries" includes, but is not limited to: Israel, Jordan, Egypt,
Syria, Lebanon, Turkey, Saudi Arabia, Iraq, Iran, Libya, Kuwait, Qatar,
Bahrain, Yemen, Oman and the United Arab Emirates, and the term "African
countries" includes all countries generally considered as part of the African
continent. There can be no assurance that the investment objective of the Fund
will be realized. See "Investment Objective and Policies".
The Fund is authorized to employ a variety of derivative investments and
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 Middle Eastern/African countries at
all or 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 A to
this Prospectus--"Futures, Options and Forward Foreign Exchange Transactions--
Risk Factors in Futures, Options and Currency Transactions". Also, the Fund may
invest in certain derivative instruments, such as indexed and inverse
securities, to enhance its return. See "Investment Objective and Policies--
Description of Certain Investments--Indexed and Inverse Securities".
Risk Factors and Special Considerations
Investment in securities of Middle Eastern/African issuers involves risks
and special considerations not typically associated with investment in
securities of U.S. issuers, including the risks associated with international
investing generally, such as currency fluctuations; the risks of investing in
countries with smaller capital markets, such as limited liquidity, price
volatility and restrictions on foreign investment; and the risks associated
with emerging economies of developing countries, including significant
political and social uncertainties, government involvement in the economies,
the possibility of asset expropriation or confiscatory levels of taxation,
reliance upon exports of primary commodities and different legal systems from
the United States. See "Risk Factors and Special Considerations".
The Fund has not established any rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality (commonly referred to as "junk bonds") are speculative
and generally involve greater volatility of price than securities in higher
rating
5
<PAGE>
categories. Also, the Fund may invest in debt securities of corporate or
governmental issuers that are in default. See "Risk Factors and Special
Considerations".
The Manager
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), which is
owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), acts as the
manager for the Fund and provides the Fund with management services. The
Manager or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the
investment adviser for over 130 other registered investment companies. The
Manager and FAM also offer portfolio management and portfolio analysis services
to individuals and institutions. As of May 31, 1995, the Manager and FAM had a
total of approximately $178.0 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager. See "Management of the Fund--Management and Advisory Arrangements".
Purchase and Redemption of Shares
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed (i) in the case of Class A or Class D shares, at the
time of the purchase or (ii) in the case of Class B or Class C shares, on a
deferred basis. Class D shares pay an ongoing account maintenance fee, and
Class B and Class C shares pay ongoing account maintenance and distribution
fees. See "Purchase of Shares".
Shareholders may redeem their shares at any time at the next determined net
asset value, except that the redemption price for shares redeemed during the
first year after purchase will be subject to the redemption fee discussed
below, Class B shares may be subject to a CDSC on shares redeemed within four
years of purchase and Class C shares may be subject to a CDSC on shares
redeemed within one year of purchase. See "Redemption of Shares".
The Fund is designed for long-term investors. To discourage short-term
trading in shares of the Fund, shares redeemed within 12 months of purchase are
subject to a redemption fee of 2.0% of the net asset value of the shares being
redeemed. The redemption fee is retained by the Fund and may be used to cover
the costs of liquidating portfolio securities.
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 "Additional
Information--Dividends and Distributions".
Determination of Net Asset Value
The net asset value of the Fund is determined by the Manager once daily, 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 P.M., New York time), on each day during which the New York Stock Exchange
is open for trading. See "Additional Information--Determination of Net Asset
Value".
6
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share, subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
60 mutual funds advised by MLAM or an affiliate of MLAM, FAM. Funds advised by
MLAM or FAM which use the Merrill Lynch Select Pricing (SM) System are referred
to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, are imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class.
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares".
7
<PAGE>
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge( (1)) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales charge No No No
((2) (3))
B CDSC for a period of up to 4 years, 0.25% 0.75% B shares convert to D
at a rate of 4.0% during the first shares automatically
year, decreasing 1.0% annually to after approximately
0.0% eight years( (4))
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales charge((3)) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $l,000,000 or more may not be
subject to an initial sales charge but instead will be subject to a 1.0% CDSC
for one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Eligible investors include certain retirement plans and participants
in certain investment programs. In addition, Class A shares will be
offered to ML & Co. and its subsidiaries (the term "subsidiaries",
when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.) and to their directors and employees and to
members of the Boards of MLAM- advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement plans
in connection with certain investment programs. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such shares will be subject to
a contingent deferred sales charge ("CDSC") of 1.0% if the shares are
redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to the Class B shares, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee. Automatic conversion of Class B shares into
Class D shares will
8
<PAGE>
occur at least once each month on the basis of the relative net asset
values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares, and the conversion and holding
periods for certain retirement plans, are modified as described under
"Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to Class C shares and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares also are subject to a
CDSC if they are redeemed within one year of purchase. Although Class
C shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature
and, accordingly, an investor that purchases Class C shares will be
subject to distribution fees that will be imposed on Class C shares
for an indefinite period subject to annual approval by the Fund's
Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain investment
programs. Class D shares also will be issued upon conversion of Class
B shares as described above under "Class B". See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares".
Shares of each class redeemed within 12 months of purchase are subject to a
redemption fee of 2.0% of the net asset value of shares being redeemed. See
"Redemption of Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may decide to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Class A, Class B, Class C and
Class D share holdings will count toward a right of accumulation which may
qualify the investor for reduced
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initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all of their funds invested initially and
intend to hold their shares for an extended period of time. Investors in Class
B shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all of their assets invested
initially and they are uncertain as to the length of time they intend to hold
their assets in MLAM-advised mutual funds. Although Class C shareholders are
subject to a shorter CDSC period at a lower rate, they forgo the Class B
conversion feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees
are further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Distribution Plans--Limitations on the Payment of Deferred
Sales Charges".
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RISK FACTORS AND SPECIAL CONSIDERATIONS
General
Because the Fund invests primarily in securities of issuers in Middle
Eastern/African countries, an investor in the Fund should be aware of certain
risk factors and special considerations relating not only to investing in the
economies of Middle Eastern/African countries, but also, more generally, to
international investing and investing in smaller, emerging capital markets,
each of which may involve risks which are not typically associated with
investments in securities of U.S. issuers. Consequently, the Fund should be
considered as a means of diversifying an investment portfolio and not in itself
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. Securities prices
in different countries are subject to different economic, financial, political
and social factors. Since the Fund invests 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. Currencies of certain
Middle Eastern/African countries may be volatile and therefore may affect the
value of securities denominated in such currencies. 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 domestic 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 Middle Eastern/African countries.
Most of the securities held by the Fund are not registered with the
Securities and Exchange Commission, nor are the issuers thereof 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 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 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.
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
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foreign laws to insider trading and similar investor protection 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.
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts") or other securities convertible
into securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States, and therefore, there may be less information
available regarding such issuers and there may not be a correlation between
such information and the market value of the Depositary Receipts. Depositary
Receipts also involve the risks of other investments in foreign securities, as
discussed above.
Risks Relating to Investment in Middle Eastern/African Countries
Certain of the risks associated with international investments are
heightened for investments in Middle Eastern/ African countries. Investment in
the securities of Middle Eastern/African issuers may increase the volatility of
the Fund's net asset value. The securities markets of Middle Eastern/African
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 also may be 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 Middle Eastern/African 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 Middle Eastern/African country. These factors, combined with
other U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment discussed below, result in potentially fewer
investment opportunities for the Fund, 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 are the political and social
uncertainties that exist for many of the Middle Eastern/African countries. Many
of the Middle Eastern/African 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 and terrorist activities; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection. Such economic,
political and social instability could severely disrupt the principal financial
markets in which the Fund invests and could adversely affect the value of the
Fund's assets. For example, South Africa currently is undergoing the drastic
political transformation from a system of apartheid to one of racial equality
and democracy. South Africa is now led by a national unity government comprised
of three partners: the African National Congress, the National Party and the
Inkatha Freedom Party. In the spring of 1994, Nelson Mandela, the leader of the
dominant party in the government, the African National Congress, became South
Africa's first black president in the country's first all-race elections. The
abolition of apartheid eliminated controversial racial legislation and led to
the lifting of economic sanctions, both of which had burdened South Africa's
political climate and economic structure. Many problems still persist, however,
among them the lingering economic disparity between the black and white
populations, as white citizens continue to hold a greatly disproportionate
portion of the country's wealth. Other difficulties that
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continue to beset South Africa include a high rate of unemployment, labor
unrest and ongoing racial tensions. Despite the repeal of economic sanctions
and the government's stated intention to stabilize the economy, anticipated
sustained economic growth has not yet come to fruition. As another example,
Islamic militants have grown in number in a few Middle Eastern countries, and
Iran has been ruled by Islamic fundamentalists since 1979. If these militants
gain strength, they may present a challenge to openness to foreign investment.
In addition, some of these movements may have destabilizing effects because
they espouse violence and anti-Western sentiments as a means to achieving their
goals, and have denounced efforts to resolve the Arab-Israeli conflict. If such
groups were to gain control of the governments of any other Middle Eastern
countries, the resulting economic, political and social changes could have an
adverse effect on the Fund's investments in such countries.
In addition, in certain Middle Eastern/African countries there may be the
possibility of asset expropriations or future confiscatory levels of taxation
affecting the Fund. In the event of expropriation, nationalization or other
confiscation, the Fund may not be fairly compensated for any losses and could
lose its entire investment in the country involved. Actions of the governments
of Middle Eastern/African countries in the future could have a significant
effect on local economies, which could adversely affect private sector
companies, market conditions and the prices and yields of securities in the
Fund's portfolio.
Certain economies in Middle Eastern/African 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 Middle Eastern/ African 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 Middle
Eastern/African 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 Middle Eastern/African 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 Middle Eastern/African countries.
The Fund, therefore, may be liable in certain Middle Eastern/African countries
for the acts of a corporation in which it invests for an amount greater than
the Fund's actual investment in such corporation. Similarly, the rights of
investors in Middle Eastern/African 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 a Middle Eastern/African country.
Certain of the risks associated with international investment and
investment in smaller, emerging capital markets are heightened for investment
in Middle Eastern/African countries. For example, some of the currencies of
Middle Eastern/African countries have experienced devaluation relative to the
U.S. dollar and major adjustments have been made periodically in certain of
such currencies. Certain Middle Eastern/African countries face serious exchange
constraints.
In addition to the relative lack of publicly available information about
Middle Eastern/African 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 Middle Eastern/African
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 Middle Eastern/African
issuers.
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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 Middle Eastern/African 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 Investment
Some Middle Eastern/African 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 investment 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.
The manner in which foreign investors may invest in companies in certain
countries, as well as limitations on such investments, may have an adverse
impact on the operations of the Fund. For example, the Fund may be required in
certain of such countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the
Fund. Re-registration in some instances may not be able to occur on a timely
basis, resulting in a delay during which the Fund may be denied certain of its
rights as an investor, including rights as to dividends or to be made aware of
certain corporate actions. There also may be instances where the Fund places a
purchase order but is subsequently informed, at the time of re-registration,
that the permissible allocation of the investment to foreign investors has been
filled, depriving the Fund of the ability to make its desired investment at
that time. There also may be a credit risk involved if the Fund invests in
securities of issuers in certain Middle Eastern/African countries where
pursuant to market practice, local law or exchange requirement or the terms of
the specific securities transaction itself, the Fund is required to make a cash
payment to an issuer, or its agent, prior to the delivery of the securities. In
these circumstances, there can be no guarantee that the Fund actually will
receive the full amount of the securities expected to be allocated to the Fund,
or that the Fund will be able to retrieve its cash payment in the event that
the issuer, or its agent, defaults in its obligation to deliver the securities.
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
investment. Securities which are subject to material legal restrictions on
repatriation of assets will be considered illiquid securities by the Fund and
subject to the limitations on illiquid investments discussed in this
Prospectus. See "Illiquid Securities" on page 18 and "Investment Objective and
Policies--Description of Certain Investments--Illiquid Securities" on page 24.
A number of Middle Eastern/African countries have authorized the formation
of closed-end investment companies to facilitate indirect foreign investment in
their capital markets. There also are investment opportunities in certain of
such countries in pooled vehicles that resemble open-end investment companies.
Under the Investment Company Act, the Fund may invest up to 10% of its total
assets in shares of other investment companies and up to 5% of its total assets
in any one investment company, provided that the investment does not represent
more than 3% of the voting stock of the related acquired investment company.
This restriction on investments in securities of investment companies may limit
opportunities for the Fund to invest indirectly in certain Middle
Eastern/African
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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. The Fund also may seek, at its
own cost, to create its own investment entities under the laws of certain
Middle Eastern/African countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities", as defined by the rules thereunder. Since banks may engage in such
activities in many countries, the Fund's ability to invest in such banks may be
limited. The provisions of the Investment Company Act also may restrict the
Fund's investments in certain foreign banks and other financial institutions.
Sovereign Debt
Certain developing countries are especially large debtors to commercial
banks and foreign governments. Investment in debt obligations ("sovereign
debt") issued or guaranteed by developing countries or their agencies,
political subdivisions and instrumentalities ("governmental entities") 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 arrearage 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.
Certain of 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. In addition, the Fund's investments in
non-dollar denominated sovereign debt securities are subject to foreign
currency risks. Also, the Fund's investments in dollar denominated sovereign
debt securities are subject to the risk that the issuer may be unable to
obtain, on favorable terms, dollars to service its interest payments and
principal repayments thereon. Similarly, the Fund may have difficulty disposing
of certain sovereign debt securities because there may be a thin trading market
for such securities.
The Fund also may invest in debt securities of supranational entities.
These entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related government agencies. Examples
include the International Bank
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for Reconstruction and Development (the "World Bank") and the African
Development Bank. The obligations of supranational entities are guaranteed only
by the related supranational entity and are not backed by the credit of any
government. The governmental members, or "stockholders," 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. It is possible that any such governmental
member or stockholder, for economic or political reasons, may refuse to satisfy
its commitment if additional capital contributions are required. The Fund may
not invest more than 25% of its total assets in the sovereign debt securities
of any particular Middle Eastern/African country.
No Rating Criteria for Debt Securities
The Fund has not established any rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating categories of
nationally recognized statistical rating organizations, such as Standard &
Poor's Ratings Group ("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" or "junk
bonds") 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 B to this Prospectus--"Ratings of Debt Securities and Preferred Stock"
on page 52. These securities commonly are referred to as "junk bonds." In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund may invest in debt securities of corporate or
governmental issuers that are in default as discussed below under "Distressed
Securities".
The market values of high yield/high risk securities, or "junk bonds", 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, or "junk bonds", 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
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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 or prices for actual sales. The Fund's
Directors, or the Manager will consider carefully 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 affect adversely 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
The Fund may invest in debt securities of corporate or governmental issuers
that are in default as to repayment of principal and/or payment of interest at
the time of acquisition by the Fund ("Distressed Securities"). Investment in
Distressed Securities is speculative and involves significant risk. The Fund
only will make such investments when the Manager 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, such as the rescheduling or other
restructuring of debt by a corporate or governmental issuer. 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. 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.
Derivative Investments
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments which may be characterized
as derivatives. These investments include various types of options
transactions, futures and options thereon and currency transactions. Such
investments also may consist of indexed securities, including inverse
securities. The Fund has express limitations on the percentage of its assets
that may be committed to certain of such investments. Other of such investments
have no express quantitative limitations, although they may be made solely for
hedging purposes, not for speculation, and may in some cases require
limitations as to the type of permissible counter-party to the transaction.
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal. Options transactions involve the potential loss of the opportunity
to profit from any price increase in the underlying security above the option
exercise price or the potential loss of the premium paid for an option.
Similarly, utilization of futures and options thereon and
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currency transactions involves the risk of imperfect correlation in movements
in the price of futures, options or currency hedge and movements in the price
of the securities or currency which are the subject of the hedge. For a further
discussion of the risks associated with these investments, see "Investment
Objective and Policies-- Description of Certain Investments--Indexed and
Inverse Securities" on page 25, "--Other Investment Policies and
Practices--Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions" on page 25 and Appendix A to this Prospectus--"Futures,
Options and Forward Foreign Exchange Transactions" on page 47.
Borrowing
The Fund may borrow up to 33-1/3% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions (so as not to force the Fund
to liquidate securities at a disadvantageous time) or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
Illiquid Securities
The Fund may invest up to 15% of its total assets in securities that lack
an established secondary trading market or otherwise are considered illiquid.
(However, under the law of certain states, the Fund presently is limited with
respect to such investments to 10% of its total assets.) Liquidity of a
security relates to the ability to dispose easily of the security and the price
to be obtained upon disposition of the security, which may be less than a
comparable more liquid security. Investment of the Fund's assets in illiquid
securities may restrict the ability of the Fund to dispose of its investments
in a timely fashion and for a fair price as well as its ability to take
advantage of market opportunities. The risks associated with illiquidity will
be particularly acute in situations in which the Fund's operations require
cash, such as when the Fund redeems shares or pays dividends, and could result
in the Fund borrowing to meet short-term cash requirements or incurring capital
losses on the sale of illiquid investments. Further, issuers whose securities
are not publicly traded are not subject to the disclosure and other investor
protection requirements which would be applicable if their securities were
publicly traded. Illiquid sovereign debt securities and corporate fixed income
and equity securities may trade at a discount from comparable, more liquid
investments. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities. In addition, the Fund may
invest in privately placed securities which may or may not be freely
transferable under the laws of the applicable jurisdiction or due to
contractual restrictions on resale. See "Investment Objective and
Policies--Description of Certain Investments--Illiquid Securities" on page 24.
Withholding and Other Taxes
Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by Middle Eastern/African 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.
18
<PAGE>
Non-Diversification
The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Fund may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk of loss with respect to its
portfolio securities. The Fund, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Additional Information--Taxes" on page 43 and "Investment Restrictions" on
page 29.
Fees and Expenses
The management fee (at the annual rate of 1.00% of the Fund's average daily
net assets) and other operating expenses of the Fund may be higher than the
management fees and operating expenses of other mutual funds managed by the
Manager and other investment advisers or of investment companies investing
exclusively in the securities of U.S. issuers. The management fees and
operating expenses, however, are believed by the Manager to be comparable to
expenses of other open-end management investment companies that invest
primarily in the securities of issuers in emerging market countries with
investment objectives similar to the investment objective of the Fund.
Foreign Sub-custodians and Securities Depositories
Rules adopted under the Investment Company Act permit the Fund to maintain
its foreign securities and cash in the custody of certain eligible non-U.S.
banks and securities depositories. Certain banks in foreign countries may not
be eligible sub-custodians for the Fund, in which event the Fund may be
precluded from purchasing securities in certain foreign countries in which it
otherwise would invest or which may result in the Fund's incurring additional
costs and delays in providing transportation and custody services for such
securities outside of such countries. The Fund may encounter difficulties in
effecting on a timely basis portfolio transactions with respect to any
securities of issuers held outside of their countries. Other banks that are
eligible foreign sub-custodians may be recently organized or otherwise lack
extensive operating experience. In addition, in certain countries there may be
legal restrictions or limitations on the ability of the Fund to recover assets
held in custody by foreign sub-custodians in the event of the bankruptcy of the
sub-custodian.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below is unaudited. Financial
statements for the Fund for the period December 30, 1994 (commencement of
operations) to April 30, 1995 are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the financial statements.
For the period December 30, 1994+ to April 30, 1995
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
Per Share Operating Performance: Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $ 10.00 $10.00 $10.00
------ ------- ------ ------
Investment income--net 0.31 0.31 0.29 0.32
Realized and unrealized gain on
investments and foreign currency
transactions--net 0.44 0.41 0.43 0.42
------ ------- ------ ------
Total from investment operations 0.75 0.72 0.72 0.74
------ ------- ------ ------
Net asset value, end of period $10.75 $ 10.72 $10.72 $10.74
====== ======= ====== ======
Total Investment Return:**
Based on net asset value per share 7.50%++ 7.20%++ 7.20%++ 7.40%++
====== ======= ====== ======
Ratios to Average Net Assets:
Expenses, excluding account maintenance and
distribution fees and net of reimbursement 0.00%* 0.00%* 0.00%* 0.00%*
====== ======= ====== ======
Expenses, net of reimbursement 0.00%* 1.00%* 1.00%* 0.25%*
====== ======= ====== ======
Expenses 4.70%* 5.75%* 5.74%* 4.96%*
====== ======= ====== ======
Investment income--net 10.21%* 8.91%* 8.94%* 9.82%*
====== ======= ====== ======
Supplemental Data:
Net assets, end of period (in thousands) $ 344 $7,268 $1,038 $1,322
====== ======= ====== ======
Portfolio turnover 0.00% 0.00% 0.00% 0.00%
====== ======= ====== ======
</TABLE>
- ---------------------------------
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of operations.
++Aggregate total investment return.
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<PAGE>
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 the Middle East and Africa
("Middle Eastern/African countries"). For purposes of its investment objective,
the Fund may invest in the securities of issuers in all countries in the Middle
East and Africa. 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 Middle Eastern/ African 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 initially
expects to emphasize investments in the securities of issuers in Morocco, South
Africa, Turkey, Israel, Jordan and Zimbabwe. 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 Fund only will invest in securities of issuers in Middle Eastern/African
countries where foreign investment is permitted and that offer market
accessibility and sub-custodial arrangements either inside or outside of such
countries that satisfy the requirements of rules adopted under the Investment
Company Act. See "Risk Factors and Special Considerations--Foreign
Sub-custodians and Securities Depositories". For purposes of the Fund's
investment objective and policies, the term "Middle Eastern countries"
includes, but is not limited to: Israel, Jordan, Egypt, Syria, Lebanon, Turkey,
Saudi Arabia, Iraq, Iran, Libya, Kuwait, Qatar, Bahrain, Yemen, Oman and the
United Arab Emirates, and the term "African countries" includes all countries
generally considered as part of the African continent.
The Manager believes that the quickening pace of political, social and
economic change in certain Middle Eastern/African countries creates the
potential for rapid economic growth which may be reflected in the prices of
securities of issuers in such countries. The Manager also believes that
regional growth may result from governmental policies directed toward market
oriented economic reform. In addition, certain Middle Eastern/African countries
have been introducing deregulatory reforms to encourage development of their
securities markets and, in varying degrees, to permit foreign investment.
Nevertheless, investments in Middle Eastern/African countries are subject to
considerable risks. See "Risk Factors and Special Considerations".
In addition to making equity investments, the Fund seeks capital
appreciation through investment in sovereign and corporate debt securities of
issuers in Middle Eastern/African countries. Such debt securities may be lower
rated or unrated obligations of corporate or sovereign issuers. To the extent
such debt securities are traded in over-the-counter markets, they are traded
by a limited number of dealers. Consequently, these securities may be less
liquid than certain other securities which are traded in over-the-counter
markets. The Fund's investments in sovereign debt consists 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. Debt
securities with
21
<PAGE>
relatively high yields usually are subject to a greater risk of default than
other comparable debt securities with lower yields.
The Fund's investments in high yield/high risk securities 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 Ratings Group ("S&P")), or, if unrated, which are considered by the
Manager 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." See "Risk Factors and Special Considerations--No Rating
Criteria for Debt Securities".
Further, the Fund may invest in debt securities that are in default as to
the payment of interest and/or the repayment of principal at the time of
acquisition by the Fund ("Distressed Securities"). The Fund will invest in
Distressed Securities only when the Manager 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, such as the rescheduling or other
restructuring of debt by a corporate or governmental issuer. 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. See "Risk
Factors and Special Considerations--Distressed Securities".
The Fund may invest in debt securities ("sovereign debt securities") issued
or guaranteed by Middle Eastern/ African governments (including Middle
Eastern/African countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign
governments) to promote economic reconstruction or development ("supranational
entities"), debt securities issued by corporations or financial institutions or
debt securities issued by the U.S. Government or an agency or instrumentality
thereof. 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 Middle Eastern/African 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 obligations of supranational
entities are guaranteed only by the related supranational entity and are not
backed by the credit of any government. 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. It is possible that any such governmental member or
stockholder, for economic or political reasons, may refuse to satisfy its
commitment if additional capital contributions are required. The Fund may not
invest more than 25% of its total assets in the sovereign debt securities of
any particular Middle Eastern/African country.
The Fund may invest in the securities of foreign issuers in the form of
Depositary Receipts or other securities convertible into securities of foreign
issuers. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. ADRs
are receipts typically issued by an American bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. GDRs are receipts issued throughout the world which evidence a
similar arrangement. Generally, ADRs, in registered form, are designed for use
in the U.S. securities markets, and EDRs, in bearer form, are designed for use
in European securities markets.
22
<PAGE>
GDRs are tradeable both in the U.S. and in Europe and are designed for use
throughout the world. The Fund may invest in unsponsored Depositary Receipts.
The issuers of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States, and therefore, there may be less
information available regarding such issuers and there not be a correlation
between such information and the market value of the Depositary Receipts.
Investment in shares of the Fund potentially offers several benefits. Many
investors, particularly individuals, lack the information or capability to
invest in Middle Eastern/African countries. It also may not be permissible for
such investors to invest directly in the capital markets of certain Middle
Eastern/African countries. The Fund offers investors the possibility of
obtaining capital appreciation through a portfolio comprised of securities of
Middle Eastern/African issuers. In managing such portfolio, the Manager 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 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 Middle Eastern/African countries become
more readily accessible to investment by foreign entities, the Fund may not be
able to diversify investment risk or realize any potential benefits from
diversification.
The Fund will not necessarily seek to diversify investments among Middle
Eastern/African 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 Middle Eastern/African countries will be determined
by the Manager. Under certain adverse investment conditions, the Fund may
restrict the Middle Eastern/African countries in which its assets are invested.
An issuer ordinarily will be considered to be in a Middle Eastern/African
country when it is organized in, or the primary trading market of its
securities is located in, a Middle Eastern/African country. The Fund may
consider an issuer to be in a Middle Eastern/African country, without reference
to such issuer's domicile or to the primary trading market of its securities,
when at least 50% of the issuer'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
Middle Eastern/African countries that are denominated in currencies other than
a Middle Eastern/African country's currency. The Fund also may consider a debt
security that is denominated in a Middle Eastern/African country's currency to
be a security of an issuer in a Middle Eastern/African 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 Middle Eastern/African countries to be the
security of a Middle Eastern/African 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 reserves the right, as a temporary defensive measure or in
anticipation of investment in Middle Eastern/African 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
23
<PAGE>
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.
Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (i) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (ii) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (iii) the potential for capital appreciation
if the market price of the underlying common stock increases. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Illiquid Securities. The Fund may invest up to 15% of its total assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. (However, under the laws of certain states, the Fund
presently is limited with respect to such investments to 10% of its total
assets.) The Fund may invest in securities of issuers in Middle Eastern/African
countries that are sold in private placement transactions between the issuers
and their purchasers and that are neither listed on an exchange nor traded in
other established markets. In many cases, privately placed securities will be
subject to contractual or legal restrictions on transfer. As a result of the
absence of a public trading market, privately placed securities in turn may be
less liquid or illiquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under that Act. The Board of Directors has determined to treat as
liquid Rule 144A securities which are freely tradeable in their primary markets
offshore. The Board of Directors may adopt guidelines and delegate to the
Manager the daily function of determining and monitoring liquidity of
restricted securities. The Board of Directors, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
The Board of Directors will carefully monitor the Fund's investments in
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. Investment in
these types of securities could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these securities.
24
<PAGE>
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 Middle Eastern/African
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.
Management of the Fund believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may allow
the Fund to seek potential investment rewards, hedge other portfolio positions,
or vary the degree of portfolio leverage relatively efficiently under different
market conditions.
Investment in Other Investment Companies and Venture Capital Funds. The
Fund may invest in other investment companies and venture capital funds whose
investment objectives and policies are consistent with those of the Fund. In
accordance with the Investment Company Act, the Fund may invest up to 10% of
its total assets in securities of other investment companies. In addition,
under the Investment Company Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies or
venture capital funds, shareholders would bear both their proportionate share
of expenses in the Fund (including management and advisory fees) and,
indirectly, the expenses of such investment companies or venture capital funds
(including management and advisory fees). Investment in such venture capital
funds involves substantial risk of loss to the Fund of its entire investment.
Other Investment Policies and Practices
Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions. The Fund is authorized to engage in various portfolio
strategies to hedge its portfolio against adverse movements in the equity, debt
and currency markets. These hedging transactions are considered to be
investments in derivatives.
The Fund has authority to write (i.e., sell) covered put and call options
on its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund also may
engage in forward foreign exchange transactions and enter into foreign currency
futures and options, and related options on such futures. Each of these
portfolio strategies is described in more detail in Appendix A to this
Prospectus. Although certain risks are involved in futures and options
transactions (as discussed in "Risk Factors in Futures, Options and Currency
Transactions" in Appendix A to this Prospectus), the Manager believes that,
because the Fund will engage in such transactions only for hedging (including
anticipatory hedging) purposes, the futures, options and currency portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of futures, options and currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of
Fund shares will fluctuate. Reference is made to Appendix A to this Prospectus
and to the Statement of Additional Information for further information
concerning these strategies.
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<PAGE>
There can be no assurance that the Fund's hedging transactions, to the
extent employed, will be effective. Suitable hedging instruments may not be
available with respect to securities of developing countries on a timely basis
and on acceptable terms. Furthermore, the Fund is not required to employ
hedging strategies and may only engage in hedging activities from time to time
and may not necessarily engage in hedging transactions when movements in the
equity, debt or currency markets occur.
Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution
of the Fund's portfolio transactions. Since portfolio transactions may be
effected on foreign securities exchanges, the Fund may incur settlement delays
on certain of such exchanges. See "Risk Factors and Special Considerations". In
executing portfolio transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Manager generally seeks
reasonably competitive fees, commissions or spreads, the Fund does not
necessarily pay the lowest fee, commission or spread available. The Fund may
invest in certain securities traded in the OTC market and, where possible, will
deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
futures, options and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Fund has no obligation
to deal with any broker or group of brokers in the execution of transactions in
portfolio securities. Subject to obtaining the best price and execution,
securities firms which provide supplemental investment research to the Manager,
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 Manager under the Management Agreement and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve as the
Fund's broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis and may receive brokerage commissions from the
Fund. In addition, the Fund may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch is a
member except pursuant to procedures approved by the Board of Directors of the
Fund which comply with rules adopted by the Securities and Exchange Commission.
To the extent Merrill Lynch is active in distributions of securities of issuers
in Middle Eastern/African countries, the Fund may be disadvantaged in that it
may not purchase securities in such distributions. In addition, consistent with
the Rules of Fair Practice of the NASD, the Fund may consider sales of shares
of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than in the U.S.,
although the Fund will endeavor to achieve the best net results in effecting
its portfolio transactions.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
26
<PAGE>
transactions. There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.
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
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. This limitation is a
fundamental policy, and it 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. During the period of such a loan, the Fund
typically receives the income on both the loaned securities and the collateral
and thereby increases its yield. In certain circumstances, the Fund may receive
a flat fee. Such loans are terminable at any time, and the borrower, after
notice, will be required to return borrowed securities within five business
days. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Portfolio Turnover. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such actions, for defensive or
other reasons, appear advisable to the Manager in light of a change in
circumstances in general market, economic or financial conditions. As a result
of its investment policies, the Fund may engage in a substantial number of
portfolio transactions. Accordingly, while the Fund anticipates that its annual
portfolio turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. A high
portfolio turnover rate involves certain tax consequences and correspondingly
greater transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the Fund.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when- issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund 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 amount of its commitments in
connection with such purchase transactions.
There can be no assurance that a security purchased on a when-issued basis
or purchased or sold for delayed delivery will be issued, and the value of the
security, if issued, on the delivery date may be more or less than its purchase
price. 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.
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 or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the
27
<PAGE>
option of the issuer. The price and coupon of the security is fixed at the time
of the commitment. At the time of entering into the agreement the Fund is paid
a commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately 0.50% of the aggregate purchase price
of the security which the Fund has committed to purchase. The Fund will enter
into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price which is considered advantageous
to the Fund. The Fund will not enter into a standby commitment with a remaining
term in excess of 45 days and presently will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restrictions on resale that affect their marketability, will not exceed
15% of its total assets taken at the time of acquisition of such a commitment.
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 a
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. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment
period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably 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.
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, or an
affiliate thereof. 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 price at which the
trades are conducted do not reflect accrued interest on the underlying
obligation; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, such as under 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
only constitute 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, the rate of return to the Fund
would be dependent upon intervening fluctuations of the market
28
<PAGE>
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 arising from market fluctuations following the
failure of the seller to perform. Repurchase agreements and purchase and sale
contracts maturing in more than seven days are deemed to be illiquid by the
Securities and Exchange Commission and are therefore subject to the Fund's
investment restriction limiting investments in securities that are not readily
marketable to 15% of the Fund's total assets. (However, under the law of
certain states, the Fund presently is limited with respect to such investments
to 10% of its total assets.) See "Investment Restrictions" below.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies 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 (a) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (b) more than 50% of
the outstanding shares). Among its fundamental policies, the Fund may not
invest more than 25% of its total assets, taken at market value at the time of
each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a
non-fundamental policy, the Fund may not borrow 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 33-1/3% (taken at market value) of its total assets and pledge its
assets to secure such borrowings, (b) may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (c) may purchase securities on margin to the extent permitted by applicable
law. (However, at the present time, applicable law prohibits the Fund from
purchasing securities on margin.) (The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts or
options transactions is not considered to be the purchase of a security on
margin.) The purchase of securities while borrowings are outstanding will have
the effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be resold because of legal or contractual restrictions or which
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets (or 10% of its total assets
as presently required by certain state law) taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Manager the daily function
of determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
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
29
<PAGE>
issuer. The Fund's investments will be limited, however, in order to qualify as
a "regulated investment company" for purposes of the Code. See "Additional
Information--Taxes". To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities
of a single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, the Fund's net asset value may fluctuate to a greater extent than that
of a diversified company as a result of changes in the financial condition or
in the market's assessment of the issuers, and the Fund may be more susceptible
to any single economic, political or regulatory occurrence than a diversified
company.
For purposes of the diversification requirements set forth above with
respect to regulated investment companies, and to the extent required by the
Securities and Exchange Commission, the Fund, as a non-fundamental policy, will
consider securities issued or guaranteed by the government of any one foreign
country as the obligations of a single issuer.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons", as defined in the Investment Company Act, of
the Fund. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies under the Investment Company
Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Manager and FAM; President and Director of
Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML
& Co.; Executive Vice President of Merrill Lynch; Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising, Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
* Interested person, as defined in the Investment Company Act, of the Fund.
Management and Advisory Arrangements
MLAM acts as the manager of the Fund and provides the Fund with management
and investment advisory services. The Manager is owned and controlled by ML &
Co., a financial services holding company and the parent
30
<PAGE>
of Merrill Lynch. The Manager, or an affiliate of the Manager, FAM, acts as the
investment adviser to more than 130 other registered investment companies and
provides investment advisory services to individual and institutional accounts.
As of May 31, 1995, the Manager and FAM had a total of approximately $178.0
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As described in the Management Agreement, the
Manager receives for its services to the Fund monthly compensation at the
annual rate of 1.00% of the average daily net assets of the Fund. The
Management Agreement provides that, subject to the direction of the Board of
Directors of the Fund, the Manager is responsible for the actual management of
the Fund's portfolio and constantly reviews the Fund's holdings in light of its
own research analysis and that from other relevant sources. The responsibility
for making decisions to buy, sell or hold a particular security rests with the
Manager, subject to review by the Board of Directors. The Manager provides the
portfolio managers for the Fund, who 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 Manager also is obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.
The Fund pays certain expenses incurred in its operations, including, among
other things, the management fees; legal and audit fees; unaffiliated
Directors' fees and expenses; registration fees; custodian and transfer agency
fees; accounting and pricing costs; and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Also, accounting services are provided to the Fund by the Manager,
and the Fund reimburses the Manager for its costs in connection with such
services on a semi-annual basis.
Grace Pineda is a Vice President of and Portfolio Manager for the Fund. Ms.
Pineda has been a Vice President of the Manager since 1989. Prior to joining
the Manager, Ms. Pineda was a portfolio manager with Clemente Capital, Inc.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Manager (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
Transfer Agency Services
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives
31
<PAGE>
an annual fee of $11.00 per Class A or Class D shareholder account, $14.00 per
Class B or Class C shareholder account and nominal miscellaneous fees (e.g.,
account closing fees), and the Transfer Agent is entitled to reimbursement for
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except for retirement plans, where the minimum initial purchase is $100 and the
minimum subsequent purchase is $1.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing(SM)
System, as described below. The applicable offering price for purchase orders
is based upon the net asset value of the Fund next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to 15 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time), which includes
orders received after the determination of net asset value on the previous day,
the applicable offering price will be based on the net asset value determined
as of 15 minutes after the close of business on the New York Stock Exchange on
the day the order is placed with the Distributor, provided the orders are
received by the Distributor prior to 30 minutes after the close of business on
the New York Stock Exchange on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the New York Stock
Exchange, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
On December 30, 1994, the Fund completed the subscription offering of its
shares of Common Stock by issuing 22,755 Class A shares for net proceeds to the
Fund of $2,207,550, 710,875 Class B shares for net proceeds to the Fund of
$7,108,746, 89,739 Class C shares for net proceeds to the Fund of $897,390, and
96,838 Class D shares for net proceeds to the Fund of $968,383. In connection
with such subscription offering, the Distributor received $38,735, all of which
was paid to Merrill Lynch as selected dealer.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that he or she believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set
forth under "Merrill Lynch Select Pricing(SM) System" above.
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<PAGE>
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See "Distribution Plans" below.
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
Maximum 5.25% initial sales charge
A (2) (3) No No No
B shares convert to D
B CDSC for a period of up to 4 years, at shares automatically
a rate of 4.0% during the first year, after approximately
decreasing 1.0% annually to 0.0% 0.25% 0.75% eight years(4)
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales charge
(3) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $l,000,000 or more may not be
subject to an initial sales charge but instead will be subject to a 1.0% CDSC
for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified.
33
<PAGE>
Initial Sales Charge Alternatives--Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
Sales Charge as Discount to
Sales Charge as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase the Offering Price Invested the Offering Price
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than $50,000 4.75 4.99 4.50
$50,000 but less than $100,000 4.00 4.17 3.75
$100,000 but less than $250,000 3.00 3.09 2.75
$250,000 but less than $1,000,000 2.00 2.04 1.80
$1,000,000 and over** 0.00 0.00 0.00
</TABLE>
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A share purchases by certain retirement plan
investors in connection with certain investment programs. If the sales charge
is waived in connection with a purchase of $1,000,000 or more, such purchases
will be subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times, the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided that such plans meet the required minimum number of
eligible employees or required amount of assets advised by the Manager or any
of its affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services. In addition, Class A
shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
mutual funds, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds who wish to reinvest the net proceeds
from a sale of their closed-end fund shares of common stock in shares of the
Fund also may purchase Class A shares of the Fund if certain conditions set
forth in the Statement of Additional Information are met. For example, Class A
shares of the Fund and certain other MLAM-advised mutual funds are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
34
<PAGE>
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges,
including information regarding investment by employer sponsored retirement and
savings plans, is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are converted automatically into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Class B and Class C shares are both subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution- related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealer's own funds. The combination
of the CDSC and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the Fund,
which are subject to an account maintenance fee but no distribution fee.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset- based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
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Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
as a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
<S> <C>
0-1 4.00%
1-2 3.00%
2-3 2.00%
3-4 1.00%
4 and thereafter 0.00%
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to the CDSC because of dividend reinvestment. With
respect to the remaining 40 shares, the CDSC is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The
CDSC also is waived for any Class B shares which are purchased by eligible
401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial
36
<PAGE>
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not result in recognized gain or loss to shareholders for Federal income tax
purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event that such certificates are not
received by the Transfer Agent at least one week prior to the Conversion Date,
the related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. The Conversion Period is
modified for shareholders who purchased Class B shares through certain
retirement plans which qualified for a waiver of the CDSC normally imposed on
purchases of Class B shares ("Class B Retirement Plans"). When the first share
of any MLAM-advised mutual fund purchased by a Class B Retirement Plan has been
held for ten years (i.e., ten years from the date the relationship between
MLAM-advised mutual funds and the Class B Retirement Plan was established), all
Class B shares of all MLAM-advised mutual funds held in that Class B Retirement
Plan will be converted into Class D shares of the appropriate funds. Subsequent
to such conversion, that Class B Retirement Plan will be sold Class D shares of
the appropriate funds at net asset value per share.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class
37
<PAGE>
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment
of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans related to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
and Class C shares. In this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the initial sales
charges with respect to the Class A and Class D shares of the Fund in that the
deferred sales charges provide for the financing of the distribution of the
Fund's Class B and Class C shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotional and market expenses, corporate
overhead and interest expense. On the direct expense and revenue/ cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the NASD imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC,
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor voluntarily has agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments
38
<PAGE>
of the account maintenance fee. In certain circumstances, the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances, payments in excess of the amount payable under
the NASD formula will not be made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth above under "Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption, except that the redemption price for any class of
shares redeemed during the first 12 months after purchase will be the net asset
value per share minus a redemption fee of 2.0% of the net asset value of the
shares being redeemed. The redemption fee is designed to discourage short-term
trading in shares of the Fund, is retained by the Fund and may be used to cover
the cost of liquidating portfolio securities. Except for such redemption fee
and any CDSC which may be applicable to Class B and Class C shares, there will
be no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends and capital gains reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., TAMFO, P.O. Box 45289, Jacksonville, Florida 32232- 5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., TAMFO, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. The
notice in either event requires the signatures of all persons in whose names
the shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the redemption request must be guaranteed by an "eligible guarantor
institution" (including, for example, Merrill Lynch branches and certain other
financial institutions) as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
39
<PAGE>
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed
the mailing of a redemption check until such time as "good payment" (e.g., cash
or certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
Repurchase
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange (generally, 4:00 P.M., New York time) on the day
received and that such request is received by the Fund from such dealer not
later than 30 minutes after the close of business on the New York Stock
Exchange on the same day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after the close of
business on the New York Stock Exchange in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
redemption fee and CDSC in the case of Class B or Class C shares). Securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting
the notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares to such
customers. Redemptions directly through the Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund may redeem shares as set forth above.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various services or plans, or to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
Included in the Fund's shareholder services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an "Investment Account" and will receive, at least
quarterly, statements from the Transfer Agent. The statements will serve as
transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends. The statements also will show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
income dividends. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying
any applicable redemption fee and CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested
40
<PAGE>
in transferring their Class B or Class C shares from Merrill Lynch and who do
not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a tax
deferred retirement account such as an IRA from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable redemption fee and CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are automatically reinvested in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share next determined after the close of the New York Stock Exchange
on the ex-dividend date of such dividend. A shareholder, at any time, by
written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or telephone call
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, may elect to have subsequent dividends paid
in cash, rather than reinvested, in which event payment will be mailed on or
about the payment date. No redemption fee or CDSC will be imposed on
redemptions of shares issued as a result of the automatic reinvestment of
dividends or distributions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his or her regular bank account.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund in their CMA(R) or CBA(R) account or
in certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R)/CBA(R) Automated Investment Program.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends are reinvested and taking into account
all applicable recurring and nonrecurring expenses, including any redemption
fee that would be applicable to a complete redemption of the investment at the
end of the specified period, any CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period such as in the
case of Class B and Class C shares and the maximum sales charge in the case of
Class A and Class D shares. Dividends paid by the Fund with respect to all
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the
Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated
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<PAGE>
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will
not be included with respect to annual or annualized rates of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A and Class D shares or
to waiver of the CDSC in the case of Class B shares (such as investors in
certain retirement plans), performance data may take into account the reduced,
and not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses may be deducted. See
"Purchase of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate the effect of such
total return on a hypothetical $1,000 investment in the Fund at the beginning
of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
Dividends and Distributions
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income will be
paid at least annually. All net realized long- or short-term capital gains, if
any, will be distributed as dividends to the Fund's shareholders at least
annually. The per share dividends on each class of shares will be reduced as a
result of any account maintenance, distribution and transfer agency fees
applicable to that class. See "Determination of Net Asset Value" below.
Dividends may be reinvested automatically in shares of the Fund at net asset
value without a sales charge. Shareholders may elect in writing to receive any
such dividends in cash. See "Shareholder Services". Dividends are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year.
Certain gains or losses attributable to foreign currency gains or losses
from certain forward contracts may increase or decrease the amount of the
Fund's income available for distribution to shareholders. If such losses exceed
other ordinary income during a taxable year, (a) the Fund would not be able to
make any ordinary income dividend distributions and (b) distributions made
before the losses were realized but in the same taxable year would be
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<PAGE>
recharacterized as a return of capital to shareholders, rather than as an
ordinary income dividend, reducing each shareholder's tax basis in Fund shares
for Federal income tax purposes, and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's tax
basis in Fund shares (assuming that the shares were held as a capital asset).
See "Taxes" below.
Taxes
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under 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 Class A, Class B, Class C and Class D
shareholders (together the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income 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 (including long-term gains from certain transactions in futures
and options) ("capital gain dividends") are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder has
owned Fund shares. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid 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.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
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Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and
on gain from the disposition of the shares of such a company (collectively
referred to as "excess distributions"), even if such excess distributions are
paid by the Fund as a dividend to its shareholders. The Fund may be eligible to
make an election with respect to certain PFICs in which it owns shares that
will allow it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular year in excess
of the distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and 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 and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming that the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period for the acquired Class D
shares will include the holding period for the converted Class B shares.
A loss realized on a sale of shares of the Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
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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
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
Determination of Net Asset Value
The net asset value per share of all classes of the Fund is determined once
daily, as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time), on each day during which the New
York Stock Exchange is open for trading. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The net asset value per share is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
and the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price prior to the time of valuation. Securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes a call option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability subsequently is valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last bid price. Other investments, including
futures contracts and related options, for which market quotations are readily
available, are valued at market value. Securities and assets for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Organization of the Fund
The Fund was incorporated under Maryland law on March 15, 1994. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B,
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Class C and Class D Common Stock, each of which consists of 100,000,000 shares.
Shares of Class A, Class B, Class C and Class D represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to such account maintenance fees
and distribution expenditures. See "Purchase of Shares". The Fund has received
an order from the Securities and Exchange Commission permitting the issuance
and sale of multiple classes of shares. Such order permits the Fund to issue
additional classes of shares if the Board of Directors deems such issuance to
be in the best interests of the Fund. Shares issued by the Fund are fully paid,
non-assessable and have no preemptive or conversion rights.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. The Fund
will assist in shareholder communications in the manner described in Section
16(c) of the Investment Company Act.
Voting rights for Directors are not cumulative. Each share of Common Stock
is entitled to participate equally in dividends declared by the Fund and in the
net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
distribution of the shares of a class will be borne solely by such class.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this, please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
1-800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX A
FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency and stock index options and futures,
options on such futures and forward foreign exchange transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Although certain risks are involved in futures and options transactions (as
discussed below in "Risk Factors in Futures, Options and Currency
Transactions"), the Manager believes that, because the Fund only will engage in
these transactions for hedging purposes, the futures and options portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of futures and options transactions. Tax
requirements may limit the Fund's ability to engage in the hedging transactions
and strategies discussed below. See "Additional Information--Taxes".
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 call options is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone.
By writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial hedge against
the price of the underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that security at the
time of exercise for as long as the option is outstanding. The Fund may engage
in closing transactions in order to terminate put options that it has written.
The Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise
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<PAGE>
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 profit on
the sale in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of any offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase
or write put and call options on stock indices to hedge against the risks of
marketwide stock price movements 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, country or market segment.
The Fund also may purchase and sell stock index financial futures contracts
and financial futures contracts ("financial futures contracts") as a hedge
against adverse changes in the market value of its portfolio securities as
described below. A financial futures contract is an agreement between two
parties which obligates the purchaser of the financial futures contract to buy
and the seller of a financial futures contract to sell a security for a set
price on a future date. Unlike most other financial futures contracts, a stock
index financial 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 its settlement.
The Fund may effect transactions in stock index financial 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 financial futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure. This
technique generally will allow the Fund to gain exposure to a market in a
manner which is more efficient than purchasing individual securities, and may
in part or entirely offset increases in the cost of securities in such markets
that the Fund ultimately purchases. As such purchases are made, an equivalent
amount of financial futures contracts will be terminated by offsetting sales.
The Manager does not consider purchases of financial futures contracts to be a
speculative practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a financial 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),
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
financial futures contracts and stock indices in connection with its hedging
(including anticipatory 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 financial futures contracts and stock indices rather than selling the
underlying financial futures contract in anticipation of a decrease in the
market value of its securities. Similarly, the Fund may purchase call options,
or write put options on financial 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 the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. The Fund may engage in OTC options to effect the same
strategies as it would through exchange-traded options. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC
options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends 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 forward
foreign exchange. If the Fund enters into a position hedging transaction, the
Fund's custodian will place cash or liquid debt securities in a separate
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of such forward contract. If the value of the
securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged 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 U.S. dollar-denominated securities may not be available in
some or all developing countries, that the forward currency market for the
purchase for U.S. dollars in most, if not all, developing countries is not
highly developed and that in certain developing 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 OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures, for example, 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
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investment in a pound sterling denominated security. In such circumstances, for
example, the Fund may purchase a foreign currency put option enabling it to
sell a specified amount of pounds for dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the pound
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 pounds 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 pound to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. A financial futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Financial futures contracts and
options on financial futures contracts are traded on boards of trade or futures
exchanges. The Fund will not speculate in foreign currency futures, options or
related options. Accordingly, the Fund will not hedge a currency substantially
in excess of the market value of 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, the Fund will segregate
at its custodian cash, liquid equity or debt securities having a market value
substantially representing any subsequent decrease in the market value of such
hedged security, less any initial or variation margin held in the account of
its broker. The Fund may not incur potential net liabilities of more than
33-1/3% of its total assets from foreign currency futures, options 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 financial 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. The Fund has
undertaken to the State of California that the aggregate margin deposits
required on all stock index futures or options thereon, or financial futures or
options thereon, held at any time by the Fund will not exceed 5% of the Fund's
total assets.
When the Fund purchases a financial 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
financial futures contract, thereby ensuring that the use of such financial
futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
OTC stock index options, OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or any other
bank or dealer having capital of at least $150 million or whose obligations are
guaranteed by an entity having capital of at least $150 million.
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The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on financial futures contracts) if, as a result of such transaction,
the sum of the market value of OTC options currently outstanding which are held
by the Fund, the market value of the underlying securities covered by OTC call
options currently outstanding which were sold by the Fund and margin deposits
on the Fund's existing OTC options on financial futures contracts exceeds 15%
of the total assets of the Fund, taken at market value, together with all other
assets of the Fund which are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less
the amount by which the option is "in-the-money" (i.e., current market value of
the underlying security minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
commission staff of its position.
Risk Factors in Futures, Options and Currency Transactions. Utilization of
futures and options transactions to hedge the portfolio, including to affect
the Fund's exposure in various markets, involves the risk of imperfect
correlation in movements in the price of futures and options and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of futures and options also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction. In addition, futures and options
transactions in foreign markets are subject to the risk factors associated with
foreign investments generally. See "Risk Factors and Special Considerations".
The Fund intends to enter into futures and options transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close futures and options positions also could have
an adverse impact on the Fund's ability to hedge effectively its portfolio.
There also is the risk of loss by the Fund of margin deposits or collateral in
the event of the bankruptcy of a broker with whom the Fund has an open position
in an option, a financial futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day. The
Manager does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
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APPENDIX B
RATINGS OF DEBT SECURITIES AND PREFERRED STOCK
Description of Corporate Debt Ratings of Moody's Investors Service, Inc.
("Moody's")
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edged". Interest payments are
protected by a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as 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 payments and principal repayments
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 the desirable investments. Assurance
of interest payments and principal repayments 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.
</TABLE>
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 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.
52
<PAGE>
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
53
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment within the universe
of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance the earnings and asset protection will remain
relatively well maintained in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings
and asset protection are, nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade preferred stock, neither
highly protected nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative elements and its future cannot
be considered well assured. Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
"b" An issue which is rated "b" generally lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other terms of the issue over any long
period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears
on dividends with little likelihood of eventual payments.
"c" This is the lowest rated class of preferred or preference stock. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: 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.
Description of Corporate Debt Ratings of Standard & Poor's Ratings Group
("Standard & Poor's")
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
54
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest
and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions
than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB Debt rated BB has less near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet timely interest payments
and principal repayments. The BB rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but currently has the capacity to meet
interest payments and principal repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and repay principal. The B rating
category also is used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or economic conditions, it
is not likely to have the capacity to pay interest and repay principal. The CCC rating category
also is used for debt subordinated to senior debt that is assigned an actual or implied B or B-
rating.
CC The rating CC is typically applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
55
<PAGE>
D Debt rated D is in payment default. The D rating category 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.
</TABLE>
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.
<TABLE>
<S> <C>
c The letter c indicates that the holder's option to tender the security for purchase may be
canceled under certain prestated conditions enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal amount of those bonds to the
extent that the underlying deposit collateral is federally insured and interest is adequately
collateralized. In the case of certificates of deposit, the letter L indicates that the
deposit, combined with other deposits being held in the same right and capacity, will be
honored for principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of
the escrow agreement or closing documentation confirming investments and cash flows.
N.R. Not rated.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
56
<PAGE>
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely payment. They are,
however, more vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category 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.
</TABLE>
A commercial paper 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 may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstances.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt 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:
<TABLE>
<S> <C>
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.
III. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangement
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.
57
<PAGE>
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as predominately
B speculative with respect to the issuer's capacity to pay preferred stock obligations. "BB"
CCC indicates the lowest degree of speculation and "CCC" the highest degree of speculation. While
such issues will likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or sinking fund
payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt
instruments.
NR Indicates that no rating has been requested, that there is insufficient information on which to
base a rating, or that Standard & Poor's does not rate a particular type of obligation as a
matter of policy.
</TABLE>
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 may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
58
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.--AUTHORIZATION FORM (PART 1)
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
[] Class A shares [] Class B shares [] Class C shares [] Class D shares
of Merrill Lynch Middle East/Africa Fund, Inc., and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of paper
if necessary.)
1. 4.
2. 5.
3. 6.
Name
First Name Initial Last Name
Name of Co-Owner (if any)
First Name Initial Last Name
Address
(Zip Code) Date
Occupation Name and Address of Employer
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-Term Capital Gains
Select [] Reinvest Select [] Reinvest
One: [] Cash One: [] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you:
[] Check or [] Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Middle East/Africa Fund, Inc. Authorization Form.
Specify type of account (check one) [] checking [] savings
Name on your account
Bank Name
Bank Number Account Number
Bank Address
I agree that this authorization will remain in effect until I provide
written notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor
Signature of Depositor Date
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
59
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.--AUTHORIZATION FORM
(PART 1)--(Continued)
3. Social Security or Taxpayer Identification Number
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above
is my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Additional
Information-Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service (the "IRS") has notified me that I am no longer
subject thereto.
Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to under-reporting
and if you have not received a notice from the IRS that backup withholding has
been terminated. The undersigned authorizes the furnishing of this
certification to other Merrill Lynch sponsored mutual funds.
Signature of Owner Signature of Co-Owner (if any)
4. Letter of Intention--Class A and Class D shares only (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam: ......., 19....
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Middle East/Africa Fund, Inc. or any other investment company
with an initial sales charge or deferred sales charge for which Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13 month period which
will equal or exceed:
[] $25,000 [] $50,000 [] $100,000 [] $250,000 [] $1,000,000
Each purchase will be made at the then reduced offering price applicable
to the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Middle East/Africa Fund, Inc. held as security.
By
Signature of Owner
Signature of Co-Owner (If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name (2) Name
Account Number Account Number
5. For Dealer Only
Branch Office, Address, Stamp.
[ ]
This form when completed should be mailed to:
Merrill Lynch Middle East/Africa Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and agree
to notify the Distributor of any purchases made under a Letter of Intention or
Systematic Withdrawal Plan. We guarantee the shareholder's signature.
Dealer Name and Address
By Authorized Signature of Dealer
F/C Last Name
[][][] [][][][]
Branch-Code F/C No.
[][][] [][][][][]
Dealer's Customer A/C No.
60
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.--AUTHORIZATION FORM (PART 2)
Note: This form is required to apply for the Automatic Investment Plan only.
1. Account Registration
Name of Owner
Name of Co-Owner (if any)
Address [ ]
Social Security Number or Taxpayer Identification Number
Account Number (if existing account)
2. Application for Automatic Investment Plan
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase: (choose one)
[] Class A shares [] Class B shares [] Class C shares [] Class D shares
of Merrill Lynch Middle East/Africa Fund, Inc., subject to the terms set
forth below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank
account for investment in Merrill Lynch Middle East/Africa Fund, Inc. as
indicated below:
Amount of each ACH debit $
Account Number
Please date and invest ACH debits on the 20th of each month beginning
(month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing
or failure to prepare any such debit. If I change banks or desire to terminate
or suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund
and crediting my bank account. I further agree that if a debit is not honored
upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
returned dishonored debit.
Date Signature of Depositor
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To (Investor's Bank) Bank
Bank Address
City State Zip Code
As a convenience to me, I hereby request and authorize you to pay and 62
charge to my account ACH debits drawn on my account by and payable to Merrill
Lynch Financial Data Services, Inc., I agree that your rights in respect to
each such debit shall be the same as if it were a check drawn on you and signed
personally by me. This authority is to remain in effect until revoked by me in
writing. Until you receive such notice, you shall be fully protected in
honoring any such debit. I further agree that if any such debit be dishonored,
whether with or without cause and whether intentionally or inadvertently, you
shall be under no liability.
Date Signature of Depositor
Bank Account Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this application.
61
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
4 MetroTech Center, 18th Floor
Brooklyn, New York 11245
Independent Auditors
Deloitte & Touche llp
117 Campus Drive
Princeton, New Jersey 08540-6400
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund, the Manager or the Distributor. This Prospectus does
not constitute an offering in any state in which such offering may not lawfully
be made.
TABLE OF CONTENTS
Page
Fee Table 3
Prospectus Summary 5
Merrill Lynch Select Pricing(SM) System 7
Risk Factors and Special Considerations 11
Financial Highlights 20
Investment Objective and Policies 21
Description of Certain Investments 23
Other Investment Policies and Practices 25
Investment Restrictions 29
Non-Diversified Status 29
Management of the Fund 30
Board of Directors 30
Management and Advisory Arrangements 30
Code of Ethics 31
Transfer Agency Services 31
Purchase of Shares 32
Initial Sales Charge Alternatives--Class A and 34
Class D Shares
Deferred Sales Charge Alternatives--Class B and 35
Class C Shares
Distribution Plans 37
Redemption of Shares 39
Redemption 39
Repurchase 40
Shareholder Services 40
Performance Data 41
Additional Information 42
Dividends and Distributions 42
Taxes 43
Determination of Net Asset Value 45
Organization of the Fund 45
Shareholder Reports 46
Shareholder Inquiries 46
Appendix A 47
Appendix B 52
Authorization Form 59
Code # 18415-0695
Merrill Lynch
Middle East/Africa
Fund, Inc.
Prospectus
June 22, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Middle East/Africa Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 Phone No. (609) 282-2800
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-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 the Middle East and
Africa ("Middle Eastern/African countries"). For purposes of its investment
objective, the Fund may invest in the securities of issuers in all countries in
the Middle East and Africa. The Fund initially expects to emphasize investments
in the securities of issuers in Morocco, South Africa, Turkey, Israel, Jordan
and Zimbabwe. 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 Middle Eastern/African countries. The Fund may employ a
variety of derivative investments and techniques to hedge against market and
currency risk. Also, the Fund may invest in certain derivative instruments,
such as indexed and inverse securities, to enhance its return. There can be no
assurance that the Fund's investment objective will be achieved.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated June
22, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing to the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by reference
into the Prospectus. Capitalized terms used but not defined herein have the
same meanings as in the Prospectus.
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
The date of this Statement of Additional Information is June 22, 1995.
<PAGE>
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 the Middle East and Africa
("Middle Eastern/African countries"). Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
The securities markets of many countries at times in the past have moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., the manager for the
Fund (the "Manager" or "MLAM"), will effect portfolio transactions without
regard to holding period if, in its judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions. As
a result of the investment policies described in the Prospectus, the Fund's
portfolio turnover rate may be higher than that of other investment companies.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 100% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. The Fund is subject to the Federal
income tax requirement that less than 30% of the Fund's gross income must be
derived from gains from the sale or other disposition of securities held for
less than three months.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares". Under present
conditions, the Manager does not believe that these considerations will have
any significant effect on its portfolio strategy, although there can be no
assurance in this regard.
Hedging Techniques
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies--Other Investment Policies and
Practices--Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions" in the Prospectus and in Appendix A to the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency futures and options, stock index
futures and options, and options on such futures and forward foreign currency
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate.
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Although certain risks are involved in futures and options transactions (as
discussed in the Prospectus and below), the Manager believes that, because the
Fund will only engage in these transactions for hedging purposes, the futures
and options portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of futures and options
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund, in return for a premium, gives
another party a right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. The principal
reason for writing call options is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone.
By writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial hedge against a
decline in the price of the underlying security.
The writer of a covered call option has no control over when he or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation as
a writer. If an option expires unexercised, the writer would realize 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 would realize a gain or loss from the sale of
the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that security at the
time of exercise for as long as the option is outstanding. The Fund may engage
in closing transactions in order to terminate put options that it has written.
The Fund will not write a put option if the aggregate value of the obligations
underlying the put shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Prospectus may be options traded on
foreign securities exchanges. An option position may be closed only on an
exchange which provides a secondary market for an option of the same series. If
a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations
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on an exchange; (v) the facilities of an exchange or the Options Clearing
Corporation (the "Clearing Corporation") may not, at all times, be adequate to
handle current trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the Clearing Corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund also may enter into over-the-counter options transactions ("OTC
options"), which are two-party contracts with prices and terms negotiated
between the buyer and seller. The Fund will only enter into OTC options
transactions with respect to portfolio securities for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The staff of the Commission has taken the position that OTC options and the
assets used as cover for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, 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 offset partially 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; 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 cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an 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
may purchase either exchange-traded options or OTC options. 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. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
futures and options and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A financial futures contract is an agreement between two parties to buy and
sell a security, or, in the case of an index-based financial futures contract,
to make and accept a cash settlement for a set price on a future date. A
majority of transactions in financial futures contracts, however, do not result
in the actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin", are
required to be made on a daily basis as the price of the financial futures
contract fluctuates, making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the
market". At any time prior to the settlement date of the financial futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the financial futures
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contract. A final determination of variation margin is then made, additional
cash is required to be paid to or released by the broker, and the purchaser
realizes a loss or gain. In addition, a nominal commission is paid on each
completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in financial futures contracts. Section 17(f) relates to
the custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a financial futures
contract may be a "senior security" under the Investment Company Act.
Risk Factors in Futures and Options Transactions. Utilization of futures
and options transactions involves the risk of imperfect correlation in
movements in the prices of futures and options contracts and movements in the
prices of the securities and currencies which are the subject of the hedge. If
the prices of the futures and options contracts move more or less than the
prices of the hedged securities and currencies, the Fund will experience a gain
or loss which will not be completely offset by movements in the prices of the
securities and currencies which are the subject of the hedge. The successful
use of futures and options also depends on the Manager's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction.
This requires a secondary market on an exchange for call or put options of the
same series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such option
or future. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or financial futures contract
at any specific time. Thus, it may not be possible to close an option or
futures position. The Fund will acquire only over-the-counter options for which
management believes (i) the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option) unless there is only one dealer, in which case such
dealer's price will be used, or (ii) can be sold at a formula price provided
for in the over-the-counter option agreement. In the case of a futures position
or an option on a futures position written by the Fund, in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the security or currency
underlying the financial futures contracts it holds. The inability to close
futures and options positions also could have an adverse impact on the Fund's
ability to hedge effectively its portfolio.
There also is the risk of loss by the Fund of margin deposits in the event
of bankruptcy of a broker with whom the Fund has an open position in a
financial futures contract or related option. The risk of loss from investing
in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of
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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 Manager does not
believe that these trading and position limits will have any adverse impact on
the portfolio strategies for hedging the Fund's portfolio.
Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange between currencies of the different countries
in whose securities it will invest as a hedge against possible variations in
the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date and price set at the time of the contract. The Fund's
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 by the Fund. Position hedging is the sale of
forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian will place cash or liquid
debt securities in a separate account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of such forward
contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts. The Fund will not enter into a position hedging
commitment if, as a result thereof, the Fund would have more than 15% of the
value of its total assets committed to such contracts. The Fund will not enter
into a forward contract with a term of more than one year.
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 pound denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of pounds for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the pound relative to the dollar will tend to be offset by an increase
in the value of the put option. To offset, in whole or 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 pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the
policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at
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a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
Other Investment Policies and Practices
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments are 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 complies with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer, and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer.
A fund which elects to be classified as "diversified" under the Investment
Company Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets. To the extent that the Fund assumes large positions in
the securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the
issuers, and the Fund may be more susceptible to any single economic, political
or regulatory occurrence than a diversified company.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when- issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund 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 amount of its commitment in
connection with such purchase transactions.
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 or a
stated number of shares of equity securities which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. At the time of entering into the agreement
the Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security which the Fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price which is considered
advantageous to the Fund. The Fund will not enter into a standby commitment
with a remaining term in excess of 45 days and presently will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its total assets taken at the time of
acquisition of such a commitment. 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 a 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. Since the issuance
of
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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 on which the security
can reasonably 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.
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, or an
affiliate thereof. 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 price at which the
trades are conducted do not reflect accrued interest on the underlying
obligation; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, such as under 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
only constitute 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, the rate of return to the Fund
would 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 arising from market fluctuations following the failure of the seller to
perform. Repurchase agreements and purchase and sale contracts maturing in more
than seven days are deemed to be illiquid by the Securities and Exchange
Commission and are therefore subject to the Fund's investment restriction
limiting investments in securities that are not readily marketable to 15% of
the Fund's total assets. (However, under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its total
assets.) See "Investment Restrictions" below.
Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive collateral in cash or securities
issued or guaranteed by the U.S. Government which are 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 borrowers to use such
securities for delivery to purchasers when such borrowers have 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
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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 return 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, and the borrower, after notice, will be required to return borrowed
securities within five business days. The Fund may pay reasonable finder's,
administrative and custodial fees in connection with such loans. With respect
to the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which, for this purpose and under the Investment Company Act, means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). 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 to be the making of investments
for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that invest
in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances and repurchase agreements and purchase and sale
contracts and any similar instruments shall not be deemed to be the making of a
loan, and except further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in this Prospectus
and the Statement of Additional Information, as they may be amended from time
to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that the Fund (i) may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33-1/3% of its total
assets (including the amount borrowed), (ii) may borrow up to an additional 5%
of its total assets for temporary purposes, (iii) may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) may purchase securities on margin to the extent
permitted by applicable law. The Fund may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in the Prospectus and this Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act"), in selling portfolio securities.
9
<PAGE>
8. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and the Fund's
Prospectus and Statement of Additional Information, as they may be amended from
time to time, and without the Fund registering as a commodity pool operator
under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the extent
that such purchases are permitted by applicable law. Applicable law currently
allows the Fund to purchase the securities of other investment companies if
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, (iii) 10% of
the Fund's total assets, taken at market value, would be invested in such
securities, and (iv) the Fund, together with other investment companies having
the same investment adviser and companies controlled by such companies, owns not
more than 10% of the total outstanding stock of any one closed-end investment
company. Investments by the Fund in wholly-owned investment entities created
under the laws of certain countries will not be deemed an investment in other
investment companies.
b. Make short sales of securities or maintain a short position except to
the extent permitted by applicable law. The Fund does not, however, currently
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions, or which cannot otherwise be marketed, redeemed,
put to the issuer or to a third party, if at the time of acquisition more than
15% of its total assets would be invested in such securities. This restriction
shall not apply to securities which mature within seven days or securities
which the Board of Directors of the Fund has otherwise determined to be liquid
pursuant to applicable law. Notwithstanding the 15% limitation herein, to the
extent that the laws of any state in which the Fund's shares are registered or
qualified for sale require a lower limitation, the Fund will observe such
limitation. As of the date hereof, therefore, the Fund will not invest more
than 10% of its total assets in securities which are subject to this investment
restriction (c). Securities purchased in accordance with Rule 144A under the
Securities Act (each, a "Rule 144A security") and determined to be liquid by
the Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to limitations
set forth in this investment restriction (c), the State of Ohio does not
recognize Rule 144A securities as securities that are free of restrictions as
to resale. To the extent required by Ohio law, the Fund will not invest more
than 50% of its total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities, or in securities of issuers
described in (e) below.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Fund's net assets; included within such limitation, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange or a major foreign exchange. For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than 5%
of the Fund's total assets would be invested in such securities. This
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
10
<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and directors of
any subsidiary thereof each owning beneficially more than one-half of one
percent of the securities of such issuer own in the aggregate more than 5% of
the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases or exploration or development programs, except
that the Fund may invest in securities issued by companies that engage in oil,
gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Prospectus and this
Statement of Additional Information, as amended from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
money or pledge its assets, except that the Fund (a) may borrow from a bank as
a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 33-1/3% (taken at market value) of its
total assets and pledge its assets to secure such borrowings, (b) may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (c) may purchase securities on margin to the
extent permitted by applicable law. However, at the present time, applicable
law prohibits the Fund from purchasing securities on margin. The deposit or
payment by the Fund of initial or variation margin in connection with financial
futures contracts or options transactions is not considered to be the purchase
of a security on margin. The purchase of securities while borrowings are
outstanding will have the effect of leveraging the Fund. Such leveraging or
borrowing increases the Fund's exposure to capital risk, and borrowed funds are
subject to interest costs which will reduce net income. The Fund will not
purchase securities while borrowings exceed 5% of its total assets.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on financial futures
contracts exceeds 15% of the total assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. (Under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net
assets.) However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and if the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Board of
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
11
<PAGE>
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the
Fund will, for purposes of investment restriction (1), treat securities issued
or guaranteed by the government of any one foreign country as the obligations
of a single issuer.
As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets, taken at market value would
be invested in such securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with 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.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch since 1990 and a Senior Vice President thereof from
1985 to 1990; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor").
Donald Cecil (68)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (68)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising, Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors, Inc. and Harman International Industries, Inc.
Charles C. Reilly (63)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
N.Y. 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990.
12
<PAGE>
Richard R. West (57)--Director(2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's Inc. (real estate company).
Edward D. Zinbarg (60)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (54)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (61)--Senior Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
Donald C. Burke (35)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager and FAM since 1990; employee of Deloitte & Touche LLP
from 1982 to 1990.
Grace Pineda (38)--Vice President(1)--Vice President of the Manager and
Senior Portfolio Manager since 1989; analyst and portfolio manager with
Clemente Capital, Inc. from 1982 to 1989.
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
Michael J. Hennewinkel (42)--Secretary(1)(2)--Vice President of the Manager
and FAM since 1985; attorney associated with the Manager and FAM since 1982.
James W. Harshaw, III (36)--Assistant Secretary(1)(2)--Attorney associated
with the Manager and FAM since 1994; associate at a law firm from 1990 to 1994;
judicial law clerk for the United States Court of Appeals for the Third Circuit
from 1989 to 1990.
- ----------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or an affiliate, FAM, acts as
investment adviser or manager.
At May 31, 1995, the Directors and officers of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund, owned less than 1% of the outstanding shares of common stock of ML
& Co.
Compensation of Directors
The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee, which consists of all of the non-affiliated Directors, at
a rate of $500 per meeting attended. The Chairman of the Audit and Nominating
Committee receives an additional fee of $250 per meeting attended.
13
<PAGE>
The following table sets forth the estimated compensation to be paid by the
Fund to the Directors, projected through the end of the Fund's first fiscal
year, and the aggregate compensation paid by all investment companies advised
by the Manager and an affiliate, FAM ("MLAM/FAM-Advised Funds"), to the
Directors for the year ended December 31, 1994.
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from Fund and
Aggregate Benefits Accrued as Other MLAM/FAM-
Compensation Part of Fund Advised Funds Paid
Name of Director from Fund (2) Expenses to Directors (1)
<S> <C> <C> <C>
Donald Cecil $12,000 None $236,350
Edward H. Meyer $11,000 None $251,600
Charles C. Reilly $11,000 None $276,900
Richard R. West $11,000 None $300,900
Edward D. Zinbarg $10,500 None $121,500
</TABLE>
- ------------------
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM-Advised Funds as follows: Mr. Cecil (35 funds); Mr. Meyer (35 funds);
Mr. Reilly (54 funds); Mr. West (54 funds); and Mr. Zinbarg (17 funds).
Mr. Zinbarg was first elected to the boards of MLAM/FAM - Advised Funds in
October, 1994; his total compensation is calculated as if he were a Director
for all of 1994.
(2) Amount includes both 1995 and 1996 annual retainers.
Management and Advisory Arrangements
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund also may be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which they act as
investment adviser or for other advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As described in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate
of 1.00% of the average daily net assets of the Fund.
The State of California imposes limitations on the expenses of the Fund.
These expense limitations require that the Manager reimburse the Fund in an
amount necessary to prevent the ordinary operating expenses of the Fund
(excluding interest, taxes, distribution fees, brokerage fees and commissions
and extraordinary charges such as litigation costs) from exceeding in any
fiscal year 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets and 1.5% of the
remaining average daily net assets. The Manager's obligation to reimburse the
Fund is limited to the amount of the management fee. No fee payment will be
made to the Manager during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
The Fund has received an order from the State of California partially
waiving the expense limitations described above. Pursuant to the terms of such
waiver, the expense limitations that otherwise would apply are waived to the
extent that the Fund's expenses for management and auditing fees exceed the
average of such fees of a group of mutual funds managed by the Manager or an
affiliate, FAM, which primarily invest domestically.
14
<PAGE>
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports
and prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. The Distributor will pay
certain promotional expenses of the Fund incurred in connection with the
offering of its shares. Certain expenses will be financed by the Fund pursuant
to distribution plans in compliance with Rule 12b-1 under the Investment
Company Act. See "Purchase of Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will continue in effect for a period of two years from the
date of execution and will remain in effect 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 contracts or "interested persons" (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of a majority of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C and Class D share represents an identical interest in
the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid.
The Merrill Lynch Select Pricing(SM) System is used by more than 60 mutual funds
advised by the Manager or an affiliate, FAM. Funds advised by the Manager or FAM
which use the Merrill Lynch Select Pricing(SM) System are referred to herein as
"MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed
15
<PAGE>
to shareholders, the Distributor pays for the printing and distribution of
copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
under "Management of the Fund--Management and Advisory Arrangements".
Initial Sales Charge Alternatives--Class A and Class D Shares
The term "purchase", as used in the Prospectus and this Statement of
Additional Information, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or their own account
and single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and of other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or FAM who
purchased such closed-end funds prior to October 21, 1994, the date the Merrill
Lynch Select Pricing(SM) System commenced operations, and wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
Eligible Class A Shares, if the conditions set forth below are satisfied.
Alternatively, closed-end fund shareholders who purchased such shares on or
after October 21, 1994, and wish to reinvest the net proceeds from the sale of
their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares") if the following conditions are met. First,
the sale of the closed-end fund shares must be made through Merrill Lynch, and
the net proceeds therefrom must be reinvested immediately in Eligible Class A
Shares or Eligible Class D Shares. Second, the closed-end fund shares must
either have been acquired in the initial public offering or be shares
representing dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been 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 the Fund are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this investment
option, Senior Floating Rate Fund shareholders must sell their Senior Floating
Rate Fund shares to the Senior Floating Rate Fund in connection with a tender
offer conducted by Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund's prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Reduced Initial Sales Charges
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the dollar amount then being purchased plus (b) an amount
equal to the then current
16
<PAGE>
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of all classes of shares of the Fund and of any other MLAM-advised
mutual funds. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual fund made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the term
of such Letter otherwise would be subject to a further reduced sales charge
based on the right of accumulation, the purchaser will be entitled on that
purchase and subsequent purchases to the reduced percentage sales charge which
would be applicable to a single purchase equal to the total dollar value of the
Class A or Class D shares then being purchased under such Letter, but there will
be no retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter.
Employer Sponsored Retirement or Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Code and deferred compensation plans within the meaning of
Sections 403(b) and 457 of the Code, other deferred compensation arrangements,
Voluntary Employee Benefits Association ("VEBA") plans, and non-qualified After
Tax Savings and Investment programs, maintained on the Merrill Lynch Group
Employee Services system, herein referred to as "Employer Sponsored Retirement
or Savings Plans", provided that the plan has accumulated $20 million or more
in MLAM-advised mutual funds (in the case of Class A shares) or $5 million or
more in MLAM-advised mutual funds (in the case of Class D shares). Class D
shares may be offered at net asset value to new Employer Sponsored Retirement
or Savings Plans, provided that the plan has $3 million or more initially
invested in MLAM-advised mutual funds. Assets of Employer Sponsored Retirement
or Savings Plans with the same sponsor or an affiliated sponsor may be
aggregated. Class A and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares)
or between 500 and 999 employees eligible to participate
17
<PAGE>
in the plan (in the case of Class D shares). Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Any Employer Sponsored Retirement
or Savings Plan which does not meet the above described qualifications to
purchase Class A shares or Class D shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge schedule and possible
CDSC schedule disclosed in the Prospectus if it is otherwise eligible to
purchase Class A shares, (ii) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, (iii) if the
Employer Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or (iv) if
the Employer Sponsored Retirement or Savings Plan does not qualify to purchase
Class B shares with a waiver of the CDSC upon redemption, purchasing Class C
shares at the CDSC schedule disclosed in the Prospectus. The minimum initial
and subsequent purchase requirements are waived in connection with all of the
above referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM/FAM-Advised Funds, directors and employees of ML & Co. and
its subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes the Manager, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and any trust, pension, profit-sharing
or other benefit plan for such persons may purchase Class A shares of the Fund
at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund also are offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer, if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
18
<PAGE>
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities at all times shall remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement of
the account maintenance fees and/or distribution fees paid to the Distributor.
In their consideration of each Distribution Plan, the Directors must consider
all factors that they deem relevant, including information as to the benefits
of the Distribution Plan to the Fund and its related class of shareholders.
Each Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan may be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of the Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") imposes a limitation on certain asset-
based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined
19
<PAGE>
to exclude shares issued pursuant to dividend reinvestments and exchanges),
plus (2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor
voluntarily has agreed to waive interest charges on the unpaid balance in
excess of 0.50% of eligible gross sales. Consequently, the maximum amount
payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances, the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances,
payments in excess of the amount payable under the NASD formula will not be
made.
The following table sets forth comparative information for the period from
December 30, 1994 (commencement of the Fund's operations) through April 30,
1995, with respect to the Class B and Class C shares of the Fund, indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to Class B shares, the Distributor's voluntary
maximum for the period from December 30, 1994 (commencement of the Fund's
operations) through April 30, 1995.
<TABLE>
<CAPTION>
Data Calculated as of April 30, 1995
--------------------------------------------------------------------------------------------------------
Amounts
Allowable Allowable Previously Annual
Eligible Aggregate Interest Maximum Paid to Aggregate Distribution
Gross Sales on Unpaid Amount Distributor Unpaid Fee at Current
Class B Sales (1) Charges Balance (2) Payable (3) Balance Net Asset Level (4)
- ------- --------- --------- ----------- ------- ----------- --------- --------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule $7,502 $469 $15 $484 $21 $463 $55
as Adopted
Under Distributor's $7,502 $469 $15 $484 $21 $463 $55
Voluntary Waiver
(not in thousands)
Class C
- -------
Under NASD Rule $923,274 $57,705 $1,804 $59,509 $2,486 $57,023 $7,672
as Adopted
</TABLE>
- -----------------
(1) Purchase price of all eligible Class B and Class C shares sold since
December 30, 1994 (commencement of the Fund's operations) other than shares
acquired through dividend reinvestment.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing the
unpaid balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as
20
<PAGE>
determined by the Securities and Exchange Commission or such Exchange is closed
(other than customary weekend and holiday closings), for any period during
which an emergency exists, as defined by the Securities and Exchange
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Securities and Exchange Commission by order
may permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
Deferred Sales Charges--Class B Shares
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are: (a) any
partial or complete redemption in connection with a tax-free distribution
following retirement under a tax-deferred retirement plan or attaining age
59-1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided that the redemption is requested within one year of
the death or initial determination of disability.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC
upon redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming
Class B shares. "Eligible 401(k) Plan" is defined as a retirement plan
qualified under Section 401(k) of the Code with a salary reduction feature
offering a menu of investments to plan participants. The CDSC also is waived
for redemptions from a 401(a) plan qualified under the Code, provided, however,
that each such plan has the same or an affiliated sponsoring employer as an
Eligible 401(k) Plan purchasing Class B shares of MLAM-advised mutual funds
("Eligible 401(a) Plan"). Other tax qualified retirement plans within the
meaning of Sections 401(a) and 403(b) of the Code which are provided
specialized services (e.g., plans whose participants may direct on a daily
basis their plan allocations among a menu of investments) by independent
administration firms contracted through Merrill Lynch also may purchase Class B
shares with a waiver of the CDSC. The CDSC also is waived for any Class B
shares which are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan
and are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. The minimum initial and subsequent purchase requirements
are waived in connection with all the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager seeks to obtain the best net results for the Fund, taking into
account such factors as price (including
21
<PAGE>
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Manager generally
seeks reasonably competitive commission rates, the Fund does not necessarily
pay the lowest commission or spread available. The Fund has no obligation to
deal with any broker or group of brokers in execution of transactions in
portfolio securities. Subject to obtaining the best price and execution,
brokers who provide supplemental investment research to the Manager, 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 Manager under the Management Agreement and the expenses of the
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. It is possible that certain supplementary investment
research so received will primarily benefit one or more other investment
companies or other accounts for which investment discretion is exercised.
Conversely, the Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other accounts
or investment companies. In addition, consistent with the Rules of Fair
Practice of the NASD and policies established by the Board of Directors of the
Fund, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the United States, as well as GDRs traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the over-the-counter markets and
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, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Securities and Exchange Commission. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. See
"Investment Objective and Policies-- Investment Restrictions".
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategies.
22
<PAGE>
The Board of Directors has considered the possibilities of seeking to recapture
for the benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts which they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with the aggregate compensation
received by the member in effecting such transactions, and (iii) complies with
any rules the Securities and Exchange Commission has prescribed with respect to
the requirements of clauses (i) and (ii). To the extent Section 11(a) would
apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily, Monday through Friday, as of 15 minutes after the close
of business on the New York Stock Exchange (generally, 4:00 P.M., New York
time), on each day during which the New York Stock Exchange is open for
trading. The New York Stock Exchange is not open on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might
be affected materially, but only if on any such day the Fund is required to
sell or redeem shares. Net asset value is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time.
Expenses, including the management fees and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of the
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of the Class A shares, reflecting the daily expense accruals of
the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to the Class D
shares; moreover, the per share net asset value of the Class B and Class C
shares generally will be lower than the per share net asset value of the Class
D shares, reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to the Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the last
sale price (regular way) on the exchange on which such securities are traded, as
of the close of business on the day the securities are being valued or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Securities that are traded
both in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market. When the Fund writes a call
option, the amount of the
23
<PAGE>
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last sale
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased by the
Fund are valued at their last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the last bid
price. Other investments, including futures contracts and related options, for
which market quotations are readily available, are valued 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. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange. The values
of such securities used in computing the net asset value of the Fund's shares
are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the New York Stock
Exchange. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of business on the New York Stock Exchange which will not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of such securities occur during such period, then these securities
will be valued at their fair value as determined in good faith by the
Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
Investment Account
Each shareholder whose account is maintained at the Fund's transfer agent
has an Investment Account and will receive, at least quarterly, statements from
the Fund's transfer agent. The statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of income
dividends and capital gains distributions. The statements also will show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
income dividends.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the transfer agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Fund's transfer
agent. If the new brokerage firm is willing to accommodate the shareholder in
this manner, the shareholder
24
<PAGE>
must request that he or she be issued certificates for his or her shares and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he is an eligible Class A investor as described
in the Prospectus) or Class B, Class C or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Fund's transfer agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. An investor whose
shares of the Fund are held within a CMA(R)/CBA(R) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/CBA(R) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund, without a sales charge, as of the close of business on the ex-dividend
date of the dividend or distribution. Shareholders may elect in writing to
receive their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the payment
date.
Shareholders, at any time, may notify the Fund's transfer agent in writing
or by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Fund or vice versa,
and commencing ten days after receipt by the Fund's transfer agent of such
notice, those instructions will be effected.
TAXES
The Fund intends to elect and to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under 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 Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income 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
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
25
<PAGE>
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
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 ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion of
their Class B shares into Class D shares. A shareholder's basis in the Class D
shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period for the acquired Class D shares will
include the holding period for the converted Class B shares.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value
of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Securities and Exchange Commission
exemptive order permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. It should be noted that the foreign tax
credit currently is unavailable for withholding taxes paid to certain countries
in which the Fund is allowed to invest. Shareholders, however, may be able to
deduct their proportionate shares of the taxes for which the credit has been
disallowed.
26
<PAGE>
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 a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under proposed
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities" or "junk bonds"), as described in
the Prospectus. Some of these high yield/high risk securities may be purchased
at a discount and may therefore cause the Fund to accrue income before amounts
due under the obligations are paid. In addition, a portion of the interest
payments on such high yield/high risk securities may be treated as dividends
for federal income tax purposes; in such case, if the issuer of such high
yield/high risk securities is a domestic corporation, dividend payments by the
Fund will be eligible for the dividends received deduction to the extent of the
deemed dividend portion of such interest payments.
A loss realized on a sale of shares of the Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61 day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Tax Treatment of Futures, Options and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell futures, options or forward foreign
exchange contracts. Futures and options contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a non-equity option or a regulated futures contract for
a non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short- term capital
gain or loss. 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.
27
<PAGE>
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in futures, options and forward foreign
exchange contracts 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, options and forward
foreign exchange contracts and short sales of securities.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting certain short sales and closing
transactions within three months after entering into an options or futures
contract.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. Dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and 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, and resulting in a capital gain for
any shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming that the shares were held as a capital asset).
These rules and the mark-to-market rules described above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal repayments and interest payments with respect
to debt obligations issued in hyperinflationary currencies, which may include
the currencies of certain countries in which the Fund intends to invest. To
date, 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
28
<PAGE>
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
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. From time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. Total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. Average annual
total return is determined separately for Class A, Class B, Class C and Class D
shares in accordance with a formula specified by the Securities and Exchange
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any redemption fee that would be
applicable to a complete redemption of the investment at the end of the
specified period, the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class
C shares.
The Fund also may quote annual, average annual and annualized total return and
aggregate total return performance data, both as a percentage and as a dollar
amount based on a hypothetical $1,000 investment, for various periods other
than those noted below. Such data will be computed as described above, except
that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
In order to reflect the reduced sales charges in the case of Class A or Class D
shares, or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect a greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
29
<PAGE>
Set forth below is total return information for the Class A, Class B, Class C
and Class D shares of the Fund for the period indicated.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------- ----------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of the $1,000 the end of the
investment period investment period
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Average Annual Total Return*
(including maximum applicable sales charge)
Inception (December 30, 1994) 5.70% $1,018.60 9.97% $1,032.00
to April 30, 1995
Annual Total Return
(excluding maximum applicable sales charge)
Inception (December 30, 1994) 7.50% $1,075.00 7.20% $1,072.00
to April 30, 1995
Aggregate Total Return
(including maximum applicable sales charge)
Inception (December 30, 1994) 1.86% $1,018.60 3.20% $1,032.00
to April 30, 1995
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Class D Shares
--------------------------------- ---------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of the $1,000 the end of the
investment period investment period
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Average Annual Total Return*
(including maximum applicable sales charge)
Inception (December 30, 1994) 19.90% $1,062.00 5.41% $1,017.60
to April 30, 1995
Annual Total Return
(excluding maximum applicable sales charge)
Inception (December 30, 1994) 7.20% $1,072.00 7.40% $1,074.00
to April 30, 1995
Aggregate Total Return
(including maximum applicable sales charge)
Inception (December 30, 1994) 6.20% $1,062.00 1.76% $1,017.60
to April 30, 1995
</TABLE>
- --------------------
*Annualized.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on March 15, 1994. It has an
authorized capital of 400,000,000 shares of common stock, par value $0.10 per
share. At the date of this Statement of Additional Information, the shares of
the Fund are divided into Class A, Class B, Class C and Class D shares, each of
which consists of 100,000,000 shares. Under the Articles of Incorporation of
the Fund, the Directors have the authority to issue separate classes of shares
which would represent interests in the assets of the Fund and have identical
voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related to the distribution and/or account
maintenance of the shares of a class may be borne solely by such class, and a
class may have exclusive voting rights with respect to matters relating to the
expenses being borne only by such class. The Fund has received an order (the
"Multi-Class System Order") from the Commission permitting the issuance and
sale of multiple classes of shares. The Multi-Class System Order permits the
Fund to issue additional classes of shares if the Board of Directors deems such
reissuance to be in the best interests of the Fund. Upon liquidation of the
Fund, shareholders of each class are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders, except for any
expenses which may be attributable only to one class. Shares have no preemptive
rights. The redemption, conversion and exchange rights are described elsewhere
herein and in the Prospectus.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to a vote of
shareholders, except that shareholders of a class bearing account maintenance
and/or distribution expenses as provided above shall have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. The Fund does not intend to hold annual meetings of
shareholders in any year in which the Investment
30
<PAGE>
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. Voting
rights for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Redemption rights
are discussed elsewhere herein and in the Prospectus. Each share of Class A,
Class B, Class C and Class D Common Stock is entitled to participate equally in
dividends declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities,
except that, as noted above, expenses related to the account maintenance and/or
distribution of the Class B, Class C and Class D shares are borne solely by
such class. Stock certificates are issued by the transfer agent only on
specific request. Certificates for fractional shares are not issued in any
case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (approximately $219,210) are being paid by the Fund and
are being amortized over a period not exceeding five years. The proceeds
realized by the Manager upon the redemption of any of the shares initially
purchased by it will be reduced by the proportional amount of the unamortized
organizational expenses which the number of such initial shares being redeemed
bears to the number of shares initially purchased.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund, based on the value of the Fund's net
assets and number of shares outstanding on April 30, 1995, is set forth below:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Assets $344,205 $7,267,400 $1,037,870 $1,322,221
======== ========== ========== ==========
Number of Shares Outstanding 32,014 678,189 96,853 123,080
======== ========== ========== ==========
Net Asset Value Per Share (net assets divided by $ 10.75 $ 10.72 $ 10.72 $ 10.74
number of shares outstanding)
Sales Charge for Class A and Class D Shares: 5.25%
of offering price (5.54% of net amount invested*) .60 ** ** .60
======== ========== ========== ==========
Offering Price $ 11.35 $ 10.72 $ 10.72 $ 11.34
======== ========== ========== ==========
</TABLE>
- --------------------------
* Rounded to the nearest one-hundredth percent; assumes the maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B Shares" herein.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
Custodian
The Chase Manhattan Bank, N.A., Global Securities Services, 4 MetroTech
Center, 18th Floor, Brooklyn, New York 11245 acts as the custodian of the
Fund's assets (the "Custodian"). Under its contract with the Fund, the
Custodian is authorized, among other things, to establish separate accounts in
foreign currencies and to cause foreign
31
<PAGE>
securities owned by the Fund to be held in its offices outside of the United
States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Merrill Lynch Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts
as the Fund's transfer agent (the "Transfer Agent"). The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Fund--Transfer Agency Services" in the Prospectus.
Legal Counsel
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on November 30 of each year. The Fund
sends to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C. under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
To the knowledge of the Fund, no person owned beneficially 5% or more of
the Fund's shares on June 1, 1995.
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
Merrill Lynch Middle East/Africa Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Middle East/Africa Fund, Inc. as of December 15, 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 and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch Middle
East/Africa Fund, Inc. as of December 15, 1994 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 21, 1994
33
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 15, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash $100,000
Prepaid registration fees 98,963
Deferred organization costs 219,210
--------
Total Assets 418,173
LIABILITIES:
Liabilities and accrued expenses 318,173
--------
NET ASSETS $100,000
========
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 250
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 250
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 250
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 250
Paid-in Capital in excess of par 99,000
--------
NET ASSETS: $100,000
========
NET ASSET VALUE:
Class A--Based on net assets of $25,000 and 2,500 shares outstanding $10.00
======
Class B--Based on net assets of $25,000 and 2,500 shares outstanding $10.00
======
Class C--Based on net assets of $25,000 and 2,500 shares outstanding $10.00
======
Class D--Based on net assets of $25,000 and 2,500 shares outstanding $10.00
======
</TABLE>
- -------------------
Notes to Statement of Assets and Liabilities:
(1) Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") was organized as a
Maryland corporation on March 15, 1994. The Fund is registered under the
Investment Company Act of 1940 as an open-end management investment company. To
date, the Fund has not had any transactions other than those relating to
organizational matters and the sale of 2,500 Class A shares, 2,500 Class B
shares, 2,500 Class C shares and 2,500 Class D shares of Common Stock to
Merrill Lynch Asset Management, L.P. (the "Manager").
(2) The Fund intends to enter into a management agreement with the Manager, and
distribution agreements and distribution plans with Merrill Lynch Funds
Distributor, Inc. (the "Distributor"). (See "Management of the Fund--Management
and Advisory Arrangements" and "Purchase of Shares" in the Statement of
Additional Information.) Certain officers and/or directors of the Fund are
officers and/or directors of the Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event that
the Manager (or any subsequent holder) redeems any of its original shares prior
to the end of the five-year period, the proceeds of the redemption payable in
respect of such shares shall be reduced by the pro rata share (based on the
proportionate share of the original shares redeemed to the total number of
original shares outstanding at the time of redemption) of the unamortized
deferred organization expenses as of the date of such redemption. In the event
that the Fund is liquidated prior to the end of the five-year period, the
Manager (or any subsequent holder) shall bear the unamortized deferred
organization expenses.
34
<PAGE>
THE FOLLOWING FINANCIAL STATEMENTS FOR THE FUND FOR THE PERIOD DECEMBER 30,
1994 (COMMENCEMENT OF OPERATIONS) TO APRIL 30, 1995 ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which,
in the opinion of management, are necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal
recurring nature.
35
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc. April 30, 1995
SCHEDULE OF INVESTMENTS (unaudited) (in US Dollars)
<TABLE>
<CAPTION>
Shares
Held/
Face Value Percent of
AFRICA Industries Amount Investments Cost (Note 1a) Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Botswana Investment Trust 182,000 Sechaba Investment Trust $ 152,125 $ 145,545 1.5%
-------------------------------------------------------------------------------------------------------------------
Total Investments in Botswana 152,125 145,545 1.5
- ----------------------------------------------------------------------------------------------------------------------------------
Ghana Multi-Industry 55,000 Guiness Ghana 10,315 9,804 0.1
-------------------------------------------------------------------------------------------------------------------
Tobacco 70,000 Pioneer Tobacco 5,081 4,742 0.0
-------------------------------------------------------------------------------------------------------------------
Total Investments in Ghana 15,396 14,546 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Morocco Banking 5,000 Banque Marocaine du Commerce
Exterieure 221,372 236,094 2.4
-------------------------------------------------------------------------------------------------------------------
Building & 2,000 Groupe Omnium Nord Africain
Construction 89,278 83,201 0.8
-------------------------------------------------------------------------------------------------------------------
Building Materials 2,000 Les Ciments de l'Oriental 87,576 81,527 0.8
-------------------------------------------------------------------------------------------------------------------
Total Investments in Morocco 398,226 400,822 4.0
- ----------------------------------------------------------------------------------------------------------------------------------
South Africa Beverages 3,900 South African Breweries Limited 89,341 107,839 1.1
-------------------------------------------------------------------------------------------------------------------
Holding Company 14,600 Rembrandt Group Ltd. 99,142 106,982 1.0
-------------------------------------------------------------------------------------------------------------------
Retail ZAL 4,000,000 Transnet Corp., 15% due 10/01/1995 986,520 1,106,595 11.1
-------------------------------------------------------------------------------------------------------------------
Steel 111,860 SA Iron & Steel Industrial Corp.,
Ltd. 120,987 138,878 1.4
-------------------------------------------------------------------------------------------------------------------
Total Investments in South Africa 1,295,990 1,460,294 14.6
- ----------------------------------------------------------------------------------------------------------------------------------
Zimbabwe Beverage and Tobacco 160,000 Delta Corp. 200,000 198,640 2.0
-------------------------------------------------------------------------------------------------------------------
Commercial Services 153,000 Hippotour 52,756 56,080 0.6
-------------------------------------------------------------------------------------------------------------------
Total Investments in Zimbabwe 252,756 254,720 2.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Africa 2,114,493 2,275,927 22.8
- ----------------------------------------------------------------------------------------------------------------------------------
MIDDLE EAST
- ----------------------------------------------------------------------------------------------------------------------------------
Israel Financial Services 32,300 Ampal-American Israel Corp. 196,639 205,912 2.1
-------------------------------------------------------------------------------------------------------------------
Holding Company 17,800 PEC Israel Economic Corp. 440,496 491,725 4.9
-------------------------------------------------------------------------------------------------------------------
Total Investments in Israel 637,135 697,637 7.0
- ----------------------------------------------------------------------------------------------------------------------------------
Turkey Automobiles 245,000 Tofas Turk Otomobil Fabrikasi A.S. 208,636 224,824 2.3
-------------------------------------------------------------------------------------------------------------------
Banking 862,000 Garanti Bankasi A.S. 260,911 218,035 2.2
-------------------------------------------------------------------------------------------------------------------
Food & Household Products 48,000 Dardanel Onentas Gida A.S. 78,183 74,541 0.7
-------------------------------------------------------------------------------------------------------------------
Metal Fabricating 1,093,334 Turk Siemens Kablo Ve Elektrik
Sanayii A.S. 206,649 334,432 3.4
-------------------------------------------------------------------------------------------------------------------
Retail Stores 89,000 Migros Turk A.S. 195,239 230,353 2.3
-------------------------------------------------------------------------------------------------------------------
Total Investments in Turkey 949,618 1,082,185 10.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in the Middle East 1,586,753 1,779,822 17.9
- ----------------------------------------------------------------------------------------------------------------------------------
36
<PAGE>
Short-Term Face Investments Value Percent of
Securities Amount Cost (Note 1a) Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial US Turkish Treasury Bill, 122.06%*,
- ----------------------------------------------------------------------------------------------------------------------------------
Paper-Foreign** $93,348,000,000 due 3/22/1996 $1,120,967 $1,139,065 11.4%
- ----------------------------------------------------------------------------------------------------------------------------------
US Government & Agency US Treasury Bills, 5.50% due
Obligation** 4,636,000 5/11/1995 4,627,501 4,627,501 46.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 5,748,468 5,766,566 57.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments $9,449,714 9,822,315 98.5
==========
Other Assets Less
Liabilities 149,381 1.5
---------- -----
Net Assets $9,971,696 100.0%
========== =====
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Represents the yield-to-maturity on this zero coupon issue.
**Commercial Paper and certain US Government & Agency Obligations are traded on
a discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
See Notes to Financial Statements.
37
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc. April 30, 1995
FINANCIAL INFORMATION (unaudited)
<TABLE>
Statement of Assets and Liabilities as of April 30, 1995 (unaudited)
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$9,449,714) (Note 1a) $ 9,822,315
Cash 2,425
Receivables:
Capital shares sold $ 39,690
Interest 33,173
Investment adviser (Note 2) 25,901
Dividends 17,333 116,097
--------
Deferred organization expenses (Note 1g) 219,210
Prepaid registration fees and other assets (Note 1g) 95,515
-----------
Total assets 10,255,562
===========
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Capital shares redeemed 162,823
Securities purchased 19,286
Distributor (Note 2) 6,781 188,890
-------
Accrued expenses and other liabilities 94,976
-----------
Total liabilities 283,866
-----------
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets $ 9,971,696
===========
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 3,201
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 67,819
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 9,685
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 12,308
Paid-in capital in excess of par 9,223,451
Undistributed investment income--net 284,754
Undistributed realized capital losses on investments and foreign
currency transactions--net (7,092)
Unrealized appreciation on investments and foreign currency
transactions--net 377,570
-----------
Net assets $ 9,971,696
===========
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $344,205 and 32,014 shares
outstanding $ 10.75
===========
Class B--Based on net assets of $7,267,400 and 678,189 shares
outstanding $ 10.72
===========
Class C--Based on net assets of $1,037,870 and 96,853 shares
outstanding $ 10.72
===========
Class D--Based on net assets of $1,322,221 and 123,080 shares
outstanding $ 10.74
===========
- --------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
38
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc. April 30, 1995
<TABLE>
Statement of Operations for the Period December 30, 1994+ to April 30, 1995 (unaudited)
<S> <C> <C> <C>
Investment Interest and discount earned $293,630
Income Dividends (net of $188 foreign withholding tax) 18,585
(Notes 1e & 1f): Total income 312,215
--------
- --------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) $ 31,409
Registration fees (Note 1g) 30,340
Distribution fees--Class B (Note 2) 23,285
Printing and shareholder reports 19,993
Directors' fees and expenses 12,974
Accounting services (Note 2) 12,355
Professional fees 7,054
Custodian fees 5,734
Transfer agent fees--Class B (Note 2) 5,525
Distribution fees--Class C (Note 2) 3,181
Amortization of organization expenses (Note 1g) 1,740
Account maintenance fees--Class D (Note 2) 995
Transfer agent fees--Class D (Note 2) 807
Transfer agent fees--Class C (Note 2) 732
Transfer agent fees--Class A (Note 2) 194
Pricing fees 187
Other 20,016
--------
Total expenses before reimbursement 176,521
Reimbursement of expenses (Note 2) (149,060)
--------
Total expenses net of reimbursement 27,461
-------
Investment income--net 284,754
-------
- --------------------------------------------------------------------------------------------------------------------------------
Realized & Realized loss from:
Unrealized Gain Investments--net
(Loss) on (325)
Investments Foreign currency transactions--net (6,767) (7,092)
-------
& Foreign Currency Unrealized appreciation on:
Transactions--Net Investments--net
(Notes 1b, 1c, 372,601
1f & 3): Foreign currency transactions--net 4,969 377,570
------- --------
Net realized and unrealized gain on investments and foreign
currency transactions 370,478
--------
Net Increase in Net Assets Resulting from Operations $655,232
========
- --------------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
39
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc. April 30, 1995
<TABLE>
Statement of Changes in Net Assets (unaudited)
<CAPTION>
For the Period
December 30, 1994+
Increase (Decrease) in Net Assets: to April 30, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income--net $ 284,754
Realized loss on investments and foreign currency
transactions--net (7,092)
Unrealized appreciation on investments and foreign currency
transactions-- net 377,570
-----------
Net increase in net assets resulting from operations 655,232
-----------
- --------------------------------------------------------------------------------------------------------------------------------
Capital Share Net increase in net assets derived from capital share transactions 9,216,464
Transactions ----------
(Note 4):
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets 9,871,696
Beginning of period 100,000
-----------
End of period* $9,971,696
==========
- --------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net $ 284,754
==========
- --------------------------------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
40
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc. April 30, 1995
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (unaudited)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Period December 30, 1994+ to April 30, 1995
---------------------------------------------------
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
--------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
Operating ------ ------ ------ ------
Performance: Investment income--net .31 .31 .29 .32
Realized and unrealized gain on .44 .41 .43 .42
investments and foreign currency ------ ------ ------ ------
transactions--net
Total from investment operations .75 .72 .72 .74
------ ------ ------ ------
Net asset value, end of period $10.75 $10.72 $10.72 $10.74
------ ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------
Total Based on net asset value per share 7.50%++ 7.20%++ 7.20%++ 7.40%++
Investment ------ ------ ------ ------
Return:**
- ------------------------------------------------------------------------------------------------------------------
Ratios to Expenses, excluding account .00%* .00%* .00%* .00%*
Average maintenance and distribution fees ======= ======= ======= =======
Net and net of reimbursement
Assets: Expenses, net of reimbursement .00%* 1.00%* 1.00%* .25%*
Expenses 4.70%* 5.75%* 5.74%* 4.96%*
======= ======= ======= =======
Investment income--net 10.21%* 8.91%* 8.94%* 9.82%*
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period $ 344 $7,268 $1,038 $1,322
Data: (in thousands) ====== ====== ====== ======
Portfolio turnover .00% .00% .00% .00%
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Total investment returns exclude the effect of sales loads.
+Commencement of Operations.
++Aggregate total investment return.
See Notes to Financial Statements.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. Significant Accounting Policies:
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company. Prior to commencement of operations on December 30, 1994,
the Fund had no operations other than those relating to organizational matters
and the issuance of 10,000 shares of capital stock of the Fund to Merrill Lynch
Asset Management, L.P. ("MLAM") for $100,000. These unaudited financial
statements reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period presented.
All such adjustments are of a normal recurring nature. The Fund offers four
classes of shares under the Merrill Lynch Select Pricing(SM) System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes
of shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Board of Directors
as the primary market. Securities traded in the over- the-counter market are
valued at the last available bid price prior to the time of valuation.
Securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market.
Options written by the Fund are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the last asked price. Options purchased by the Fund are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, for which market
quotations are readily available, are valued 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 Fund's Board
of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and foreign currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
(bullet) Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(bullet) Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on options is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
(bullet) Foreign currency options and futures--The Fund may also purchase or
sell listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such transactions
may be effected with respect to hedges on non-US dollar denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
(bullet) Financial futures contracts--The Fund may purchase or sell stock index
futures contracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies
43
<PAGE>
into US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(d) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(e) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code of 1986 applicable to regulated investment companies
and to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(f) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend date, except that if the ex-
dividend date has passed, certain dividends from foreign securities are
recorded as soon as the funds are informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period beginning with commencement of operations. Prepaid
registration fees are charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with MLAM. The
general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution Agreement and
Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. As compensation for its services to the Fund,
MLAM receives monthly compensation at the annual rate of 1.00% of the average
daily net assets of the Fund.
Certain states in which shares of the Fund are qualified for sale impose
limitations on the
44
<PAGE>
expenses of the Fund. The most restrictive annual expense limitation requires
that MLAM reimburse the Fund to the extent that expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. MLAM's obligation to reimburse
the Fund is limited to the amount of the investment advisory fee. For the
period from December 30, 1994 (commencement of the Fund's operations) through
April 30, 1995, MLAM earned fees of $31,409, all of which was voluntarily
waived. MLAM also reimbursed the Fund $117,651 in additional expenses. No fee
payment will be made to MLAM during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation at the time of such
payment.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
Account Maintenance Fee Distribution Fee
----------------------- ----------------
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders. For the period from December 30, 1994 (commencement of the Fund's
operations) through April 30, 1995, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class D shares as
follows:
MLFD MLPF&S
Class D $285 $4,672
For the period ended April 30, 1995, MLPF&S received contingent deferred sales
charges of $3,673 and $100 relating to transactions in Class B and Class C
Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("FDS"), a wholly owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLPF&S, PSI, FDS, MLFD and/or ML & Co.
3. Investments:
Purchases of investments, excluding short-term securities, for the period ended
April 30, 1995, were $4,702,434.
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of April 30, 1995 were as
follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Gains
- --------------------------------------------------------------------------------
Long-term investments -- $ 354,503
Short-term investments $ (325) 18,098
Foreign currency transactions (6,767) 4,969
--------- -----------
Total $ (7,092) $ 377,570
========= ===========
- --------------------------------------------------------------------------------
As of April 30, 1995, net unrealized appreciation for Federal income tax
purposes aggregated $372,601, of which $440,035 related to appreciated
securities and $67,434 related to depreciated securities. The aggregate cost of
investments at April 30, 1995 for Federal income tax purposes was $9,449,714.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$9,216,464 for the period ended April 30, 1995.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Period from Shares Dollar
December 30, 1994+ through April Amount
30, 1995
- --------------------------------------------------------------------------------
Shares sold 33,989 $ 344,152
Shares redeemed (4,475) (45,617)
------ ----------
Net increase 29,514 $ 298,535
====== ==========
- --------------------------------------------------------------------------------
+Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
- --------------------------------------------------------------------------------
Class B Shares for the Period from Shares Dollar
December 30, 1994+ through April Amount
30, 1995
- --------------------------------------------------------------------------------
Shares sold 753,998 $7,549,533
Shares redeemed (78,309) (789,285)
------- ----------
Net increase 675,689 $6,760,248
======= ==========
- --------------------------------------------------------------------------------
+Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
- --------------------------------------------------------------------------------
Class C Shares for the Period from Shares Dollar
December 30, 1994+ through April Amount
30, 1995
- --------------------------------------------------------------------------------
Shares sold 95,723 $ 960,098
Shares redeemed (1,370) (13,010)
------ ----------
Net increase 94,353 $ 947,088
====== ==========
- --------------------------------------------------------------------------------
+Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
- --------------------------------------------------------------------------------
Class D Shares for the Period from Shares Dollar
December 30, 1994+ through April Amount
30, 1995
- --------------------------------------------------------------------------------
Shares sold 121,317 $1,216,487
Shares redeemed (737) (5,894)
------- ----------
Net increase 120,580 $1,210,593
======= ==========
- --------------------------------------------------------------------------------
+Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
46
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Hedging Techniques 2
Other Investment Policies and Practices 7
Investment Restrictions 9
Management of the Fund 12
Directors and Officers 12
Compensation of Directors 13
Management and Advisory Arrangements 14
Purchase of Shares 15
Initial Sales Charge Alternatives--
Class A and Class D Shares 16
Reduced Initial Sales Charges 16
Distribution Plans 19
Redemption of Shares 20
Deferred Sales Charges--Class B Shares 21
Portfolio Transactions and Brokerage 21
Determination of Net Asset Value 23
Shareholder Services 24
Investment Account 24
Automatic Investment Plans 25
Automatic Reinvestment of Dividends and Capital 25
Gains Distributions
Taxes 25
Tax Treatment of Futures, Options and Forward 27
Foreign Exchange Transactions
Special Rules for Certain Foreign Currency 28
Transactions
Performance Data 29
General Information 30
Description of Shares 30
Computation of Offering Price Per Share 31
Independent Auditors 31
Custodian 31
Transfer Agent 32
Legal Counsel 32
Reports to Shareholders 32
Additional Information 32
Independent Auditors' Report 33
Statement of Assets and Liabilities 34
Financial Statements (unaudited) 35
Code # 18412-0695
(Merrill Lynch Logo)
Merrill Lynch
Middle East/Africa
Fund, Inc.
Statement of
Additional
Information
June 22, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Contained in Part A:
Financial Highlights for the period ended April 30, 1995 (unaudited)
Contained in Part B:
Independent Auditors' Report
Statement of Assets and Liabilities as of December 15, 1994 (audited)
Schedule of Investments as of April 30, 1995 (unaudited)
Statement of Assets and Liabilities as of April 30, 1995 (unaudited)
Statement of Operations for the period ended April 30, 1995 (unaudited)
Statement of Changes in Net Assets for the period ended April 30, 1995
(unaudited)
Financial Highlights for the period ended April 30, 1995 (unaudited)
(b) Exhibits
Exhibit
Number
1 --Amended and Restated Articles of Incorporation of the
Registrant.(a)
2 --By-Laws of the Registrant.(a)
3 --None.
4(a) --Portions of the Articles of Incorporation and the By-Laws of
the Registrant defining the rights of shareholders.(b)
(b) --Specimen Share Certificates for Class A, Class B, Class C and
Class D Shares.(c)
5 --Form of Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P. (the "Manager").(a)
6(a) --Form of Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. (the
"Distributor").(a)
(b) --Form of Class B Shares Distribution Agreement between the
Registrant and the Distributor.(a)
(c) --Form of Class C Shares Distribution Agreement between the
Registrant and the Distributor.(a)
(d) --Form of Class D Shares Distribution Agreement between the
Registrant and the Distributor.(a)
7 --None.
8 --Form of Custody Agreement between the Registrant and The Chase
Manhattan Bank, N.A.(a)
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant
and Financial Data Services, Inc. (the "Transfer Agent").(a)
(b) --Form of License Agreement relating to the use of the "Merrill
Lynch" name.(a)
10 --None.
11 --Consent of Deloitte & Touche llp, independent auditors for the
Registrant.
12 --None.
13 --Certificate of the Manager.(c)
14 --None.
15(a) --Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(b) --Form of Class C Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(c) --Form of Class D Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
16(a) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item 22
relating to Class A shares.
(b) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item 22
relating to Class B shares.
(c) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item 22
relating to Class C shares.
(d) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item 22
relating to Class D shares.
C-1
<PAGE>
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
(a) Previously filed as an Exhibit to Pre-Effective Amendment No. 1 to this
Registration Statement on Form N-1A on November 18, 1994.
(b) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7) and
Articles VI, VII and IX of the Registrant's Articles of Incorporation, filed as
Exhibit 1 to the Registration Statement on Form N-1A referred to in paragraph
(a) above and to Article II, Article III (Sections 1, 3, 5 and 6) and Articles
VI, VII, XIII and XIV of the Registrant's By-Laws, filed as Exhibit 2 to the
Registration Statement on Form N-1A referred to in paragraph (a) above.
(c) Previously filed as an Exhibit to Pre-Effective Amendment No. 2 to this
Registration Statement on Form N-1A on December 22, 1994.
Item 25. Persons Controlled by or under Common Control with the Registrant
The Registrant is not controlled by or under common control with any
person.
Item 26. Number of Holders of Securities
Title of Class Number of Record
Holders at
May 31, 1995
Class A Shares of Common Stock, par value $0.10 per share 3
Class B Shares of Common Stock, par value $0.10 per share 13
Class C Shares of Common Stock, par value $0.10 per share 3
Class D Shares of Common Stock, par value $0.10 per share 3
Item 27. Indemnification
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of each of the Class A, Class B,
Class C and Class D Shares Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only on receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount which it is ultimately determined that he or she is entitled
to receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assumes that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance and (b) a
majority of a quorum of the Registrant's disinterested non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of each of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising in
connection with the Registration Statement or the Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
C-2
<PAGE>
Item 28. Business and Other Connections of the Manager
The Manager acts as the investment adviser for the following open-end
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund,
Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Institutional
Intermediate Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Asset Builder Program, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc.; and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P., an affiliate of the Manager ("FAM"), acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi- State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers
Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured
Fund, Inc., MuniVest Florida Fund, 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 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., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM, the Distributor, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. 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 World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of the Transfer Agent is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
January 1, 1993, for his or her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the preceding
paragraph, and Messrs. Durnin, Giordano, Harvey, Hewitt, Kirstein and Monagle
and Ms. Griffin are directors, trustees or officers of one or more of such
companies.
C-3
<PAGE>
<TABLE>
<CAPTION>
Position(s) Other Substantial Business, Profession,
Name with the Manager Vocation or Employment
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company; Limited Partner of FAM
Princeton Services General Partner General Partner of FAM
Arthur Zeikel President President of FAM; President and Director of Princeton
Services; Director of MLFD; Executive Vice President of ML
& Co.; Executive Vice President of Merrill Lynch
Terry K. Glenn Executive Vice President Executive Vice President of FAM; Executive Vice President
and Director of Princeton Services; President and Director
of MLFD; Director of the Transfer Agent; President of
Princeton Administrators, L.P.
Bernard J. Durnin Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Elizabeth Griffin Senior Vice President Senior Vice President of FAM
Norman R. Harvey Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
N. John Hewitt Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Philip L. Kirstein Senior Vice President, Senior Vice President, General Counsel and Secretary of
General Counsel and FAM; Senior Vice President, General Counsel, Director and
Secretary Secretary of Princeton Services; Director of MLFD
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of FAM; Senior Vice
Controller President of Princeton Services
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton Administrators, L.P.
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Richard L. Reller Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Gerald M. Richard Senior Vice President and Senior Vice President and Treasurer of FAM; Senior Vice
Treasurer President and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Anthony Wiseman Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
Item 29. Principal Underwriters
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc.; and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Graczyk, Fatseas and Wasel is One Financial Center,
Boston, Massachusetts 02111-2665.
C-4
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) Position(s) and Office(s) Position(s) and Office(s)
Name with MLFD with the Registrant
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Sharon Creveling Vice President and Assistant Treasurer None
Mark A. Desario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536) and the Transfer Agent (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).
Item 31. Management Services
Other than as set forth under the caption "Management of the
Fund--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund--Management
and Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a
party to any management-related service contract.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Plainsboro and the State of New Jersey, on the 21st day of June,
1995.
Merrill Lynch Middle East/Africa
Fund, Inc.
(Registrant)
By: /s/ Terry K. Glenn
(Terry K. Glenn, Executive Vice President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
Signature Title Date
Arthur Zeikel* President (Principal Executive
(Arthur Zeikel) Officer) and Director
Gerald M. Richard* Treasurer (Principal Financial
(Gerald M. Richard) and Accounting Officer)
Donald Cecil* Director
(Donald Cecil)
Edward H. Meyer* Director
(Edward H. Meyer)
Charles C. Reilly* Director
(Charles C. Reilly)
Richard R. West* Director
(Richard R. West)
Edward D. Zinbarg* Director
(Edward D. Zinbarg)
*By: /s/ Terry K. Glenn June 21, 1995
(Terry K. Glenn, Attorney-in-Fact)
C-6
<PAGE>
POWER OF ATTORNEY
I, Edward D. Zinbarg, hereby authorize Arthur Zeikel, Terry K. Glenn, Gerald
M. Richard, Mark B. Goldfus, Robert Harris or Michael J. Hennewinkel, or any of
them, as attorney-in-fact, to sign on my behalf any amendments to the
Registration Statement for each of the following registered investment
companies and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission: Emerging Tigers Fund, Inc.; Merrill Lynch Americas
Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill
Lynch Dragon Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill Lynch International
Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill Lynch Middle
East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill Lynch
Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.; and
Worldwide DollarVest Fund, Inc.
Dated: February 21, 1995 /s/ Edward D. Zinbarg
Edward D. Zinbarg
(Director of each above referenced
Maryland corporation and Trustee of each
above referenced Massachusetts business
trust)
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T under the Securities Act of 1933, the
following table presents fair and accurate narrative descriptions of graphic
and image material omitted from this EDGAR submission file due to
ASCII-incompatibility, and cross-references this material to the location of
each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page No.
No.
<S> <C> <C>
11 Consent of Deloitte & Touche llp, independent auditors for the
Registrant.
16(a) Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A shares.
16(b) Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B shares.
16(c) Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C shares.
16(d) Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D shares.
27(a) Financial Data Schedule for Class A shares.
27(b) Financial Data Schedule for Class B shares.
27(c) Financial Data Schedule for Class C shares.
27(d) Financial Data Schedule for Class D shares.
</TABLE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Middle East/Africa Fund, Inc.
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 33-55843 of our report dated December 21, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.
Deloitte & Touche llp
Princeton, New Jersey
June 22, 1995
Exhibit 16(a)
Middle East/Africa--Class A
12/30/94-04/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 10.55
Divided by Net Asset Value 10.00
Equals Shares Purchased 94.787 100.000
Plus Shares Acquired through Dividend Reinvestment 0.000 0.000
Equals Shares Held at 04/30/95 94.787 100.000
Multiplied by Net Asset Value at 04/30/95 10.75 10.75
Equals Ending Redeemable Value of $1,000 Investment (ERV) at 04/30/95 1,018.96 1,075.00
Divided by $1,000 (P) 1.0186 1.0750
Subtract 1 0.0186 0.0750
Expressed as a percentage equals the Aggregate Total Return for the Period (T) 1.86%
Expressed as a percentage equals the Aggregate Total Return for the Period 7.50%
ERV divided by P 1.0186
Raise to the power of 3.0165
Equals 1.0570
Subtract 1 0.0570
Expressed as a percentage equals the Average Annualized Total Return 5.70%
</TABLE>
*Does not include sales charge for the period.
Exhibit 16(b)
Middle East/Africa--Class B
12/30/94-04/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.00 10.00
Equals Shares Purchased 100.000 100.000
Plus Shares Acquired through Dividend Reinvestment 0.000 0.000
Equals Shares Held at 04/30/95 100.000 100.000
Multiplied by Net Asset Value at 04/30/95 10.72 10.72
Equals Ending Value before deduction for contingent deferred sales charge 1,072.00 1,072.00
Less deferred sales charge (40.00) 0.00
Equals Ending Redeemable Value of $1,000 Investment (ERV) at 04/30/95 1,032.00 1,072.00
Divided by $1,000 (P) 1.0320 1.0720
Subtract 1 0.0320 0.0720
Expressed as a percentage equals the Aggregate Total Return for the Period (T) 3.20%
Expressed as a percentage equals the Aggregate Total Return for the Period 7.20%
ERV divided by P 1.0320
Raise to the power of 3.0165
Equals 1.0997
Subtract 1 0.0997
Expressed as a percentage equals the Average Annualized Total Return 9.97%
</TABLE>
*Does not include sales charge for the period.
Exhibit 16(c)
Middle East/Africa--Class C
12/30/94-04/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.00 10.00
Equals Shares Purchased 100.000 100.000
Plus Shares Acquired through Dividend Reinvestment 0.000 0.000
Equals Shares Held at 04/30/95 100.000 100.000
Multiplied by Net Asset Value at 04/30/95 10.72 10.72
Equals Ending Value before deduction for contingent deferred sales charge 1,072.00 1,072.00
Less deferred sales charge (10.00) 0.00
Equals Ending Redeemable Value of $1,000 Investment (ERV) at 04/30/95 1,062.00 1,072.00
Divided by $1,000 (P) 1.0620 1.0720
Subtract 1 0.0620 0.0720
Expressed as a percentage equals the Aggregate Total Return for the Period (T) 6.20%
Expressed as a percentage equals the Aggregate Total Return for the Period 7.20%
ERV divided by P 1.0620
Raise to the power of 3.0165
Equals 1.1990
Subtract 1 0.1990
Expressed as a percentage equals the Average Annualized Total Return 19.90%
</TABLE>
*Does not include sales charge for the period.
Exhibit 16(d)
Middle East/Africa--Class D
12/30/94-04/30/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 10.55
Divided by Net Asset Value 10.00
Equals Shares Purchased 94.787 100.000
Plus Shares Acquired through Dividend Reinvestment 0.000 0.000
Equals Shares Held at 04/30/95 94.787 100.000
Multiplied by Net Asset Value at 04/30/95 10.74 10.74
Equals Ending Redeemable Value of $1,000 Investment (ERV) at 04/30/95 1,018.01 1,074.00
Divided by $1,000 (P) 1.0176 1.0740
Subtract 1 0.0176 0.0740
Expressed as a percentage equals the Aggregate Total Return for the Period (T) 1.76%
Expressed as a percentage equals the Aggregate Total Return for the Period 7.40%
ERV divided by P 1.0176
Raise to the power of 3.0165
Equals 1.0541
Subtract 1 0.0541
Expressed as a percentage equals the Average Annualized Total Return 5.41%
</TABLE>
*Does not include sales charge for the period.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000920599
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 9449714
<INVESTMENTS-AT-VALUE> 9822315
<RECEIVABLES> 116097
<ASSETS-OTHER> 317150
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10255562
<PAYABLE-FOR-SECURITIES> 19286
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 264580
<TOTAL-LIABILITIES> 283866
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9316464
<SHARES-COMMON-STOCK> 32014
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 284754
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7092)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 377570
<NET-ASSETS> 344205
<DIVIDEND-INCOME> 18585
<INTEREST-INCOME> 293630
<OTHER-INCOME> 0
<EXPENSES-NET> 27461
<NET-INVESTMENT-INCOME> 284754
<REALIZED-GAINS-CURRENT> (7092)
<APPREC-INCREASE-CURRENT> 377570
<NET-CHANGE-FROM-OPS> 655232
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33989
<NUMBER-OF-SHARES-REDEEMED> 4475
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 9871696
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31409
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 176521
<AVERAGE-NET-ASSETS> 292237
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .44
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.75
<EXPENSE-RATIO> 4.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000920599
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 9449714
<INVESTMENTS-AT-VALUE> 9822315
<RECEIVABLES> 116097
<ASSETS-OTHER> 317150
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10255562
<PAYABLE-FOR-SECURITIES> 19286
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 264580
<TOTAL-LIABILITIES> 283866
<SENIOR-EQUITY> 0
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