<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
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. [_]
POST-EFFECTIVE AMENDMENT NO. 4 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES.)
----------------
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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: PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
BROWN & WOOD LLP
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.,
ESQ.
FRANK P. BRUNO, ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on January 24, 1997.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
(par value $0.10 per
share)................ 230,363 $11.44 $329,998* $100
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 342,432 shares of common stock.
(3) 140,915 of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) under the Investment Company Act of 1940 in
previous filings during Registrant's current fiscal year.
(4) 201,517 of the shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table; Prospectus Summary
Condensed Financial
Item 3. Information............ Financial Highlights
Item 4. General Description of Prospectus Summary; Investment
Registrant............. 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 Cover Page; Purchase of Shares;
Securities............. Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities Cover Page; Fee Table; Prospectus
Being Offered.......... Summary; Merrill Lynch Select
PricingSM System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Fee Table; Prospectus Summary; Merrill
Repurchase............. Lynch Select PricingSM System;
Purchase of Shares; Redemption of
Shares
Pending Legal
Item 9. Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
General Information and
Item 12. History................ Not Applicable
Investment Objective and
Item 13. Policies............... Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of Management of the Fund; General
Securities............. Information--Additional Information
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services......... Shares; General Information
Brokerage Allocation and
Item 17. Other Practices........ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Purchase of Shares; Redemption of
Securities............. Shares; Shareholder Services; General
Information--Description of Shares
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered.......... 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
Calculation of
Item 22. Performance Data....... Performance Data
Item 23. Financial Statements.... Independent Auditors' Report; Statement
of Assets and Liabilities; Financial
Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MARCH 25, 1997
MERRILL LYNCH 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 currently expects to emphasize investments in the
securities of issuers in Botswana, Ghana, Morocco, South Africa, Turkey,
Israel, Jordan and Zimbabwe, although the Fund is not required to invest in
securities of issuers located in the aforementioned markets. 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 22.
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."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 25, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
(Continued from Cover Page)
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System."
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), or from other securities dealers that 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, but
as of May 1, 1997, $5.35) for confirming purchases and repurchases. Purchases
and redemptions made 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
Reinvestments.......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)................................. None(d) 4.0% during the first 1.0% None(d)
year decreasing 1.0% for one year(f)
annually to 0.0% after
the fourth year(e)
Redemption Fee Payable to the Fund (as
a percentage of amount redeemed)(g).... 2.00% 2.00% 2.00% 2.00%
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees(h)...................... 1.00% 1.00% 1.00% 1.00%
Rule 12b-1 Fees(i):
Account Maintenance Fees.............. None 0.25% 0.25% 0.25%
Distribution Fees..................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees........................ .29% .29% .29% .29%
Shareholder Servicing Costs(j)........ .20% .23% .23% .20%
Miscellaneous......................... 3.35% 3.38% 3.39% 3.34%
----- ----- ----- -----
Total Other Expenses................ 3.84% 3.90% 3.91% 3.83%
----- ----- ----- -----
Total Fund Operating Expenses(k)........ 4.84% 5.90% 5.91% 5.08%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors, including
existing Class A shareholders, certain retirement plans and certain
participants in fee-based programs. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares" on page 36 and
"Shareholder Services--Fee-Based Programs" on page 46.
(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 38.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A or
Class D purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares" on page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge instead may be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase. Such
CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 46.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs" on page 46.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 46.
(g) Applies only to redemptions made within one year of purchase. See
"Redemption of Shares" on page 44.
(h) See "Management of the Fund--Management and Advisory Arrangements" on page
32.
(i) See "Purchase of Shares--Distribution Plans" on page 41.
(j) See "Management of the Fund--Transfer Agency Services" on page 34.
(k) For the fiscal year ended November 30, 1996, Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") voluntarily waived its entire
management fee and voluntarily reimbursed the Fund for a portion of other
expenses (excluding Rule 12b-1 fees). Total Fund Operating Expenses in the
Fee Table above have been restated to assume the absence of any such
waiver of fees or reimbursement of expenses because the Manager may
discontinue or reduce such waiver of fees or reimbursement of expenses at
any time without notice. For the fiscal year ended November 30, 1996, the
Manager waived management fees and reimbursed expenses totaling 4.37% for
Class A shares, 4.40% for Class B shares, 4.41% for Class C shares, and
4.36% for Class D shares after which Total Fund Operating Expenses were
.47% for Class A shares, 1.50% for Class B shares, 1.50% for Class C
shares and .72% for Class D shares.
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 To-
tal Fund Operating Expenses for each class
set forth on page 3, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period (including any applica-
ble CDSC for Class B and Class C shares):
Class A..................................... $117* $190 $283 $515
Class B..................................... $119* $195 $288 $551**
Class C..................................... $ 89* $175 $289 $565
Class D..................................... $120* $197 $293 $532
An investor would pay the following expenses
on the same assuming no redemption at the end
of the period:
Class A..................................... $ 98 $190 $283 $515
Class B..................................... $ 59 $175 $288 $551**
Class C..................................... $ 59 $175 $289 $565
Class D..................................... $101 $197 $293 $532
</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 Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The Example should not be considered a representation
of past or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the Example. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85, but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through the 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 currently expects to
emphasize investments in the securities of issuers in Botswana, Ghana, Morocco,
South Africa, Turkey, Israel, Jordan and Zimbabwe, although the Fund is not
required to invest in securities of issuers located in the aforementioned
markets. 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
5
<PAGE>
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 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
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 its affiliate, Fund Asset Management, L.P. ("FAM"),
acts as the investment adviser for over 130 registered investment companies.
The Manager and FAM also offer portfolio management and portfolio analysis
services to individuals and institutions. As of February 28, 1997, the Manager
and FAM had a total of approximately $248.2 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,
6
<PAGE>
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 (the
"NYSE") (generally, 4:00 p.m., New York time), on each day during which the
NYSE is open for trading. See "Additional Information--Determination of Net
Asset Value."
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 50 registered investment companies advised by MLAM or its
affiliate, FAM. Funds advised by MLAM or FAM that 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and accordingly such charges will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling
different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select 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
7
<PAGE>
particular circumstances. More detailed information as to each class of shares
is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/)(/6/) FEE FEE FEATURE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- --------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- --------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/7/) 0.25% 0.75% No
- --------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D share purchases of $1,000,000 or more will not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC for one
year. Such CDSC may be waived in connection with certain fee-based
programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be modified.
(6) 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."
(7) The CDSC may be waived in connection with certain fee-based programs.
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
of the Fund are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares of
the Fund. Eligible investors include participants in certain fee-based
programs. In addition, Class A shares of the Fund will be offered at net
asset value to ML & Co. and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.) and 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 of Class A shares in connection with certain fee-
based programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
shares may be subject to a 1.0% CDSC if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with
certain fee-based programs. Sales charges also are reduced under a right
of accumulation that takes into account the investor's holdings of all
classes
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of all MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares."
Class B:
Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75%, of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee. Automatic conversion of Class B shares into Class D
shares will 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%
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 of 1.0% if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-
based programs. Although Class C shares are subject to a CDSC for
only one year (as compared to four years for Class B), Class C shares
have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such purchases may be subject
to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-
based programs. The schedule of initial sales charges and reductions
for the Class D shares is the same as the schedule for Class A
shares, except that there is no waiver for purchases in connection
with certain fee-based programs. Class D shares also will be issued
upon conversion of Class B shares as described above under "Class B."
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or her
particular circumstances.
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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 CDSCs 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. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have
lower total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all 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
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
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<PAGE>
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 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;
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<PAGE>
(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 primarily 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 continue to beset South Africa include a high rate of
unemployment, labor unrest and ongoing racial tensions. Although the repeal of
economic sanctions and the government's institution of a reconstruction and
development program have fostered current growth, the persistence of the
aforementioned difficulties cast doubt on its sustainability. 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
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<PAGE>
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.
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.
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<PAGE>
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 19 and "Investment Objective and
Policies--Description of Certain Investments--Illiquid Securities" on page 25.
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 of 1940, as amended (The "Investment Company
Act") the Fund may invest up to 10% of its total assets in shares of other
investment companies and up to 5% of its total assets in any one investment
company, provided that the investment does not represent more than 3% of the
voting stock of the related acquired investment company. This restriction on
investments in securities of investment companies may limit opportunities for
the Fund to invest indirectly in certain Middle Eastern/African 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.
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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 may not invest more than 25% of its total assets in the sovereign debt
securities of any particular Middle Eastern/African country.
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 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.
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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 Services ("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 61. 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 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
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<PAGE>
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
18
<PAGE>
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
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 26, "--Other Investment Policies and Practices--Portfolio
Strategies Involving Futures, Options and Forward Foreign Exchange
Transactions" on page 27 and Appendix A to this Prospectus--"Futures, Options
and Forward Foreign Exchange Transactions" on page 55.
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.
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 25.
19
<PAGE>
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.
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 48 and "Investment Restrictions" on
page 30.
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.
20
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the Financial Statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial Statements and the independent
auditors' report thereon for the fiscal year ended November 30, 1996 are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited Financial Statements.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------------------------- ------------------------- ------------------------- -------------------------
FOR THE FOR THE FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
YEAR DECEMBER 30, YEAR DECEMBER 30, YEAR DECEMBER 30, YEAR DECEMBER 30,
ENDED 1994+ TO ENDED 1994+ TO ENDED 1994+ TO ENDED 1994+ TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996++ 1995 1996++ 1995 1996++ 1995 1996++ 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $10.66 $10.00 $10.56 $10.00 $10.56 $10.00 $10.63 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment
income--net..... .42 .57 .32 .79 .31 .83 .40 .77
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. (.80) .09 (.80) (.23) (.79) (.27) (.80) (.14)
------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations...... (.38) .66 (.48) .56 (.48) .56 (.40) .63
------ ------ ------ ------ ------ ------ ------ ------
LESS DIVIDENDS
AND
DISTRIBUTIONS:
Investment
income--net..... (.85) -- (.74) -- (.74) -- (.82) --
Realized gain on
investments--
net............. (.03) -- (.03) -- (.03) -- (.03) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends
and
distributions... (.88) -- (.77) -- (.77) -- (.85) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period... $ 9.40 $10.66 $ 9.31 $10.56 $ 9.31 $10.56 $ 9.38 $10.63
====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... (4.17)% 6.60%# (5.14)% 5.60%# (5.16)% 5.60%# (4.31)% 6.30%#
====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .47% .00%* 1.50% 1.01%* 1.50% 1.01%* .72% .25%*
====== ====== ====== ====== ====== ====== ====== ======
Expenses........ 4.84% 4.63%* 5.90% 5.68%* 5.91% 5.67%* 5.08% 4.89%*
====== ====== ====== ====== ====== ====== ====== ======
Investment
income--net..... 4.24% 8.43%* 3.15% 8.33%* 3.14% 8.45%* 4.01% 9.07%*
====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 399 $ 648 $5,699 $7,701 $ 692 $1,012 $ 969 $1,569
====== ====== ====== ====== ====== ====== ====== ======
Portfolio
turnover........ 46.36% 40.97% 46.36% 40.97% 46.36% 40.97% 46.36% 40.97%
====== ====== ====== ====== ====== ====== ====== ======
Average
commission rate
paid##.......... $.0022 -- $.0022 -- $.0022 -- $.0022 --
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average outstanding shares during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
21
<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 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 currently expects to emphasize investments in the securities of
issuers in Botswana, Ghana, Morocco, South Africa, Turkey, Israel, Jordan and
Zimbabwe, although the Fund is not required to invest in securities of issuers
located in the aforementioned markets. 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 ("OTC") 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-
22
<PAGE>
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 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 and "BBB" or lower by 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 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
23
<PAGE>
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. 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 may 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
24
<PAGE>
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 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. 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
25
<PAGE>
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.
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
26
<PAGE>
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.
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
27
<PAGE>
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 Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated persons, may serve as the Fund's broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency basis and may receive brokerage commissions from the Fund. In addition,
the Fund may not purchase securities during the existence of any underwriting
syndicate for such securities of which Merrill Lynch is a member except
pursuant to procedures approved by the Board of Directors of the Fund which
comply with rules adopted by the Commission. To the extent Merrill Lynch is
active in distributions of securities of issuers in Middle Eastern/African
countries, the Fund may be disadvantaged in that it may not purchase securities
in such distributions. In addition, consistent with the Conduct Rules of the
NASD, the Fund may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch. Costs associated with transactions in foreign securities are
generally higher than in the U.S., although the Fund will endeavor to achieve
the best net results in effecting its portfolio transactions.
The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.
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.
Such collateral 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.
28
<PAGE>
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 Manager will effect portfolio
transactions without regard to the time they have been held 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 may engage in a substantial number of
portfolio transactions and the Fund's portfolio turnover rate may be higher
than that of other investment companies. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. 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 liquid 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 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
29
<PAGE>
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; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement. In all instances,
the Fund takes possession of the underlying securities when investing in
repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its
total assets in repurchase agreements or purchase and sale contracts maturing
in more than seven days, together with all other illiquid securities.
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 that are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which
30
<PAGE>
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 that
cannot readily be resold because of legal or contractual restrictions or that
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. 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
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
31
<PAGE>
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
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 its affiliate, FAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.; and Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising, Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
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 of Merrill Lynch. The
Manager, or its affiliate, FAM, acts as the investment adviser to more
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<PAGE>
than 130 registered investment companies and provides investment advisory
services to individual and institutional accounts. As of February 28, 1997, the
Manager and FAM had a total of approximately $248.2 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 Manager has also entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
indirect, wholly-owned subsidiary of ML & Co. and an affiliate of the Manager,
pursuant to which the Manager pays MLAM U.K. a fee for providing investment
advisory services to the Manager with respect to the Fund in an amount to be
determined from time to time by the Manager and MLAM U.K. but in no event in
excess of the amount the Manager actually receives for providing services to
the Fund pursuant to the Management Agreement. MLAM U.K. has offices at Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
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. For the fiscal year ended November 30, 1996, the Manager earned
fees pursuant to the Management Agreement of $97,346 (based on average net
assets of approximately $9.8 million), all of which was voluntarily waived.
MLAM U.K. received no fees pursuant to the Sub-Advisory Agreement during the
fiscal year ended November 30, 1996. 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. For the fiscal year ended
November 30, 1996, the Fund reimbursed the Manager $60,432 for such accounting
services. For the fiscal year ended November 30, 1996, the ratio of total
expenses to average net assets was 4.84% for Class A shares, 5.90% for Class B
shares, 5.91% for Class C shares and 5.08% for Class D shares.
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. Ms. Pineda is
primarily responsible for the day-to-day management of the Fund's investment
portfolio.
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 that incorporates the Code of
Ethics of the Manager (together, the "Codes"). The
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<PAGE>
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 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 an
annual fee of up to $11.00 per Class A or Class D account and up to $14.00 per
Class B or Class C account and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. The term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co. For the fiscal year ended
November 30, 1996, the total fee paid by the Fund to the Transfer Agent was
$22,196.
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 PricingSM
System, as described below. The applicable offering price for purchase orders
is based upon the net asset value of the Fund next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New
34
<PAGE>
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
NYSE 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 NYSE on that day. If the purchase orders are not received prior to 30
minutes after the close of business on the NYSE, 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, but as of May 1, 1997,
$5.35) to confirm a sale of shares to such customers. Purchases directly
through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that 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 PricingSM System is set forth
under "Merrill Lynch Select PricingSM System."
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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans."
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
35
<PAGE>
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 PricingSM System,
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/)(/6/) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- -------------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.75% B shares convert to
4 years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- -------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/7/) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D share purchases of $1,000,000 or more will not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC for one
year. Such CDSC may be waived in connection with certain fee-based
programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be modified.
(6) 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."
(7) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
36
<PAGE>
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 SALES LOAD AS DISCOUNT TO SELECTED
PERCENTAGE OF PERCENTAGE* OF THE DEALERS AS PERCENTAGE
AMOUNT OF PURCHASE THE OFFERING PRICE NET AMOUNT INVESTED OF 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 in connection with
certain fee-based programs. If the sales charge is waived in connection
with a purchase of $1,000,000 or more, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
A or Class D shares by certain employer-sponsored retirement or savings
plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times, the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended November 30, 1996, the Fund sold 15,446 of its
Class A shares for aggregate net proceeds to the Fund of $161,605. There were
no gross sales charges for the sale of the Fund's Class A shares for that year
and the Distributor received no CDSCs with respect to redemption within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver.
During the fiscal year ended November 30, 1996, the Fund sold 10,891 of its
Class D shares for aggregate net proceeds to the Fund of $112,953. The gross
sales charges for the sale of its Class D shares for that year were $2,418, of
which $157 and $2,261 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemption within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares of the Fund are offered to a
limited group of investors and also will be issued upon reinvestment of
dividends on outstanding Class A shares of the Fund. 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 TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services, collective investment trusts for which Merrill Lynch Trust Company
serves as trustee and purchases made in connection with certain fee-based
37
<PAGE>
programs. In addition, Class A shares are offered at net asset value to ML &
Co. and its subsidiaries and their directors and employees and to members of
the Boards of MLAM-advised mutual funds, including the Fund. Certain persons
who acquired shares of certain MLAM-advised closed-end funds in their initial
offering who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLAM-
advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth under "Eligible Class A Investors." See "Shareholder
Services--Fee-Based Programs."
Class A and Class D shares are offered at net asset value to employer-
sponsored retirement or savings plans that are eligible to purchase such shares
at net asset value. Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, subject to
certain conditions, Class A and Class D shares are offered at net asset value
to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are also 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 is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
38
<PAGE>
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."
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.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years after 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
YEAR SINCE PERCENTAGE
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>
For the fiscal year ended November 30, 1996, the Distributor received CDSCs
of $54,951 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
39
<PAGE>
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. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services--Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year 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 purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. The Class C CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs." For the fiscal year ended November 30, 1996, the Distributor
received CDSCs of $1,532 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
40
<PAGE>
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.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
41
<PAGE>
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.
For the fiscal year ended November 30, 1996, the Fund paid the Distributor
$70,613 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $7.1 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended November 30, 1996, the Fund paid the Distributor
$8,155 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of approximately $818,000), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended November 30, 1996, the Fund paid the Distributor
$3,247 pursuant to the Class D Distribution Plan (based on average net assets
subject to such Class D Distribution Plan of approximately $1.3 million), all
of which was paid to Merrill Lynch for providing account maintenance activities
in connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses 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 CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales 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.
42
<PAGE>
As of December 31, 1996, with respect to Class B shares, the fully allocated
accrual expenses for the period since December 30, 1994 (commencement of
operations) incurred by the Distributor and Merrill Lynch exceeded fully
allocated accrual revenues by approximately $116,000 (2.21% of Class B net
assets at that date). For Class B shares, as of November 30, 1996, direct cash
revenues for the period since the commencement of operations exceeded direct
cash expenses by $72,054 (1.26% of Class B net assets at that date). As of
December 31, 1996, with respect to Class C shares, the fully allocated accrual
expenses for the period since December 30, 1994 (commencement of operations)
incurred by the Distributor and Merrill Lynch exceeded fully accrual revenues
by approximately $9,000 (1.71% of Class C net assets at that date). For Class C
shares, as of November 30, 1996, direct cash revenues for the period since the
commencement of operations exceeded direct cash expenses by $13,077 (1.89% of
Class C net assets at that date).
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Conduct Rules of the NASD imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC, borne by
the Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor 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 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."
43
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all 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, 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., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. The 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.
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
NYSE (generally, 4:00 p.m., New York time) on
44
<PAGE>
the day received and that such request is received by the Fund from such dealer
not later than 30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable 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, but as of May 1, 1997, $5.35) to confirm a repurchase of
shares to such customers. Repurchases directly through the Transfer Agent are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted 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.
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.
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Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. 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 business on the NYSE
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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific
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Program (including charges and limitations on transferability applicable to
shares that may be held in such Program) is available in such Program's client
agreement and from Merrill Lynch Investor Services at (800) MER-FUND or (800)
637-3863.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends 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 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.
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Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the 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." 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.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other ordinary income during a taxable
year, (a) the Fund would not be able to make any ordinary income dividend
distributions and (b) all or a portion of distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, rather than as an ordinary income dividend, thereby
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 continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it
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distributes to Class A, Class B, Class C and Class D shareholders (together the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable 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 other
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 all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than 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.
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The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends 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 NYSE (generally,
4:00 p.m., New York time), on each day during which the NYSE 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; in addition, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the
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Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability 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 OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair 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. As of the
date of this Prospectus, 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, 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." 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.
P.O. Box 45289
Jacksonville, FL 32232-5289
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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. 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 on or before a specified
future date and at a specified 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
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exercise price of the underlying securities. By writing a put, the Fund will be
obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise for as long as
the option is outstanding. The Fund may engage in closing transactions in order
to terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying the put options
shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any 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 or Other Financial Index Futures and Options. The Fund is authorized to
engage in transactions in stock or other financial index options and futures
(including futures or government bonds), 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."
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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.
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 securities in a
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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 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 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
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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.
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.
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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")
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.
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.
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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.
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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.
Preferred stock rating symbols and their definitions are as follows:
"aaa"An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa"An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
"caa"An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: 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.
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DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS SERVICES
("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.
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.
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.
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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.
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.
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.
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.
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*
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.
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:
A-1This 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.
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-3Issues 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.
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.
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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:
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.
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,
B as predominately speculative with respect to the issuer's capacity to
CCC pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
67
<PAGE>
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and 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.
68
<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........................................................................
.................................................... Date......................
(Zip Code)
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.
69
<PAGE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY 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)
..................., 19......
Date of initial purchase
Dear Sir/Madam:
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
- - - We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - shareholder's signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Middle East/Africa By: .................................
Fund, Inc. Authorized Signature of Dealer
c/o Merrill Lynch Financial
Data Services, Inc. [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch Code F/C No.
Jacksonville, Florida 32232-5289 ...............
F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
70
<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
(Please Print) [ ]
Name of Owner.......................... Social Security Number or
First Name Initial Last Taxpayer Identification
Name No.
Address................................
....................................... Account Number ....................
(Zip Code) (if existing account)
Name of Co-Owner (if any)..............
First Name Initial Last Name
Address................................
.......................................
(Zip Code)
- -------------------------------------------------------------------------------
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 as 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 AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY 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:
To...............................Bank
(Investor's Bank)
Amount of each ACH debit $........
Bank Address.........................
Account No. ......................
City...... State...... Zip Code......
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
or as soon thereafter as charge to my account ACH debits
- ------- drawn on my account by and payable
(month) possible. to Merrill Lynch Financial Data
Services, Inc., I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked
such debit. If I change banks or personally by me in writing. Until
desire to terminate or suspend this you receive such notice, you shall
program, I agree to notify you be fully protected in honoring any
promptly in writing. I hereby such debit. I further agree that if
authorize you to take any action to any such debit be dishonored,
correct erroneous ACH debits of my whether with or without cause and
bank account or purchases of Fund whether intentionally or
shares including liquidating shares inadvertently, you shall be under no
of the Fund and crediting my bank liability.
account. I further agree that if a
debit is not honored upon ............ .....................
presentation, Merrill Lynch Financial Date Signature of
Data Services, Inc. is authorized to Depositor
discontinue immediately the Automatic
Investment Plan and to liquidate ............ .....................
sufficient shares held in my account Bank Signature of Depositor
to offset the purchase made with the Account (If joint account,
returned dishonored debit. Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
71
<PAGE>
[This Page Intentionally Left Blank]
72
<PAGE>
[This Page Intentionally Left Blank]
73
<PAGE>
[This Page Intentionally Left Blank]
74
<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 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 3
Prospectus Summary......................................................... 5
Merrill Lynch Select PricingSM System...................................... 7
Risk Factors and Special Considerations.................................... 11
Financial Highlights....................................................... 21
Investment Objective and Policies.......................................... 22
Description of Certain Investments........................................ 25
Other Investment Policies and Practices................................... 27
Investment Restrictions.................................................... 30
Non-Diversified Status.................................................... 31
Management of the Fund..................................................... 32
Board of Directors........................................................ 32
Management and Advisory Arrangements...................................... 32
Code of Ethics............................................................ 33
Transfer Agency Services.................................................. 34
Purchase of Shares......................................................... 34
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 36
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 38
Distribution Plans........................................................ 41
Redemption of Shares....................................................... 44
Redemption................................................................ 44
Repurchase................................................................ 44
Shareholder Services....................................................... 45
Investment Account........................................................ 45
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 46
Automatic Investment Plans................................................ 46
Fee-Based Programs........................................................ 46
Performance Data........................................................... 47
Additional Information..................................................... 48
Dividends and Distributions............................................... 48
Taxes..................................................................... 48
Determination of Net Asset Value.......................................... 51
Organization of the Fund.................................................. 52
Shareholder Reports....................................................... 52
Shareholder Inquiries..................................................... 53
Appendix A................................................................. 55
Appendix B................................................................. 61
Authorization Form......................................................... 69
</TABLE>
Code # 18415-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Middle/East Africa Fund, Inc.
[ART]
PROSPECTUS
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH 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 that seeks 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 currently expects to emphasize investments
in the securities of issuers in Botswana, Ghana, Morocco, South Africa, Turkey,
Israel, Jordan and Zimbabwe; although the Fund is not required to invest in
securities of issuers located in the aforementioned markets. 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 PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated March 25,
1997 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing 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 March 25, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity and debt securities of corporate
and governmental issuers in countries located in 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. For
the period December 30, 1994 (commencement of operations) to November 30, 1995
and for the fiscal year ended November 30, 1996, the Fund's portfolio turnover
rate was 40.97% and 46.36%, respectively. As a result of the investment
policies described in the Prospectus, the Fund's portfolio turnover rate may be
higher than that of other investment companies. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The 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,
2
<PAGE>
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.
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
price on or before a specified date, in the case of an option on securities, or
agrees to pay to another party an amount based on any gain in a specified
securities index beyond a specified level on or before the expiration date, in
the case of an option on a securities index. 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 realizes a gain in
the amount of the premium. Such a gain, of course, may be offset by a decline
in the market value of the underlying security during the option period. If a
call option is exercised, the writer realizes a gain or loss from the sale of
the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars or
non-U.S. currencies with a securities depository with a value equal to or
greater than the exercise price of the
3
<PAGE>
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 on an exchange; (v) the facilities of an exchange
or the Options Clearing Corporation (the "Clearing Corporation") may not, at
all times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund also may enter into over-the-counter ("OTC") options transactions,
which are two-party contracts with prices and terms negotiated between the
buyer and seller. The Fund will only enter into OTC options transactions with
respect to portfolio securities for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option). The staff of
the Commission has taken the position that OTC options and the assets used as
cover for written OTC options are illiquid securities.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put, 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 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 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.
4
<PAGE>
Stock or Other Financial Index Futures and Options. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index options and futures (including futures on government bonds),
and related options on such futures. Set forth below is further information
concerning futures transactions.
A financial futures contract is an agreement between two parties to buy and
sell a security, or, in the case of an index-based financial futures contract,
to make and accept a cash settlement for a set price on a future date. A
majority of transactions in financial futures contracts, however, do not result
in the actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin," are
required to be made on a daily basis as the price of the financial futures
contract fluctuates, making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the
market." At any time prior to the settlement date of the financial futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the financial futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in financial futures contracts. Section 17(f) relates to
the custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a financial futures
contract may be a "senior security" under the Investment Company Act.
Risk Factors in Futures and Options Transactions. Utilization of futures and
options transactions involves the risk of imperfect correlation in movements in
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
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there appears to be a liquid secondary market for such option or future.
However, there can be no assurance that a liquid secondary market will exist
for any particular call or put option or financial futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only OTC options (i) 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) unless there is only one dealer, in which case such dealer's price will
be used, or (ii) that management believes can be sold at a formula price
provided for in the OTC option agreement. In the case of a futures position or
an option on a futures position written by the Fund, in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the security or currency
underlying the financial futures contracts it holds. The inability to close
futures and options positions also could have an adverse impact on the Fund's
ability to hedge its portfolio effectively.
There also is the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a financial
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The 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
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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 OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a 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 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
7
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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 liquid 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 liquid securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying 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.
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<PAGE>
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement. In all instances,
the Fund takes possession of the underlying securities when investing in
repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its
total assets in repurchase agreements or purchase and sale contracts maturing
in more than seven days, together with all other illiquid securities.
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 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
In addition to the investment restrictions set forth in the Prospectus, 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:
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<PAGE>
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 the
Prospectus and this 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.
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,
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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.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above, borrow
money or pledge its assets, except that the Fund (a) may borrow from a bank
as a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 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.
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
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<PAGE>
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money." This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Board of
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
In addition, as a non-fundamental policy which may be changed by the Board of
Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), 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
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years, is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Director(1)(2)--President of the 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 & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (70)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
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Edward H. Meyer (70)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising, Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors, Inc. and Harman International Industries, Inc.
Charles C. Reilly (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
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 Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania, from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (59)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company), Smith-Corona Corporation (manufacturer of typewriters and
word processors) and Alexander's Inc. (real estate company).
Edward D. Zinbarg (62)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential
Reinsurance Company and former Trustee of the Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the 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 (63)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager and FAM since 1990.
Grace Pineda (40)--Vice President(1)--Vice President of the Manager and
Senior Portfolio Manager since 1989.
Gerald M. Richard (47)--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 thereof since 1984.
James W. Harshaw (38)--Secretary(1)(2)--Attorney associated with the Manager
and FAM since 1994; associate at Sullivan & Cromwell from 1990 to 1994;
judicial law clerk for the United States Court of Appeals for the Third
Circuit from 1989 to 1990.
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(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.
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At February 28, 1997, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of approximately 3.3% of the outstanding shares of
the Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and
the other officers of the Fund, owned less than 1% of the outstanding shares
of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director 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 (the "Committee"), which consists of all of the
non-affiliated Directors, at a rate of $500 per Committee meeting attended.
The Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended November 30, 1996, fees and
expenses paid to such non-affiliated Directors aggregated $37,811.
The following table sets forth for the fiscal year ended November 30, 1996,
compensation paid by the Fund to the non-affiliated Directors, and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM-Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION FROM
RETIREMENT FUND AND OTHER
BENEFITS ACCRUED MLAM/FAM-ADVISED
COMPENSATION AS PART OF FUND FUNDS PAID TO
NAME OF DIRECTOR FROM FUND EXPENSES DIRECTORS(1)
---------------- ------------ ---------------- -----------------
<S> <C> <C> <C>
Donald Cecil.................... $8,500 None $268,933
Edward H. Meyer................. $6,500 None $227,933
Charles C. Reilly............... $7,500 None $293,833
Richard R. West................. $7,500 None $269,833
Edward D. Zinbarg............... $7,500 None $127,333
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
Mr. Cecil (32 registered investment companies consisting of 32
portfolios); Mr. Meyer (32 registered investment companies consisting of
32 portfolios); Mr. Reilly (41 registered investment companies consisting
of 54 portfolios); Mr. West (41 registered investment companies consisting
of 54 portfolios) and Mr. Zinbarg (18 registered investment companies
consisting of 18 portfolios).
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 other 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 it acts 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
14
<PAGE>
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. For the period December 30, 1994
(commencement of operations) to November 30, 1995 and for the fiscal year ended
November 30, 1996, the total investment advisory fees earned by the Manager
pursuant to the Management Agreement aggregated $95,530 and $97,346,
respectively, all of which were voluntarily waived by the Manger. As described
in the Prospectus, the Manager has also entered into a sub-advisory agreement
with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to
which MLAM U.K. provides investment advisory services to the Manager with
respect to the Fund.
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 non-affiliated 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. For the period December
30, 1994 (commencement of operations) to November 30, 1995 and for the fiscal
year ended November 30, 1996, the Fund reimbursed the Manager $42,157 and
$60,432, respectively, for accounting services. 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. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
Duration and Termination. Unless earlier terminated as described 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.
15
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and 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 (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan).
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Manager or an affiliate, FAM. Funds advised
by the Manager or FAM that utilize the Merrill Lynch Select PricingSM 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 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
There were no gross sales charges for the sale of Class A shares for the
fiscal year ended November 30, 1996 and for the period December 30, 1994
(commencement of operations) to November 30, 1995. The gross sales charges for
the sale of Class D shares for the fiscal year ended November 30, 1996 were
$2,418, of which the Distributor received $157 and Merrill Lynch received
$2,261. The gross sales charges for the sale of Class D shares for the period
December 30, 1994 (commencement of operations) to November 30, 1995 were
$13,813, of which the Distributor received $1,003 and Merrill Lynch received
$12,810.
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
16
<PAGE>
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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or
Contingent Deferred Sales Charge (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day
that the related tender offer terminates and will be effected at the net asset
value of the designated class of the Fund on such day.
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 net asset value or cost, whichever is
higher, of the purchaser's combined holdings of all
17
<PAGE>
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 but, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A 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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM/FAM-Advised Funds, 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 their directors and employees and any trust,
pension, profit-sharing or other benefit plan for such persons may purchase
Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from
18
<PAGE>
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, 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 of termination.
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
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may, in appropriate cases, be adjusted to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities 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.
19
<PAGE>
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees 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 Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum
20
<PAGE>
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 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 as of November 30,
1996, with respect to Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to Class B shares, the Distributor's voluntary
maximum for the period indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1996
---------------------------------------------------------------------------------
(IN THOUSANDS)
ALLOWABLE ALLOWABLE AMOUNTS ANNUAL
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE DISTRIBUTION
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID FEE AT CURRENT
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE NET ASSET LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD DECEMBER 30,
1994 (COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30, 1996:
Under NASD Rule as
Adopted................ $9,159 $572 $89 $661 $180 $481 $43
Under Distributor's
Voluntary Waiver....... $9,159 $572 $46 $618 $180 $438 $43
CLASS C SHARES, FOR THE
PERIOD DECEMBER 30,
1994 (COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30, 1996:
Under NASD Rule as
Adopted................ $1,209 $ 76 $11 $ 87 $ 15 $ 72 $ 5
</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 NASD maximum or, with respect to
Class B shares, the voluntary maximum.
21
<PAGE>
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 (the "NYSE") is restricted as
determined by the Commission or the NYSE is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists,
as defined by the Commission, as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission 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 AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge 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. For the period
December 30, 1994 (commencement of operations) to November 30, 1995 and for the
fiscal year ended November 30, 1996, with respect to redemptions of Class B
shares, the Distributor received CDSCs of $20,279 and $54,951, respectively,
all of which were paid to Merrill Lynch. For the period December 30, 1994
(commencement of operations) to November 30, 1995 and for the fiscal year ended
November 30, 1996, with respect to redemptions of Class C shares, the
Distributor received CDSCs of $800 and $1,532, respectively, all of which were
paid to Merrill Lynch.
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 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.
22
<PAGE>
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. For the fiscal year ended November 30,
1996, the Fund paid total brokerage commissions of $45,424, of which $205 or
.45% was paid to Merrill Lynch for effecting .47% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. For the
period December 30, 1994 (commencement of operations) to November 30, 1995, the
Fund paid total brokerage commissions of $51,000, none of which was paid to
Merrill Lynch. 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 Conduct Rules 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 OTC 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 OTC 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
Commission. Since transactions in the OTC 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 listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
See "Investment Objective and Policies--Investment Restrictions."
23
<PAGE>
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.
The Board of Directors has considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the 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, 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 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 NYSE (generally, 4:00 p.m., New York time), on each day
during which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies 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 Class B, Class C and Class D shares generally
will be lower than the per share net asset value of Class A shares, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class B
and Class C shares generally will be lower than the per share net asset value
of Class D shares, reflecting the daily expense accruals of the distribution
fees and
24
<PAGE>
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund. 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 NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE 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, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, 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
25
<PAGE>
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 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 or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the 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) or 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 NYSE on the
ex-dividend date of such 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.
26
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
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 to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot
27
<PAGE>
claim foreign tax credits on investments in foreign securities held in the
Fund. If more than 50% in value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible, and intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to include their
proportionate shares of such withholding taxes in their U.S. income tax returns
as gross income, treat such proportionate shares as taxes paid by them and
deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S. income taxes.
No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from the Fund's election described in this
paragraph but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. The
Fund will report annually to its shareholders the amount per share of such
withholding taxes. For this purpose, the Fund will allocate foreign taxes and
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to 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.
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 Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities" 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 and distribute income
before amounts due under the obligations
28
<PAGE>
are paid. In addition, a portion of the interest payments on such high
yield/high risk securities may be treated as dividends for Federal income tax
purposes; in such case, if the issuer of such high yield/high risk securities
is a domestic corporation, dividend payments by the Fund will be eligible for
the dividends received deduction to the extent of the deemed dividend portion
of such interest payments.
The Fund may invest up to 10% of its total assets in securities of other
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.
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. Application of these rules to Section 1256 contracts held by the
Fund may alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in futures, options
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in futures, options and
forward foreign exchange contracts.
29
<PAGE>
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an 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 all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than 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
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
30
<PAGE>
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 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 (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over 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.
31
<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 periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One Year Ended November
30, 1996............... (10.87)% $ 891.30 (10.32)% $ 896.80
Inception (December 30,
1994) to November 30,
1996................... (1.69)% $ 967.90 (1.36)% $ 974.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year Ended November 30,
1996................... (4.17)% $ 958.30 (5.14)% $ 948.60
Inception (December 30,
1994) to November 30,
1995................... 6.60 % $1,066.00 5.60 % $1,056.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (December 30,
1994) to November 30,
1996................... (3.21)% $ 967.90 (2.60)% $ 974.00
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One Year Ended November
30, 1996............... (7.77)% $ 922.30 (11.00)% $ 890.00
Inception (December 30,
1994) to November 30,
1996................... 0.08 % $1,001.50 (1.90)% $ 963.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year Ended November 30,
1996................... (5.16)% $ 948.40 (4.31)% $ 956.90
Inception (December 30,
1994) to November 30,
1995................... 5.60 % $1,056.00 6.30 % $1,063.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (December 30,
1994) to November 30,
1996................... 0.15 % $1,001.50 (3.63)% $ 963.70
</TABLE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on March 15, 1994. At the date
of this Statement of Additional Information, the Fund has an authorized capital
of 400,000,000 shares of common stock, par value $0.10 per share, 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. 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.
32
<PAGE>
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 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 November 30, 1996, is set forth
below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net Assets............................. $398,917 $5,699,475 $691,514 $969,300
======== ========== ======== ========
Number of Shares Outstanding........... 42,416 612,105 74,247 103,349
======== ========== ======== ========
Net Asset Value Per Share (net assets
divided by number of shares outstand-
ing).................................. $ 9.40 $ 9.31 $ 9.31 $ 9.38
Sales Charge for Class A and Class D
Shares: 5.25% of offering price (5.54%
of net asset value per share)*........ .52 ** ** .52
-------- ---------- -------- --------
Offering Price......................... $ 9.92 $ 9.31 $ 9.31 $ 9.90
======== ========== ======== ========
</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 and Class C
Shares" herein.
33
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
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
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., 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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on November 30 of each year. The Fund sends
to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
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 February 28, 1997.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Middle East/Africa Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Middle East/Africa Fund, Inc. as
of November 30, 1996, the related statements of operations for the year then
ended and changes in net assets for the year then ended and the period December
30, 1994 (commencement of operations) to November 30, 1995, and the financial
highlights for the year then ended and the period December 30, 1994
(commencement of operations) to November 30, 1995. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
November 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Middle East/Africa Fund, Inc. as of November 30, 1996, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 6, 1997
35
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Botswana Multi-Industry 232,000 Sechaba Investment Trust $ 190,492 $ 157,447 2.0%
Total Investments in Botswana 190,492 157,447 2.0
Ghana Health & Personal 85,000 Unilever Ghana Ltd. 62,559 39,041 0.5
Care
Multi-Industry 904,743 Guiness Ghana Ltd. 156,444 127,295 1.6
Tobacco 70,000 Pioneer Tobacco Co. Ltd. 5,081 5,291 0.1
Total Investments in Ghana 224,084 171,627 2.2
Morocco Banking 3,428 Banque Marocaine du Commerce
Exterieure (GDR)(b) 116,045 155,319 2.0
Building Materials 2,000 ++Les Ciments de l'Oriental 87,576 85,812 1.1
Total Investments in Morocco 203,621 241,131 3.1
South Beverages 6,336 South African Breweries Ltd. 179,899 159,913 2.1
Africa 3,850 South African Breweries Ltd. (ADR)(a) 97,906 96,731 1.3
---------- ---------- ------
277,805 256,644 3.4
Diversified 21,500 Barlow Rand Ltd. 300,190 197,449 2.5
Entertainment 236,170 Sun International (Bophuthatswana) Ltd. 320,021 205,098 2.6
Financial Services 15,000 First National Bank Holdings Ltd. 150,017 71,157 0.9
Foreign ZAL 6,950,000 South African Bond, 12% due 2/28/2005 1,416,938 1,252,345 16.1
Government
Obligations
Mining 2,300 Anglo American Corp. of South Africa,
Ltd. (ADR)(a) 144,912 129,950 1.7
26,200 Beatrix Mines Ltd. 212,044 167,803 2.2
1,300 De Beers Centenary AG 40,511 39,725 0.5
12,426 Driefontein Consolidated Ltd. (ADR)(a) 186,511 141,346 1.8
12,300 Ingwe Coal Corp., Ltd. 97,800 99,874 1.3
2,500 Vaal Reefs Exploration & Mining Co.,
Ltd. 240,240 174,229 2.2
6,363 Western Areas Gold Mining Company
Ltd. (ADR)(a) 93,645 98,627 1.3
4,297 Western Areas Gold Mining Company Ltd.
(Ordinary) 59,817 60,173 0.8
---------- ---------- ------
1,075,480 911,727 11.8
Retail 113,500 ++Meikles Africa Ltd. 150,047 164,575 2.1
Total Investments in South Africa 3,690,498 3,058,995 39.4
Zimbabwe Beverage & Tobacco 55,423 Delta Corporation 93,034 172,673 2.2
Entertainment & 75,000 ++Zimbabwe Sun International 28,305 27,900 0.4
Leisure
Real Estate 164,081 Hippo Valley Estates 60,325 144,968 1.9
Total Investments in Zimbabwe 181,664 345,541 4.5
Total Investments in Africa 4,490,359 3,974,741 51.2
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
MIDDLE
EAST
<S> <S> <C> <S> <C> <C> <C>
Egypt Banking 511 Commercial International Bank (Egypt)
S.A.E. 60,437 72,279 0.9
6,500 ++Commercial International Bank (Egypt)
S.A.E. (GDR)(b) 97,250 97,500 1.3
---------- ---------- ------
157,687 169,779 2.2
Engineering & 16,810 ++Torah Portland Cement Company, Egypt 304,842 356,658 4.6
Construction
Housing 1,250 ++Nasr City Company for Housing &
Reconstruction 53,454 86,563 1.1
Total Investments in Egypt 515,983 613,000 7.9
Israel Banking 194,852 Bank Hapoalim Ltd. 309,137 286,970 3.7
Engineering & 3,603 Koor Industries Ltd. 301,578 311,978 4.0
Construction 5,000 Koor Industries Ltd. (ADR)(a) 89,050 86,875 1.1
---------- ---------- ------
390,628 398,853 5.1
Merchandising 37,100 ++Blue Square Chain Stores Properties
and Investments Ltd. 201,555 285,516 3.7
600 ++Blue Square Chain Stores Properties
and Investments Ltd. (ADR)(a) 9,067 8,400 0.1
---------- ---------- ------
210,622 293,916 3.8
Total Investments in Israel 910,387 979,739 12.6
Turkey Brewery 83,200 Erciyas Biracilik Ve Malt Sanayii
A.S. (GDR)(b) 279,760 189,280 2.4
Building & 1,999,000 Adana Cimento Sanayii (Class A) 111,099 109,374 1.4
Construction
Steel 2,993,733 Eregli Demir Ve Celik Fabrikalari
T.A.S. (Erdemir) 337,641 424,124 5.5
Total Investments in Turkey 728,500 722,778 9.3
Total Investments in the Middle East 2,154,870 2,315,517 29.8
SHORT-TERM
SECURITIES
US Government & 696,000 Federal Home Loan Mortgage Corp.,
Agency Obligations* 5.70% due 12/02/1996 695,780 695,780 9.0
Total Investments in Short-Term
Securities 695,780 695,780 9.0
Total Investments $7,341,009 6,986,038 90.0
==========
Other Assets Less Liabilities 773,168 10.0
---------- ------
Net Assets $7,759,206 100.0%
========== ======
</TABLE>
* Certain US Government & Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at the
time of purchase by the Fund.
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
++ Non-income producing security.
See Notes to Financial Statements.
37
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$7,341,009) (Note 1a) $ 6,986,038
Cash 262
Foreign cash 8,224
Receivables:
Securities sold $ 530,957
Investment adviser (Note 2) 107,471
Interest 45,517
Dividends 6,184 690,129
------------
Deferred organization expenses (Note 1f) 184,665
Prepaid registration fees and other assets (Note 1f) 18,580
------------
Total assets 7,887,898
------------
Liabilities: Payables:
Securities purchased 58,214
Capital shares redeemed 9,883
Distributor (Note 2) 5,246 73,343
------------
Accrued expenses and other liabilities 55,349
------------
Total liabilities 128,692
------------
Net Assets: Net assets $ 7,759,206
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 4,242
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 61,210
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 7,425
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 10,335
Paid-in capital in excess of par 8,468,372
Undistributed investment income--net 247,109
Accumulated realized capital losses on investments and foreign
currency transactions--net (680,061)
Unrealized depreciation on investments and foreign currency
transactions--net (359,426)
------------
Net assets $ 7,759,206
============
Net Asset Class A--Based on net assets of $398,917 and 42,416
Value: shares outstanding $ 9.40
============
Class B--Based on net assets of $5,699,475 and 612,105
shares outstanding $ 9.31
============
Class C--Based on net assets of $691,514 and 74,247
shares outstanding $ 9.31
============
Class D--Based on net assets of $969,300 and 103,349 shares
outstanding $ 9.38
============
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1996
<S> <S> <C> <C>
Investment Dividends (net of $13,089 foreign withholding tax) $ 281,771
Income Interest and discount earned 173,886
(Notes 1d & 1e): ------------
Total income 455,657
------------
Expenses: Investment advisory fees (Note 2) $ 97,346
Account maintenance and distribution fees--Class B (Note 2) 70,613
Professional fees 62,453
Accounting services (Note 2) 60,432
Amortization of organization expenses (Note 1f) 59,891
Registration fees (Note 1f) 52,040
Printing and shareholders reports 49,447
Directors' fees and expenses 37,811
Custodian fees 28,051
Transfer agent fees--Class B (Note 2) 16,635
Account maintenance and distribution fees--Class C (Note 2) 8,155
Account maintenance fees--Class D (Note 2) 3,247
Transfer agent fees--Class D (Note 2) 2,544
Pricing fees 2,480
Transfer agent fees--Class C (Note 2) 1,921
Transfer agent fees--Class A (Note 2) 1,096
Other 5,437
------------
Total expenses before reimbursement 559,599
Reimbursement of expenses (Note 2) (428,911)
------------
Total expenses after reimbursement 130,688
------------
Investment income--net 324,969
------------
Realized & Realized loss from:
Unrealized Loss Investments--net (679,544)
On Investments & Foreign currency transactions--net (44,445) (723,989)
Foreign Currency ------------
Transactions--Net Change in unrealized depreciation on:
(Notes 1b, 1c, Investments--net (29,731)
1e & 3): Foreign currency transactions--net (4,286) (34,017)
------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (758,006)
------------
Net Decrease in Net Assets Resulting from Operations $ (433,037)
============
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
For the December 30,
Year Ended 1994++ to
November 30, November 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 324,969 $ 806,936
Realized loss on investments and foreign currency transactions
--net (723,989) (28,517)
Change in unrealized depreciation on investments and foreign
currency transactions--net (34,017) (325,409)
------------ ------------
Net increase (decrease) in net assets resulting from operations (433,037) 453,010
------------ ------------
Dividends and Investment income--net:
Distributions to Class A (51,662) --
Shareholders Class B (541,025) --
(Note 1g): Class C (71,137) --
Class D (121,684) --
Realized gain on investments--net:
Class A (1,581) --
Class B (18,968) --
Class C (2,502) --
Class D (3,830) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (812,389) --
------------ ------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (1,925,740) 10,377,362
(Note 4): ------------ ------------
Net Assets: Total increase (decrease)in net assets (3,171,166) 10,830,372
Beginning of period 10,930,372 100,000
------------ ------------
End of period* $ 7,759,206 $ 10,930,372
============ ============
*Undistributed investment income--net (Note 1h) $ 247,109 $ 752,093
============ ============
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A Class B Class C Class D
The following per share data
and ratios have been derived For the For the For the For the
from information provided For the Period For the Period For the Period For the Period
in the financial statements. Year Dec. 30, Year Dec. 30, Year Dec. 30, Year Dec. 30,
Ended 1994++ to Ended 1994++ to Ended 1994++ to Ended 1994++ to
Increase (Decrease) in Net Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30,
Asset Value: 1996++++ 1995 1996++++ 1995 1996++++ 1995 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning
Performance: of period $10.66 $10.00 $10.56 $10.00 $10.56 $10.00 10.63 10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment income--net .42 .57 .32 .79 .31 .83 .40 .77
</TABLE>
40
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net (.80) .09 (.80) (.23) (.79) (.27) (.80) (.14)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations (.38) .66 (.48) .56 (.48) .56 (.40) .63
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Investment income--net (.85) -- (.74) -- (.74) -- (.82) --
Realized gain on
investments--net (.03) -- (.03) -- (.03) -- (.03) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions (.88) -- (.77) -- (.77) -- (.85) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $ 9.40 $10.66 $ 9.31 $10.56 $ 9.31 $10.56 $ 9.38 $10.63
====== ====== ====== ====== ====== ====== ====== ======
Total Investment Based on net asset value
Return:** per share (4.17%) 6.60%+++ (5.14%) 5.60%+++ (5.16%) 5.60%+++(4.31%) 6.30%+++
====== ====== ====== ====== ====== ====== ====== ======
Ratios to Average Expenses, net of
Net Assets: reimbursement .47% .00%* 1.50% 1.01%* 1.50% 1.01%* .72% .25%*
====== ====== ====== ====== ====== ====== ====== ======
Expenses 4.84% 4.63%* 5.90% 5.68%* 5.91% 5.67%* 5.08% 4.89%*
====== ====== ====== ====== ====== ====== ====== ======
Investment income--net 4.24% 8.43%* 3.15% 8.33%* 3.14% 8.45%* 4.01% 9.07%*
====== ====== ====== ====== ====== ====== ====== ======
Supplemental Net assets, end of period
Data: (in thousands) $ 399 $ 648 $5,699 $7,701 $ 692 $1,012 $ 969 $1,569
====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover 46.36% 40.97% 46.36% 40.97% 46.36% 40.97% 46.36% 40.97%
====== ====== ====== ====== ====== ====== ====== ======
Average commission rate
paid+++++ $.0022 -- $.0022 -- $.0022 -- $.0022 --
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
++++ Based on average outstanding shares during the period.
+++ Aggregate total investment return.
+++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
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. 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. Securities traded in the over-the-
counter market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one exchange, the
securities are valued on the
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
exchange designated by or under the authority of the Board of Directors as the
primary market. Securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price in the
case of exchange-traded options or, in the case of options traded in the over-
the-counter market, the last asked price. Options purchased are valued at the
last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market value quotations are not
available are valued at their fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in equity, debt and currency markets. Losses may arise due to
changes in the value of the contract or if the counterparty does not perform
under the contract.
* Options--The Fund is authorized to write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
* Foreign currency options and futures--The Fund 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.
* 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.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend date, except that if the ex-
dividend date has passed, certain dividends from foreign securities are recorded
as soon as the Fund is 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.
(f) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
42
<PAGE>
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, current year's
permanent book/tax differences of $44,445 have been reclassified between
accumulated net realized capital losses and undistributed net investment income.
These reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("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. For the year ended November 30, 1996, MLAM earned
fees of $97,346, all of which was voluntarily waived. MLAM also reimbursed the
Fund $331,565 in additional expenses.
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended November 30, 1996, 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 $157 $2,261
For the year ended November 30, 1996, MLPF&S received contingent deferred sales
charges of $54,951 and $1,532 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $205 in commissions on the execution of portfolio
security transactions for the Fund for the year ended November 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLPF&S, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1996 were $4,018,846 and $5,677,910, respectively.
Net realized and unrealized gains (losses) as of November 30, 1996 were as
follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ (679,553) $ (354,971)
Short-term investments 9 --
Foreign currency transactions (20,820) (4,455)
Foreign foreign exchange contracts (23,625) --
---------- -----------
Total $ (723,989) $ (359,426)
========== ===========
As of November 30, 1996, net unrealized depreciation for Federal income tax
purposes aggregated $354,971, of which $503,565 related to appreciated
securities and $858,536 related to depreciated securities. The aggregate cost of
investments at November 30, 1996 for Federal income tax purposes was $7,341,009.
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $(1,925,740) and $10,377,362 for the years ended November 30, 1996 and
November 30, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 15,446 $ 161,605
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,358 26,229
---------- -----------
Total issued 17,804 187,834
Shares redeemed (36,243) (366,373)
---------- -----------
Net decrease (18,439) $ (178,539)
========== ===========
Class A Shares for the Period
December 30, 1994++ to November Dollar
30, 1995 Shares Amount
Shares sold 68,348 $ 729,728
Shares redeemed (9,993) (106,209)
---------- -----------
Net increase 58,355 $ 623,519
========== ===========
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 82,351 $ 854,084
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,020 63,443
---------- -----------
Total issued 88,371 917,527
Shares redeemed (205,679) (2,013,667)
---------- -----------
Net decrease (117,308) $(1,096,140)
========== ===========
Class B Shares for the Period
December 30, 1994++ to November Dollar
30, 1995 Shares Amount
Shares sold 832,728 $ 8,419,730
Shares redeemed (105,813) (1,085,440)
---------- -----------
Net increase 726,915 $ 7,334,290
========== ===========
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class C Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
Shares sold 20,835 $ 211,576
Shares issued to shareholders in
reinvestment of dividends and
distributions 704 8,084
---------- ----------
Total issued 21,539 219,660
Shares redeemed (43,114) (431,908)
---------- ----------
Net decrease (21,575) $ (212,248)
========== ==========
Class C Shares for the Period
December 30, 1994++ to Dollar
November 30, 1995 Shares Amount
Shares sold 101,871 $1,027,680
Shares redeemed (8,549) (91,175)
---------- ----------
Net increase 93,322 $ 936,505
========== ==========
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class D Shares for the
Year Ended Dollar
November 30, 1996 Shares Amount
Shares sold 10,891 $ 112,953
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,310 25,977
---------- ----------
Total issued 13,201 138,930
Shares redeemed (57,396) (577,743)
---------- ----------
Net decrease (44,195) $ (438,813)
========== ==========
Class D Shares for the Period
December 30, 1994++ to Dollar
November 30, 1995 Shares Amount
Shares sold 153,535 $1,573,684
Shares redeemed (8,491) (90,636)
---------- ----------
Net increase 145,044 $1,483,048
========== ==========
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
44
<PAGE>
5. Commitments:
At November 30, 1996, the Fund had entered into foreign exchange contracts under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $23,000 and $401,000, respectively.
6. Capital Loss Carryforward:
At November 30, 1996, the Fund had a net capital loss carryforward of
approximately $680,000, all of which expires in 2004. This amount will be
available to offset like amounts of any future taxable gains.
7. Subsequent Event:
On December 1, 1996, the Board of Directors declared an ordinary income dividend
in the amount of $0.436055 per Class A Share, $0.319034 per Class B Share,
$0.331592 per Class C Share and $0.405895 per Class D Share, payable on December
23, 1996 to shareholders of record as of December 13, 1996.
45
<PAGE>
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46
<PAGE>
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47
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 2
Other Investment Policies and Practices.................................. 7
Investment Restrictions.................................................. 9
Management of the Fund.................................................... 12
Directors and Officers................................................... 12
Compensation of Directors................................................ 14
Management and Advisory Arrangements..................................... 14
Purchase of Shares........................................................ 16
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 16
Reduced Initial Sales Charges............................................ 17
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 20
Distribution Plans....................................................... 20
Limitations on the Payment of Deferred Sales Charges..................... 20
Redemption of Shares...................................................... 22
Deferred Sales Charges--
Class B and Class C Shares.............................................. 22
Portfolio Transactions and Brokerage...................................... 22
Determination of Net Asset Value.......................................... 24
Shareholder Services...................................................... 25
Investment Account....................................................... 25
Automatic Investment Plans............................................... 26
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 26
Taxes..................................................................... 27
Tax Treatment of Futures, Options and Forward Foreign Exchange
Transactions............................................................ 29
Special Rules for Certain Foreign Currency Transactions.................. 30
Performance Data.......................................................... 31
General Information....................................................... 32
Description of Shares.................................................... 32
Computation of Offering Price Per Share.................................. 33
Independent Auditors..................................................... 34
Custodian................................................................ 34
Transfer Agent........................................................... 34
Legal Counsel............................................................ 34
Reports to Shareholders.................................................. 34
Additional Information................................................... 34
Independent Auditors' Report.............................................. 35
Financial Statements...................................................... 36
</TABLE>
Code # 18412-0397
[LOGO] MERRILL LYNCH
Merrill Lynch
Middle East/Africa Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the fiscal year ended November 30, 1996 and
for the period December 30, 1994 (commencement of operations) to
November 30, 1995.
Contained in Part B:
Schedule of Investments as of November 30, 1996.
Statement of Assets and Liabilities as of November 30, 1996.
Statement of Operations for the year ended November 30, 1996.
Statements of Changes in Net Assets for the fiscal year ended
November 30, 1996 and for the period December 30, 1994
(commencement of operations) to November 30, 1995.
Financial Highlights for the fiscal year ended November 30, 1996 and
for the period December 30, 1994 (commencement of operations) to
November 30, 1995.
(b)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1 --Amended and Restated Articles of Incorporation of the Registrant,
dated October 5, 1994.(a)
2 --By-Laws of the Registrant.(a)
3 --None.
4(a) --Portions of the Amended and Restated 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(a) --Form of Management Agreement between the Registrant and Merrill
Lynch Asset Management, L.P.(a)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
6(a) --Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (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 --Custody Agreement between the Registrant and Brown Brothers Harriman
& Co.
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(a)
(b) --Form of License Agreement relating to the use of name between the
Registrant and Merrill Lynch & Co., Inc.(a)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10 --Opinion of Brown & Wood LLP, counsel to the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P.(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 C Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.(d)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(d)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.(d)
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares.(d)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing SM System Plan Pursuant to Rule 18f-
3.(e)
</TABLE>
- --------
(a) Filed on November 18, 1994 as an Exhibit to Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 33-55843) (the "Registration Statement").
(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 Amended and Restated Articles
of Incorporation, filed as Exhibit 1 to the Registration Statement, and
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.
(c) Filed on December 22, 1994 as an Exhibit to Pre-Effective Amendment No. 2
to the Registration Statement.
(d) Filed on June 22, 1995 as an Exhibit to Post-Effective Amendment No. 2 to
the Registration Statement.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS FEBRUARY 28, 1997*
-------------- ------------------
<S> <C>
Class A Common Stock, par value $0.10 per share.............. 79
Class B Common Stock, par value $0.10 per share.............. 724
Class C Common Stock, par value $0.10 per share.............. 98
Class D Common Stock, par value $0.10 per share.............. 123
</TABLE>
- --------
*Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Amended and Restated
Articles of Incorporation, Article VI of the Registrant's By-Laws, Section 2-
418 of the Maryland General 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 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 assures 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, or (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,
C-3
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Director, officer, or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
or the principal underwriter in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc., and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund,
C-4
<PAGE>
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the MLAM, FAM, 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 Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
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
December 1, 1994, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) OTHER SUBSTANTIAL BUSINESS,
NAME WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ---------------- ----------------------------------
<S> <C> <C>
ML & Co............ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton General Partner General Partner of FAM
Services..........
Arthur Zeikel...... President President of FAM; President and
Director
of Princeton Services; Director of
MLFD; Executive Vice President of ML
& Co.
Terry K. Glenn..... Executive Vice Executive Vice President of FAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) OTHER SUBSTANTIAL BUSINESS,
NAME WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ---------------- ----------------------------------
<S> <C> <C>
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
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM; Senior
Vice
President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, Counsel and
General Counsel Secretary of FAM; Senior Vice
and Secretary President,
General Counsel, Director and
Secretary
of Princeton Services; Director of
MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of
FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of FAM; Senior
Jr. ................... Vice
President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior
Vice
President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989
to 1995
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
and Treasurer of FAM; Senior Vice 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>
C-6
<PAGE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since December 1, 1994, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and
Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel...... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD;
Executive Vice President of ML & Co.
Alan J. Albert..... Senior Managing Vice President of the Manager
Director
Terry K. Glenn..... Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of MLFDS; President
of Princeton Administrators, L.P.
Adrian Holmes...... Managing Director Director of Merrill Lynch Global
Asset Management
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------- ----------------------------------
<S> <C> <C>
Andrew John Bascand..... Director Director of Merrill Lynch Global
Asset Management
Edward Gobora........... Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
of the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Stephen J. Yardley...... Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc.; and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.............. President and Director Executive Vice President
Arthur Zeikel............... Director President and Director
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
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 its
transfer agent, Merrill Lynch Financial Data Services, Inc., (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--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 each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-9
<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 Township of Plainsboro and the State of New Jersey, on the 24th day of
March 1997.
Merrill Lynch Middle East/Africa
Fund, Inc.
(Registrant)
/s/ Gerald M. Richard
By:__________________________________
(GERALD M. RICHARD, TREASURER)
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 and
(ARTHUR ZEIKEL) Director
(Principal Executive Officer)
Gerald M. Richard* Treasurer (Principal Financial
- ------------------------------------- and Accounting
(GERALD M. RICHARD) 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)
/s/ Gerald M. Richard March 24, 1997
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
5(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
8 --Custody Agreement between the Registrant and Brown Brothers Harriman
& Co.
10 --Opinion of Brown & Wood llp, counsel to the Registrant.
11 --Consent of Deloitte & Touche llp, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.-CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 7341009
<INVESTMENTS-AT-VALUE> 6986038
<RECEIVABLES> 690129
<ASSETS-OTHER> 211731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7887898
<PAYABLE-FOR-SECURITIES> 58214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70478
<TOTAL-LIABILITIES> 128692
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8551584
<SHARES-COMMON-STOCK> 42416
<SHARES-COMMON-PRIOR> 60855
<ACCUMULATED-NII-CURRENT> 247109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (680061)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (359426)
<NET-ASSETS> 398917
<DIVIDEND-INCOME> 281771
<INTEREST-INCOME> 173886
<OTHER-INCOME> 0
<EXPENSES-NET> (130688)
<NET-INVESTMENT-INCOME> 324969
<REALIZED-GAINS-CURRENT> (723989)
<APPREC-INCREASE-CURRENT> (34017)
<NET-CHANGE-FROM-OPS> (433037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (51662)
<DISTRIBUTIONS-OF-GAINS> (1581)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15446
<NUMBER-OF-SHARES-REDEEMED> (36243)
<SHARES-REINVESTED> 2358
<NET-CHANGE-IN-ASSETS> (3171166)
<ACCUMULATED-NII-PRIOR> 752093
<ACCUMULATED-GAINS-PRIOR> 26364
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97346
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 559599
<AVERAGE-NET-ASSETS> 560596
<PER-SHARE-NAV-BEGIN> 10.66
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> (.80)
<PER-SHARE-DIVIDEND> (.85)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.40
<EXPENSE-RATIO> 4.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.-CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 7341009
<INVESTMENTS-AT-VALUE> 6986038
<RECEIVABLES> 690129
<ASSETS-OTHER> 211731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7887898
<PAYABLE-FOR-SECURITIES> 58214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70478
<TOTAL-LIABILITIES> 128692
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8551584
<SHARES-COMMON-STOCK> 612105
<SHARES-COMMON-PRIOR> 729414
<ACCUMULATED-NII-CURRENT> 247109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (680061)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (359426)
<NET-ASSETS> 5699475
<DIVIDEND-INCOME> 281771
<INTEREST-INCOME> 173886
<OTHER-INCOME> 0
<EXPENSES-NET> (130688)
<NET-INVESTMENT-INCOME> 324969
<REALIZED-GAINS-CURRENT> (723989)
<APPREC-INCREASE-CURRENT> (34017)
<NET-CHANGE-FROM-OPS> (433037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (541025)
<DISTRIBUTIONS-OF-GAINS> (18968)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 82351
<NUMBER-OF-SHARES-REDEEMED> (205679)
<SHARES-REINVESTED> 6020
<NET-CHANGE-IN-ASSETS> (3171166)
<ACCUMULATED-NII-PRIOR> 752093
<ACCUMULATED-GAINS-PRIOR> 26364
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97346
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 559599
<AVERAGE-NET-ASSETS> 7080679
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> (.80)
<PER-SHARE-DIVIDEND> (.74)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.31
<EXPENSE-RATIO> 5.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.-CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 7341009
<INVESTMENTS-AT-VALUE> 6986038
<RECEIVABLES> 690129
<ASSETS-OTHER> 211731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7887898
<PAYABLE-FOR-SECURITIES> 58214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70478
<TOTAL-LIABILITIES> 128692
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8551584
<SHARES-COMMON-STOCK> 74247
<SHARES-COMMON-PRIOR> 95822
<ACCUMULATED-NII-CURRENT> 247109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (680061)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (359426)
<NET-ASSETS> 691514
<DIVIDEND-INCOME> 281771
<INTEREST-INCOME> 173886
<OTHER-INCOME> 0
<EXPENSES-NET> (130688)
<NET-INVESTMENT-INCOME> 324969
<REALIZED-GAINS-CURRENT> (723989)
<APPREC-INCREASE-CURRENT> (34017)
<NET-CHANGE-FROM-OPS> (433037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (71137)
<DISTRIBUTIONS-OF-GAINS> (2502)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20835
<NUMBER-OF-SHARES-REDEEMED> (43114)
<SHARES-REINVESTED> 704
<NET-CHANGE-IN-ASSETS> (3171166)
<ACCUMULATED-NII-PRIOR> 752093
<ACCUMULATED-GAINS-PRIOR> 26364
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97346
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 559599
<AVERAGE-NET-ASSETS> 817706
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> (.79)
<PER-SHARE-DIVIDEND> (.74)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.31
<EXPENSE-RATIO> 5.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.-CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 7341009
<INVESTMENTS-AT-VALUE> 6986038
<RECEIVABLES> 690129
<ASSETS-OTHER> 211731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7887898
<PAYABLE-FOR-SECURITIES> 58214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70478
<TOTAL-LIABILITIES> 128692
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8551584
<SHARES-COMMON-STOCK> 103349
<SHARES-COMMON-PRIOR> 147544
<ACCUMULATED-NII-CURRENT> 247109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (680061)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (359426)
<NET-ASSETS> 969300
<DIVIDEND-INCOME> 281771
<INTEREST-INCOME> 173886
<OTHER-INCOME> 0
<EXPENSES-NET> (130688)
<NET-INVESTMENT-INCOME> 324969
<REALIZED-GAINS-CURRENT> (723989)
<APPREC-INCREASE-CURRENT> (34017)
<NET-CHANGE-FROM-OPS> (433037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (121684)
<DISTRIBUTIONS-OF-GAINS> (3830)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10891
<NUMBER-OF-SHARES-REDEEMED> (57396)
<SHARES-REINVESTED> 2310
<NET-CHANGE-IN-ASSETS> (3171166)
<ACCUMULATED-NII-PRIOR> 752093
<ACCUMULATED-GAINS-PRIOR> 26364
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97346
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 559599
<AVERAGE-NET-ASSETS> 1302250
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (.80)
<PER-SHARE-DIVIDEND> (.82)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.38
<EXPENSE-RATIO> 5.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 4th day of November, 1996, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a non-diversified, open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated December 22, 1994, pursuant to
<PAGE>
which MLAM provides management and investment and advisory services to the Fund;
and
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement.
MLAM U.K. hereby accepts such employment and agrees during such period, at its
own expense, to render, or arrange for the rendering of, such services and to
assume the obligations herein set forth for the compensation provided for
herein. MLAM and its affiliates shall for all purposes herein be deemed a
Professional Investor as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
2
<PAGE>
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice and supervision as the
latter may from time to time consider necessary for the proper supervision of
the assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the assets of the Fund
shall be held in the various securities in which the Fund invests, options,
futures, options on futures or cash; all of the foregoing subject always to the
restrictions of the Articles of Incorporation and By-Laws of the Fund, as they
may be amended and/or restated from time to time, the provisions of the
Investment Company Act and the statements relating to the Fund's investment
objective, investment policies and investment restrictions as the same are set
forth in the currently effective prospectus and statement of additional
information relating to the shares of the Fund under the Securities Act of 1933,
as amended (the "Prospectus" and "Statement of Additional Information",
respectively). MLAM U.K. shall make recommendations and effect transactions
with respect to foreign currency matters, including foreign exchange contracts,
foreign currency options, foreign currency futures and related options on
foreign currency futures and forward foreign currency transactions. MLAM U.K.
shall also make recommendations or take action as to the manner in which voting
rights, rights to consent
3
<PAGE>
to corporate action and any other rights pertaining to the portfolio securities
of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and
personnel necessary to perform its obligations under this Agreement and shall at
its own expense provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are affiliated persons of
MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Management Agreement.
4
<PAGE>
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE>
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K. MLAM has the right to
obtain from MLAM U.K. a copy of the IMRO complaints procedure and to approach
IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
6
<PAGE>
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Management Agreement (but not later than two years after the date hereof) and
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) the Directors of the Fund or by the vote of a majority of
the outstanding voting securities of the Fund and (ii) a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who
7
<PAGE>
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By /s/ Terry K. Glenn
----------------------------------------
Title: Executive Vice President
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Arthur Zeikel
----------------------------------------
Title: Director and Chairman
9
<PAGE>
EXHIBIT 99.8
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this 23rd day of July, 1996, between MERRILL
LYNCH MIDDLE EAST/AFRICA FUND, INC.(the "Fund") and Brown Brothers Harriman &
Co. (the "Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian for
the term and subject to the provisions of this Agreement. The Custodian shall
not be under any duty or obligation to require the Fund to deliver to it any
securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Certificate of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed
pursuant to the provisions of Section 3 hereof, the Custodian shall have and
perform the following powers and duties:
A. Safekeeping - To keep safely the securities of the Fund that have been
-----------
delivered to the Custodian and from time to time to receive delivery of
securities for safekeeping.
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B. Manner of Holding Securities - To hold securities of the Fund (1) by
----------------------------
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities of the Fund
------------------------
(1) in the name or any nominee name of the Custodian or the Fund, or in the name
or any nominee name of any agent appointed pursuant to Section 5E, or (2) in
street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section
---------
V on Page 14, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long
2 -
<PAGE>
as such payment instructions to Securities System or Subcustodian include a
requirement that delivery is only against payment of securities, and (ii) in the
case of time deposits, call account, deposits, currency deposits, and other
deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the Custodian
may make payment therefor without receiving an instrument evidencing said
deposit so long as such payment instructions detail specific securities to be
acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange securities
---------
held by it for the account of the Fund for other securities in connection with
any reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without such instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian and further provided the Custodian shall at the time
of surrendering securities or instruments receive a receipt or other evidence of
ownership thereof.
F. Sales of Securities - Upon receipt of proper
-------------------
3 -
<PAGE>
instructions, to make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct
-------------------
a subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor
4 -
<PAGE>
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
---------------------------------
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
----------------------------
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
----------
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an
----------------------------
5 -
<PAGE>
account or accounts in the name of the Fund on the Custodian's books subject
only to draft or order by the Custodian. All funds received by the Custodian
from or for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U. S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open and
operate an additional account(s) in such other banks or trust companies as may
be designated by the Fund in such instructions (any such bank or trust company
so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the Custodian's draft or
order. Such accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U. S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed
to be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefor shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
L. Interest Bearing Call or Time Deposits - To place interest bearing
--------------------------------------
fixed term and call deposits with such banks and
6 -
<PAGE>
in such amounts as the Fund may authorize pursuant to proper instructions. Such
deposits may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U. S.
Dollars or other currencies and need not be evidenced by the issuance or
delivery of a certificate to the Custodian, provided that the Custodian shall
include in its records with respect to the assets of the Fund, appropriate
notation as to the amount and currency of each such deposit, the accepting
Banking Institution, and other appropriate details. Such deposits, other than
those placed with the Custodian, shall be deemed portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks, as described in
Section K of this agreement. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to
---------------------------------------------------
proper instructions, to enter into foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on behalf and
for the account of the Fund. Such transactions may be undertaken by the
Custodian with such Banking Institutions, including the Custodian and
Subcustodian(s) as principals, as approved and authorized by the Fund. Foreign
exchange contracts and options other than those
7 -
<PAGE>
executed with the Custodian, shall be deemed to be portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks as described in
Section 2-K of this agreement. Upon receipt of proper instructions, to receive
and retain confirmations evidencing the purchase or sale of a futures contract
or an option on a futures contract by the Fund; to deposit and maintain in a
segregated account, for the benefit of any futures commission merchant or to pay
to such futures commission merchant, assets designated by the Fund as initial,
maintenance or variation "margin" deposits intended to secure the Fund's
performance of its obligations under any futures contracts purchased or sold or
any options on futures contracts written by the Fund, in accordance with the
provisions of any agreement or agreements among any of the Fund, the Custodian
and such futures commission merchant, designated to comply with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding such margin deposits; and to release
and/or transfer assets in such margin accounts only in accordance with any such
agreements or rules.
N. Stock Loans - Upon receipt of proper instructions to deliver securities
-----------
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event
8 -
<PAGE>
U.S. Government securities are to be used as collateral, the Custodian will not
release the securities to be loaned until it has received confirmation that such
collateral has been delivered to the Custodian. The Custodian and Fund
understand that the timing of receipt of such confirmation will normally require
that the delivery of securities to be loaned will be made one day after receipt
of the U.S. Government collateral.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund or in connection with transfer
of securities, and pursuant to proper instructions to take such other actions
with respect to collection or receipt of funds or transfer of securities which
involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
----------------------------------------
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or
9 -
<PAGE>
securities, insofar as available, for the payment of dividends or other
distributions to Fund shareholders. Upon receipt of proper instructions from
the Fund, or upon receipt of instructions from the Shareholder Servicing Agent
(given by such person or persons and in such manner on behalf of the Shareholder
Servicing Agent as the Fund shall have authorized), the Custodian shall release
funds or securities, insofar as available, to the Shareholder Servicing Agent or
as such Agent shall otherwise instruct for payment to Fund shareholders who have
delivered to such Agent a request for repurchase or redemption of their shares
of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
---------------------
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions from the Administrator, to
-----
pay or cause to be paid, insofar as funds are available for the purpose, bills,
statements, or other obligations of the Fund.
10 -
<PAGE>
S. Deposit of Fund Assets in Securities Systems - The Custodian may
--------------------------------------------
deposit and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
11 -
<PAGE>
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such securities
have been transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
the Fund. The Custodian shall transfer securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian or an Agent as referred to above, and
be provided to the Fund at its request. The Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Fund on the next business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on
12 -
<PAGE>
the Securities System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the Securities System; and
the Custodian and such Agents shall send to the Fund such reports on their own
systems of internal accounting control as the Fund may reasonably request from
time to time.
5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
---------------
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
----------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
13 -
<PAGE>
conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures, encumber securities, borrow
or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex
-------------------
from the Fund or a written request, direction, instruction or certification
signed or initialled on behalf of the Fund by two or more persons as the Board
of Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give proper instructions may be identified
by the Board of Directors by name, title or position and will include at least
one officer empowered by the Board to name other individuals who are authorized
to give proper instructions on behalf of the Fund. Telephonic or other oral
instructions given by any one of the above persons will be considered proper
instructions if the Custodian reasonably believes them to have been given by a
person
14 -
<PAGE>
authorized to give such instructions with respect to the transaction involved.
Oral instructions will be confirmed by tested telex or in writing in the manner
set forth above but the lack of such confirmation shall in no way affect any
action taken by the Custodian in reliance upon such oral instructions. The Fund
authorizes the Custodian to tape record any and all telephonic or other oral
instructions given to the Custodian by or on behalf of the Fund (including any
of its officers, Directors, employees or agents) and will deliver to the
Custodian a similar authorization from any investment manager or adviser or
person or entity with similar reponsibilities which is authorized to give proper
instructions on behalf of the Fund to the Custodian. Proper instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
Proper instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
3. Securities, funds and other property of the Fund may be held by
subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and
15 -
<PAGE>
regulations thereunder) to act as a Subcustodian for the Fund, provided that the
Fund shall have approved in writing (1) any such bank or trust company and the
subcustodian agreement to be entered into between such bank or trust company and
the Custodian, and (2) if the subcustodian is a bank organized under the laws of
a country other than the United States, the holding of securities, cash and
other property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of its appointment
as such. The Custodian may, at any time in its discretion, remove any bank or
trust company that has been appointed as a Subcustodian but will promptly notify
the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has approved
to date are set forth on Appendix A hereto. Such Appendix shall be amended
from time to time as Subcustodians, branches or offices are changed, added or
deleted. The Fund shall be responsible for informing the Custodian sufficiently
in advance of a proposed investment which is to be held at a location not listed
on Appendix A, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Custodian to put
the appropriate arrangements in place with such Subcustodian pursuant to such
subcustodian agreement.
16 -
<PAGE>
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, in the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in accordance with the provisions of this Section 3. At
the election of the Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Custodian's
rights against any such Subcustodian for loss or damage caused the Fund by such
Subcustodian.
At the written request of the Fund, the Custodian will
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terminate any Subcustodian appointed pursuant to the provisions of this Section
3 in accordance with the termination provisions under the applicable
subcustodian agreement. The Custodian will not amend any subcustodian agreement
or agree to change or permit any changes thereunder except upon the prior
written approval of the Fund.
In the event the Custodian receives a claim from a Subcustodian under the
indemnification provisions of any subcustodian agreement, the Custodian shall
promptly give written notice to the Fund of such claim. No more than thirty
days after written notice to the Fund of the Custodian's intention to make such
payment, the Fund will reimburse the Custodian the amount of such payment except
in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature.
5. A. The Custodian shall not be liable for any action taken or omitted
in reliance upon proper instructions believed by it to be genuine or upon any
other written notice, request, direction, instruction, certificate or other
instrument believed by it to be genuine and signed by the proper party or
parties.
The Chairman of the Board of the Fund shall certify to the Custodian the
names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such
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notice, request, direction, instruction, certificate or instrument on behalf of
the Fund, the names and signatures of the officers of the Fund, the name and
address of the Shareholder Servicing Agent, and any resolutions, votes,
instructions or directions of the Fund's Board of Directors or shareholders.
Such certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and may be considered in full force and
effect until receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund, (but only to
the extent such expenses are reasonable) to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
B. With respect to the portfolio securities, cash and other property of
the Fund held by a Securities System, the Custodian shall be liable to the Fund
only for any loss or damage to the Fund resulting from use of the Securities
System if caused by any negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their employees or from any
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failure of the Custodian or any such agent to enforce effectively such rights as
it may have against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to the Fund for
its own negligence in transmitting any instructions received by it from the Fund
and for its own negligence in connection with the delivery of any securities or
funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its
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or its nominee's breach of the relevant standard of conduct set forth in this
Agreement. Without limiting the foregoing indemnification obligation of the
Fund, the Fund agrees to indemnify the Custodian and its nominees against any
liability the Custodian or such nominee may incur by reason of taxes assessed to
the Custodian or such nominee or other costs, liability or expense incurred by
the Custodian or such nominee resulting directly or indirectly from the fact
that portfolio securities or other property of the Fund is registered in the
name of the Custodian or such nominee.
In order that the indemnification provisions contained in this Paragrapgh
5-C shall apply, however, it is understood that if in any case the Fund may be
asked to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the Custodian
against any claim which may be the subject of this indemnification, and in the
event that the Fund so elects it will so notify the Custodian, and thereupon the
Fund shall take over complete defense of the claim, and the Custodian shall in
such situation initiate no further legal or other expenses for which
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it shall seek indemnification under this Paragraph 5-C. The Custodian shall in
no case confess any claim or make any compromise in any case in which the Fund
will be asked to indemnify the Custodian except with the Fund's prior written
consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalizaton, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other similar act or event beyond the Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund
on demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
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F. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company as its agent (an
"Agent") to carry out such of the provisions of this Agreement as the Custodian
may from time to time direct, provided, however, that the appointment of such
Agent (other than an Agent appointed pursuant to the third paragraph of Section
3) shall not relieve the Custodian of any of its responsibilities under this
agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 5D, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy-five (75) days
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after the date of such delivery or mailing. In the event of termination the
Custodian shall be entitled to receive prior to delivery of the securities,
funds and other property held by it all accrued fees and unreimbursed expenses
the payment of which is contemplated by Sections 5D and 6, upon receipt by the
Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof. No provision of
this Agreement may be amended or terminated except by a statement in writing
signed by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the
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preceding sentence shall be deemed to be an amendment of this Agreement.
9. This instrument is executed and delivered in the Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund in care of Merrill Lynch Asset Management, Inc., 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Mailing address: Post Office
Box 9011, Princeton, New Jersey 08543, Attention: Mr. Gerald M. Richard, Senior
Vice President/Treasurer, or to such other address as the Fund may have
designated to the Custodian in writing, or to the Custodian at 40 Water Street,
Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to
such other address as the Custodian may have designated to the Fund in writing,
shall be deemed to have been properly delivered or given hereunder to the
respective addressee.
11. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
12. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
MERRILL LYNCH MIDDLE EAST/ BROWN BROTHERS HARRIMAN & CO.
AFRICA FUND, INC.
By /s/ Gerald M. Richard /s/ Stokley P. Towles
--------------------------- -----------------------------
Title: Treasurer Title: Partner
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EXHBIT 99.10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
March 25, 1997
Merrill Lynch Middle East/Africa Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Middle East/Africa Fund, Inc., a Maryland corporation (the "Fund"), of
shares of common stock, par value $0.10 per share, of the Fund (the "Shares"),
under the Securities Act of 1933, as amended, pursuant to the Fund's
registration statement on Form N-1A (File No. 33-55843), as amended (the
"Registration Statement"), in the amount set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended and restated, the By-Laws of the Fund and such other
documents as we have deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
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EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Middle East/Africa Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-55843 of our report dated January 6, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
March 24, 1997
