<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 5
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 8
(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.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.,
ESQ.
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.
Title of Securities Being Registered: Shares of Common Stock, par value $.10
per share.
----------------
<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
Registrant............. Prospectus Summary; Investment
Objective and Policies; Additional
Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Purchase of Shares;
Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Prospectus
Summary; Merrill Lynch Select
Pricing/SM/ System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or
Repurchase............. Fee Table; Prospectus Summary; Merrill
Lynch Select PricingSM System;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
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
Securities............. Management of the Fund; General
Information--Additional Information
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of
Brokerage Allocation and Shares; General Information
Item 17. Other Practices........ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities............. Purchase of Shares; Redemption of
Shares; Shareholder Services; General
Information--Description of Shares
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information--Computation of Offering
Price Per Share
Item 20. Tax Status.............. Taxes
Item 21. Underwriters............ Purchase of Shares
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 4, 1998
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 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 4, 1998 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund. 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 that for retirement plans,
the minimum initial purchase is $100 and the minimum subsequent purchase is $1,
and for participants in certain fee-based programs, the minimum initial
purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $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:
Shareholder Servicing Costs(j)........ 0.17% 0.21% 0.22% 0.17%
Miscellaneous......................... 5.19% 5.25% 5.25% 5.25%
----- ----- ----- -----
Total Other Expenses................ 5.36% 5.46% 5.47% 5.42%
----- ----- ----- -----
Reimbursement(k)........................ (5.89)% (5.95)% (5.95)% (5.95)%
------- ------- ------- -------
Total Fund Operating Expenses........... 0.47% 1.51% 1.52% 0.72%
===== ===== ===== =====
</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 by certain retirement plans and participants 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 that
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, 1997, 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,
absent such waiver of fees and reimbursement of expenses, were 6.36% for
Class A shares, 7.46% for Class B shares, 7.47% for Class C shares and
6.67% 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..................................... $76* $67 $77 $109
Class B..................................... $75* $68 $82 $160**
Class C..................................... $45* $48 $83 $181
Class D..................................... $78* $74 $90 $137
An investor would pay the following expenses
on the same assuming no redemption at the end
of the period:
Class A..................................... $76 $67 $77 $109
Class B..................................... $15 $48 $82 $160**
Class C..................................... $15 $48 $83 $181
Class D..................................... $78 $74 $90 $137
</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
$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 100 registered investment companies.
The Manager and FAM also offer portfolio management services to individuals and
institutions. As of January 31, 1998, the Manager and FAM had a total of
approximately $287.0 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager. See
"Management of the Fund--Management and Advisory Arrangements."
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed (i) in the case of Class A or Class D shares, at the
time of the purchase or (ii) in the case of Class B or Class C shares, on a
deferred basis. Class D shares pay an ongoing account maintenance fee, and
Class B and Class C shares pay ongoing account maintenance and distribution
fees. See "Purchase of Shares."
Shareholders may redeem their shares at any time at the next determined net
asset value, except that the redemption price for shares redeemed during the
first year after purchase will be subject to the redemption fee discussed
below, Class B shares may be subject to a CDSC on shares redeemed within four
years of purchase and Class C shares may be subject to a CDSC on shares
redeemed within one year of purchase. See "Redemption of Shares."
The Fund is designed for long-term investors. To discourage short-term
trading in shares of the Fund, shares redeemed within 12 months of purchase are
subject to a redemption fee of 2.0% of the net asset value of the shares being
redeemed. The redemption fee is retained by the Fund and may be used to cover
the costs of liquidating portfolio securities.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income. Dividends from such net investment income are paid at least
annually. All net realized long-term and short-term capital gains,
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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The 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 four 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 by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. 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, certain retirement
plans and certain fee-based programs was modified. Also, Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(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 certain
retirement plans and 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 by certain retirement plans and
participants in connection with certain fee-based programs. Purchases
of $1,000,000 or more may not be subject to
8
<PAGE>
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. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
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 who
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 by retirement
plans and participants 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."
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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.
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 that 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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<PAGE>
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
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<PAGE>
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems or the risk of
intermediary counter party failures could cause the Fund to miss investment
opportunities. The inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to subsequent
declines in the value of such portfolio security or, if the Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States.
For example, there may be no comparable provisions under certain 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
12
<PAGE>
countries. Many of the Middle Eastern/African countries may be subject to a
greater degree of economic, political and social instability than is the case
in the United States and Western European countries. Such instability may
result from, among other things: (i) authoritarian governments or military
involvement in political and economic decision-making, including changes in
government through extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social conditions; (iii)
internal insurgencies and terrorist activities; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection. Such
economic, political and social instability could severely disrupt the principal
financial markets in which the Fund invests and could adversely affect the
value of the Fund's assets. For example, Islamic militants have grown in number
in a few Middle Eastern countries, and Iran has been ruled by Islamic
fundamentalists since 1979. If these militants gain strength, they may present
a challenge to openness to foreign investment. In addition, some of these
movements may have destabilizing effects because they espouse violence and
anti-Western sentiments as a means to achieving their goals, and have denounced
efforts to resolve the Arab-Israeli conflict. If such groups were to gain
control of the governments of any other Middle Eastern countries, the resulting
economic, political and social changes could have an adverse effect on the
Fund's investments in such countries.
In addition, in certain Middle Eastern/African countries there may be the
possibility of asset expropriations or future confiscatory levels of taxation
affecting the Fund. In the event of expropriation, nationalization or other
confiscation, the Fund may not be fairly compensated for any losses and could
lose its entire investment in the country involved. Actions of the governments
of Middle Eastern/African countries in the future could have a significant
effect on local economies, which could adversely affect private sector
companies, market conditions and the prices and yields of securities in the
Fund's portfolio.
Certain economies in Middle Eastern/African countries depend to a significant
degree upon exports of primary commodities such as gold, silver, copper,
diamonds and oil and, therefore, are vulnerable to changes in commodity prices
which, in turn, may be affected by a variety of factors. In addition,
governments of many Middle Eastern/African countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, governmental actions in the
future could have a significant effect on economic conditions in Middle
Eastern/African countries, which could affect private sector companies and the
Fund, as well as the value of securities in the Fund's portfolio.
The legal systems in certain Middle Eastern/African countries also may have
an adverse impact on the Fund. For example, while the potential liability of a
shareholder in a U.S. corporation with respect to acts of the corporation
generally is limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain Middle Eastern/African countries.
The Fund, therefore, may be liable in certain Middle Eastern/African countries
for the acts of a corporation in which it invests for an amount greater than
the Fund's actual investment in such corporation. Similarly, the rights of
investors in Middle Eastern/African issuers may be more limited than those of
shareholders of U.S. corporations. It may be difficult or impossible to obtain
and/or enforce a judgment in a Middle Eastern/African country.
13
<PAGE>
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.
15
<PAGE>
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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<PAGE>
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, a Division of The McGraw-Hill Companies, Inc. ("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" on page 60. 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
17
<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, futures and
options thereon and currency forwards and options thereon and indexed
securities including inverse securities. The Fund has express limitations on
the percentage of its assets that may be committed to certain of such
investments. Other of such investments have no express quantitative
limitations, although they may be made solely for hedging purposes, not for
speculation, and may in some cases require limitations as to the type of
permissible counter-party to the transaction.
18
<PAGE>
Investments in indexed securities, including inverse securities, subject the
Fund to the risks associated with changes in the particular indices, which
risks 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--"Investment
Practices Involving the Use of Options, Futures and Foreign Exchange" on page
54.
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, 1997 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 CLASS B CLASS C
------------------------------- ------------------------------- -------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED PERIOD
NOV. 30, DEC. 30, 1994+ NOV. 30, DEC. 30, 1994+ NOV. 30, DEC. 30, 1994+
-------------- TO NOV. 30, -------------- TO NOV. 30, -------------- TO NOV. 30,
1997++ 1996++ 1995 1997++ 1996++ 1995 1997++ 1996++ 1995
------ ------ -------------- ------ ------ -------------- ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 9.40 $10.66 $10.00 $ 9.31 $10.56 $10.00 $ 9.31 $10.56 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Investment
income--net..... .48 .42 .57 .37 .32 .79 .36 .31 .83
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. 1.52 (.80) .09 1.51 (.80) (.23) 1.55 (.79) (.27)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations...... 2.00 (.38) .66 1.88 (.48) .56 1.91 (.48) .56
------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends
and
distributions:
Investment
income--net..... (.44) (.85) -- (.32) (.74) -- (.33) (.74) --
Realized gain on
investments--
net............. -- (.03) -- -- (.03) -- -- (.03) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends
and
distributions... (.44) (.88) -- (.32) (.77) -- (.33) (.77) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period... $10.96 $ 9.40 $10.66 $10.87 $ 9.31 $10.56 $10.89 $ 9.31 $10.56
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 22.43% (4.17)% 6.60%# 21.02% (5.14)% 5.60%# 21.42% (5.16)% 5.60%#
====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .47% .47% .00%* 1.51% 1.50% 1.01%* 1.52% 1.50% 1.01%*
====== ====== ====== ====== ====== ====== ====== ====== ======
Expenses........ 6.36% 4.84% 4.63%* 7.46% 5.90% 5.68%* 7.47% 5.91% 5.67%*
====== ====== ====== ====== ====== ====== ====== ====== ======
Investment
income--net..... 4.35% 4.24% 8.43%* 3.40% 3.15% 8.33%* 3.33% 3.14% 8.45%*
====== ====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 989 $ 399 $ 648 $5,947 $5,699 $7,701 $ 723 $ 692 $1,012
====== ====== ====== ====== ====== ====== ====== ====== ======
Portfolio
turnover........ 78.12% 46.36% 40.97% 78.12% 46.36% 40.97% 78.12% 46.36% 40.97%
====== ====== ====== ====== ====== ====== ====== ====== ======
Average
commission rate
paid##.......... $.0012 $.0022 -- $.0012 $.0022 -- $.0012 $.0022 --
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
CLASS D
-------------------------------
FOR THE FOR THE
YEAR ENDED PERIOD
NOV. 30, DEC. 30, 1994+
---------------- TO NOV. 30,
1997++ 1996++ 1995
------ ------ --------------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 9.38 $10.63 $10.00
------- -------- --------------
Investment
income--net..... .46 .40 .77
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. 1.50 (.80) (.14)
------- -------- --------------
Total from
investment
operations...... 1.96 (.40) .63
------- -------- --------------
Less dividends
and
distributions:
Investment
income--net..... (.41) (.82) --
Realized gain on
investments--
net............. -- (.03) --
------- -------- --------------
Total dividends
and
distributions... (.41) (.85) --
------- -------- --------------
Net asset value,
end of period... $10.93 $ 9.38 $10.63
======= ======== ==============
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 21.95% (4.31)% 6.30%#
======= ======== ==============
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... .72% .72% .25%*
======= ======== ==============
Expenses........ 6.67% 5.08% 4.89%*
======= ======== ==============
Investment
income--net..... 4.18% 4.01% 9.07%*
======= ======== ==============
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $1,109 $ 969 $1,569
======= ======== ==============
Portfolio
turnover........ 78.12% 46.36% 40.97%
======= ======== ==============
Average
commission rate
paid##.......... $.0012 $.0022 --
======= ======== ==============
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average outstanding shares.
# 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 OTC 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
22
<PAGE>
levels. In accordance with its investment objective, the Fund will not seek to
benefit from anticipated short-term fluctuations in currency exchange rates.
The receipt of income from such debt securities is incidental to the Fund's
objective of long-term capital appreciation. The Fund, from time to time, may
invest in debt securities with relatively high yields (as compared with other
debt securities meeting the Fund's investment criteria), notwithstanding that
the Fund may not anticipate that such securities will experience substantial
capital appreciation. Such income can be used, however, to offset the operating
expenses of the Fund. Debt securities with 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. 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 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.
23
<PAGE>
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 of
its issuer. Additionally, the Fund may consider a derivative product tied to
securities or issuers located in
24
<PAGE>
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 or its delegate, the Manager, monitors 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 certain investment practices
involving the use of options, futures and foreign exchange, which may expose
the Fund to certain risks. These investment practices and the associated risks
are described in detail in Appendix A to the Prospectus on page 54.
Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution
of the Fund's portfolio transactions. Since portfolio transactions may be
effected on foreign securities exchanges, the Fund may incur settlement delays
on certain of such exchanges. See "Risk Factors and Special Considerations." In
executing portfolio transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Manager generally seeks
reasonably competitive fees, commissions or spreads, the Fund does not
necessarily pay the lowest fee, commission or spread available. The Fund may
invest in certain securities traded in the OTC market and, where possible, will
deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
futures, options and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Fund has no obligation
to deal with any broker or group of brokers in the execution of transactions in
portfolio securities. Subject to obtaining the best price and execution,
securities firms which provide supplemental investment research to the Manager,
including Merrill Lynch, may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the 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
27
<PAGE>
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 or in a
private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. 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. 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 this 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
28
<PAGE>
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 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.
29
<PAGE>
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 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
30
<PAGE>
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 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.
31
<PAGE>
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*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); and Executive Vice
President of ML & Co.
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 than 100
registered investment companies and provides investment advisory services to
individual and institutional accounts. The Manager also offers portfolio
management services to individual and institutional accounts. As of January 31,
1998, the Manager and FAM had a total of approximately $287.0 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager.
The Fund has entered into a management agreement (the "Management Agreement")
with the Manager. As described in the Management Agreement, the Manager
receives for its services to the Fund monthly compensation at the annual rate
of 1.00% of the average daily net assets of the Fund. The Management Agreement
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio
and constantly reviews the Fund's holdings in
32
<PAGE>
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, 1997, the Manager earned
fees pursuant to the Management Agreement of $85,890 (based on average daily
net assets of approximately $8.6 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, 1997. 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, 1997, the Fund reimbursed the Manager $66,132 for such accounting
services. For the fiscal year ended November 30, 1997, the ratio of total
expenses to average net assets was 6.36% for Class A shares, 7.46% for Class B
shares, 7.47% for Class C shares and 6.67% for Class D shares.
A. Grace Pineda is a Senior Vice President and Portfolio Manager of the Fund.
Ms. Pineda has been a First Vice President of the Manager since 1997 and was a
Vice President of the Manager from 1989 to 1997. 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 of the Investment Company Act that incorporates the Code of Ethics
of the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on Fund investment
personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities
33
<PAGE>
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the 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
The Transfer Agent, a subsidiary of ML & Co., acts as the Fund's transfer
agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives 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 certain transaction charges and out-of-pocket expenses incurred by it under
the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended November 30,
1997, the total fee paid by the Fund to the Transfer Agent was $17,226.
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 that for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1 and for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
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 on that day, 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, $5.35) to
confirm a sale of shares to such customers. Purchases made directly through the
Transfer Agent are not subject to the processing fee.
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. The proceeds from the account maintenance fees are
used to compensate the Distributor and Merrill Lynch (pursuant to a sub-
agreement) for providing continuing account maintenance activities. 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 CDSCs and distribution fees with respect to Class B
35
<PAGE>
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. Investors are advised that only Class A and Class D shares may be
available for purchase through securities dealers, other than Merrill Lynch,
that are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION 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
four years, at a rate of 4.0% D shares automatically
during the first year, decreasing after approximately
1.0% 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 may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Certain Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply. 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, certain retirement
plans and fee-based programs may be modified. Also, Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(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 by certain retirement
plan investors and participants in 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. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain 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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
During the fiscal year ended November 30, 1997, the Fund sold 70,183 Class A
shares for aggregate net proceeds to the Fund of $762,817. There were no gross
sales charges for the sale of 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, 1997, the Fund sold 30,184 Class D
shares for aggregate net proceeds to the Fund of $334,924. The gross sales
charges for the sale of Class D shares for that year were $6,296, of which
$637 and $5,659 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. 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. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign owned banking institutions, provided
that the program or branch has $3 million or more initially invested in MLAM-
advised mutual funds. Also eligible to purchase
37
<PAGE>
Class A shares at net asset value are participants in certain investment
programs including TMA SM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and purchases made in
connection with certain fee-based programs. In addition, Class A shares are
offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. 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." The proceeds from the account maintenance fees are used
to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement)
for providing continuing account maintenance activities.
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.
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, 1997, the Distributor received CDSCs
of $45,331 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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 that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The Class B CDSC also is waived for
any Class B shares purchased within qualifying Employee Access SM Accounts.
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, 1997, the Distributor
received CDSCs of $1,686 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, 1997, the Fund paid the Distributor
$60,469 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $6.1
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, 1997, the Fund paid the
Distributor $6,751 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$0.7 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended November 30, 1997, the Fund paid the
Distributor $2,614 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$1.0 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, the last date for which fully allocated accrual
information is available, 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, 1997, direct cash
revenues for the period since the commencement of operations exceeded direct
cash expenses by $151,690 (2.55% 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 allocated accrual
revenues by approximately $9,000 (1.71% of Class C net assets at that date).
For Class C shares, as of November 30, 1997, direct cash revenues for the
period since the commencement of operations exceeded direct cash expenses by
$19,015 (2.63% 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 certificates, 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 it has assured itself that
"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 that
do not have selected dealer agreements with the Distributor, however, may
impose a transaction charge on the shareholder for transmitting the notice of
repurchase to the Fund. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a repurchase of shares to such customers.
Repurchases made directly through the Fund's 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. 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 such shares and then
must turn the certificates over to the new firm for re-registration as
described in the preceding sentence. 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, or
both dividends and capital gains distributions paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date.
The Fund is not responsible for any failure of delivery to the shareholder's
address of record and no interest will accrue on amounts represented by
uncashed distribution or redemption checks. 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 or 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
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Programs also generally prohibit such shares from being transferred to another
account at Merrill Lynch, to another broker-dealer or to the Transfer Agent.
Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
a specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in such
Program's client agreement and from the Transfer Agent at (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
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expressed either as a percentage or as a dollar amount in order to illustrate
the effect of such total return on a hypothetical $1,000 investment in the Fund
at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 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 "Additional Information--Determination of Net
Asset Value." Dividends may be reinvested automatically in shares of the Fund
at net asset value without a sales charge. However, a shareholder whose account
is maintained at the Transfer Agent or whose account is maintained through
Merrill Lynch 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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amounts
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January 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. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both shareholders and the RIC. No deductions for
foreign taxes, however, may be claimed by
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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 and other information needed to claim the foreign tax credit.
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 recent legislation
the Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares over
their adjusted basis and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge with respect
to 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
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basis in the Class B shares converted, and the holding period for the acquired
Class D shares will include the holding period for the converted Class B
shares.
A loss realized on a sale of shares of the Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
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 sum of 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.
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Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation.
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 the 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.
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.
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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
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
INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS, FUTURES
AND FOREIGN EXCHANGE
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, as described below. Such
instruments, which may be regarded as derivatives, are referred to collectively
herein as "Strategic Instruments."
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up-front payment (the
"option premium"), the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. In the event the market value of the portfolio
holdings underlying the put option increases rather than decreases, however,
the Fund will lose the option premium and will consequently realize a lower
return on the portfolio holdings than would have been realized without the
purchase of the put.
The Fund is also authorized to purchase call options on securities it intends
to purchase or securities indices the performance of which substantially
correlates with the performance of the types of securities it intends to
purchase. When the Fund purchases a call option, in consideration for the
option premium, the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before the expiration date, in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index increases beyond a specified
level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund may also purchase put or call options in connection with closing out
put or call options it has previously sold. However, the Fund will not purchase
options on securities if, as a result of such purchase, the aggregate cost
(option premiums paid) of all outstanding options on securities held by the
Fund would exceed 5% of the market value of the Fund's total assets.
Writing Options. The Fund is authorized to write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund writes a call option, in return for an option premium, the Fund gives
another party the right
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to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before the expiration date, in the case of
an option on a securities index. The Fund may write call options to earn
income, through the receipt of option premiums. In the event the party to which
the Fund has written an option fails to exercise its rights under the option
because the value of the underlying securities is less than the exercise price,
the Fund will partially offset any decline in the value of the underlying
securities through the receipt of the option premium and will realize a greater
return than would have been realized on the underlying securities alone. By
writing a call option, however, the Fund limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.
The Fund may also write put options on securities or securities indices. When
the Fund writes a put option, in return for an option premium, the Fund gives
another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party the amount of any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its right
under the option because the value of the underlying securities is greater than
the exercise price, the Fund will profit by the amount of the option premium.
By writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund may write a
put option on a security or a securities index as an anticipatory hedge or in
connection with trading strategies involving combinations of options, for
example, the sale and purchase of options with identical expiration dates on
the same security or index but different exercise prices (a technique called a
"spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency Instruments"
below. A call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the option (or, in
the case of an option on a securities index, securities which substantially
replicate the performance of such index) or owns a call option, warrant or
convertible instrument which is immediately exercisable for, or convertible
into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their
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obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
FUTURES
The Fund may engage in transactions in futures, including stock index futures
contracts and financial futures contracts, and options thereon. Financial
futures contracts are standardized, exchange-traded contracts which obligate a
purchaser to take delivery, and a seller to make delivery, of a specific amount
of a commodity at a specified future date at a specified price. Stock index
futures contracts are similar to other futures contracts except that they do
not require actual delivery of securities but instead result in cash settlement
based on the difference in value of the index between the time the contract was
entered into and the time of its settlement.
No price is paid upon entering into a futures contract. Rather, upon
purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
The sale of a futures contract for hedging purposes limits the Fund's risk of
loss through a decline in the market value of portfolio holdings correlated
with the futures contract prior to the expiration date of the futures contract.
In the event the market value of the portfolio holdings correlated with the
futures contract increases rather than decreases, however, the Fund will
realize a loss on the futures position and a lower return on the portfolio
holdings than would have been realized without the purchase of the futures
contract.
The purchase of a futures contract as an anticipatory hedge may protect the
Fund from having to pay more for securities as a consequence of increases in
the market value for such securities during a period when the Fund was
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
in a futures contract, however, the Fund may realize a loss relating to the
futures position.
The Fund will limit transactions in futures and options on futures to the
extent necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in forward foreign exchange transactions, purchase and
sell options on currencies and purchase and sell currency futures and related
options thereon (collectively, "Currency Instruments") for the purpose of
hedging against the decline in the value of currencies in which its portfolio
holdings are denominated against the United States dollar.
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Forward foreign exchange transactions are OTC contracts to purchase or sell a
specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. The Fund will enter into
foreign exchange transactions for the purpose of hedging either a specific
transaction or a portfolio position. The Fund may enter into a forward foreign
exchange transaction for purposes of hedging a specific transaction by, for
example, entering into a contract to purchase a currency needed to settle a
security transaction or entering into a contract to sell a currency in which
the Fund anticipates receiving a dividend or distribution. The Fund may enter
into a forward foreign exchange transaction for purposes of hedging a portfolio
position by selling forward a currency in which a portfolio position of the
Fund is denominated or by entering into a contract to purchase a currency in
which the Fund anticipates acquiring a portfolio position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through the use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through the use of currency options. Currency
options are similar to options on securities, but in consideration for an
option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Options on Securities and
Securities Indices--Types of Options" above and "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
When entering into a transaction in a Currency Instrument, the Fund will not
hedge a currency substantially in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated in
such currency. In addition, the Fund will not incur potential net liabilities
of more than 33 1/3% of its total assets from Currency Instruments.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and lower its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.
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RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the
Fund will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
The Fund intends to enter transactions involving Strategic Instruments only
if there appears to be a liquid secondary market for such instruments or, in
the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a Strategic Instrument or the Fund will otherwise be able
to sell such instrument at an acceptable price. It may therefore not be
possible to close a position in a Strategic Instrument without incurring
substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign exchange
transactions, futures transactions, sales of put options) may expose the Fund
to potential losses which exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold or
(ii) for which the Manager anticipates the Fund can receive on each business
day at least two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC options
and the assets underlying written OTC options are illiquid securities. The Fund
has therefore adopted an investment policy pursuant to which it will not
purchase or sell OTC options (including OTC options on futures contracts) if,
as a result of such transactions, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
securities underlying OTC call options currently outstanding which have been
sold by the Fund and margin deposits on the Fund's outstanding OTC options
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are deemed to be illiquid or are
otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a dealer in U.S. government securities recognized as a "primary dealer" by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a
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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 exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a third-
party guaranty or other credit enhancement. In particular, the Fund will engage
in OTC Options, including 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.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited from purchasing directly by its
investment restrictions.
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APPENDIX B
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")--CORPORATE DEBT
RATINGS
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 in 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 and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
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DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt 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 earning coverage of fixed financial charges and high
internal cash generation; and
--well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME 2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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.
PRIME 3: 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.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning
ratings to such issuers, Moody's evaluates the financial strength of the
indicated 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.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of any
issuer whose securities or debt obligations you consider buying or selling.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of Moody's bond rating symbols is used in the quality ranking of
preferred stock. 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.
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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 a reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
a
An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and 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 "a" to "b": the modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S") ISSUE CREDIT RATINGS
A Standard & Poor's issue credit rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific program (including
ratings on medium term note programs and commercial paper programs). It takes
into consideration the creditworthiness of guarantors, insurers, or other forms
of credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated.
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The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors 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. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper. Short-
term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long-term obligations. The result is a dual rating,
in which the short-term rating addresses the put feature, in addition to the
usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
I.
Likelihood of Payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
II.
Nature of and provisions of the obligation; and
III.
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.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA
An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. Capacity to meet its financial commitment on the obligation
is extremely strong.
AA
An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A
An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB
An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
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Obligations rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB
An obligation rated "BB" is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B
An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB", but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC
An obligation rated "CCC" is currently vulnerable to non-payment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC
The rating "CC" is currently highly vulnerable to non-payment.
C
The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D
An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation 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 or the taking of similar action if payments on an
obligation are jeopardized.
N.R.
indicates not rated.
R This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
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A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligations.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an
obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
DESCRIPTION OF STANDARD & POOR'S RATING OUTLOOK AND CREDITWATCH
A Standard & Poor's Rating Outlook assesses the potential direction of an
issuer's long-term debt rating over the intermediate to longer term. In
determining a Rating Outlook, consideration is given to any changes in the
economic and/or fundamental business conditions. An Outlook is not necessarily
a precursor of a rating change or future CreditWatch action. Ratings appear on
CreditWatch when an event or deviation from an expected trend has occurred or
is expected and additional information is necessary to take a rating action.
For example, an issue is placed under such special surveillance as the result
of mergers, recapitalizations, regulatory actions, or unanticipated operating
developments. Such rating reviews normally are completed within 90 days, unless
the outcome of a specific event is pending. CreditWatch designations and Rating
Outlooks may be:
"Positive" indicates that ratings may be raised.
"Negative" means ratings may be lowered.
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"Stable" indicates that ratings are not likely to change.
"Developing" means ratings may be raised or lowered.
"N.M." means not meaningful.
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, B Preferred stock rated "BB", "B", and "CCC" are regarded, on balance,
CCC as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. 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.
66
<PAGE>
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.
N.R. 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.
The 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. [Preferred stock ratings are wholly unrelated to
Standard & Poor's earnings and dividend rankings for common stocks.]
The ratings are based on current information furnished to Standard & Poor's
by the issuer, or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S DUAL RATINGS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating symbols are
used for bonds to denote the long-term maturity and the commercial paper rating
symbols for the put option (for example, "AAA/A-1+"). With short-term demand
debt, Standard & Poor's note rating symbols are used with the short-term issue
credit rating symbols (for example, "SP-1+/A-1+").
67
<PAGE>
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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......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Middle East/Africa Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Middle East/Africa Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
- - - authorization form and agree to
This form when completed should be notify the Distributor of any
mailed to: purchases or sales made under a
Letter of Intention, Automatic
Merrill Lynch Middle East/Africa Investment Plan or Systematic
Fund, Inc. Withdrawal Plan. We guarantee the
c/o Merrill Lynch Financial Data shareholder's signature.
Services, Inc.
P.O. Box 45289 .....................................
Jacksonville, Florida 32232-5289 Dealer Name and Address
By: .................................
Authorized Signature of Dealer
[ ][ ][ ] [ ][ ][ ][ ][ ]
Branch Code F/C No.
...............
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
Taxpayer Identification No.
First Name Initial Last Name
Address.................................
Account Number ....................
........................................ (if existing account)
(Zip Code)
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 To...............................Bank
LYNCH MIDDLE EAST/AFRICA FUND, INC. (Investor's Bank)
AS INDICATED BELOW:
Bank Address.........................
Amount of each ACH debit $.........
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
(month) possible. drawn on my account by and payable
to Merrill Lynch Financial Data
I agree that you are drawing these Services, Inc., I agree that your
ACH debits voluntarily at my request rights in respect to each such debit
and that you shall not be liable for shall be the same as if it were a
any loss arising from any delay in check drawn on you and signed
preparing or failure to prepare any personally by me. This authority is
such debit. If I change banks or to remain in effect until revoked
desire to terminate or suspend this personally by me in writing. Until
program, I agree to notify you you receive such notice, you shall
promptly in writing. I hereby be fully protected in honoring any
authorize you to take any action to such debit. I further agree that if
correct erroneous ACH debits of my any such debit be dishonored,
bank account or purchases of Fund whether with or without cause and
shares including liquidating shares of whether intentionally or
the Fund and crediting my bank inadvertently, you shall be under no
account. I further agree that if a liability.
debit is not honored upon
presentation, Merrill Lynch Financial ............. ......................
Data Services, Inc. is authorized to Date Signature of
discontinue immediately the Automatic Depositor
Investment Plan and to liquidate
sufficient shares held in my account ............. ......................
to offset the purchase made with the Bank Account Signature of Depositor
returned dishonored debit. Number (If joint account,
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>
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<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<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....................................................... 53
Shareholder Inquiries..................................................... 53
Appendix A................................................................. 54
Appendix B................................................................. 60
Authorization Form......................................................... 69
</TABLE>
Code # 18415-0398
[LOGO]MERRILL LYNCH
MERRILL LYNCH
MIDDLE EAST/AFRICA
FUND, INC.
[ART]
PROSPECTUS
MARCH 4, 1998
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 4,
1998 (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 4, 1998
<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 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 fiscal years ended November 30, 1996 and 1997, the Fund's portfolio
turnover rates were 46.36% and 78.12%, 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'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.
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange which may expose the Fund to
certain risks. These investment practices and the associated risks are
described in detail in Appendix A attached to the Prospectus.
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
2
<PAGE>
may invest in securities of a single issuer. The Fund's investments are
limited, however, in order to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes." To qualify, the Fund complies with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value
of its total assets will be invested in the securities of a single issuer, and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's net asset
value may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other 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.
3
<PAGE>
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.
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
4
<PAGE>
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which, for this purpose and under the Investment Company Act, means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. Invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
2. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed to be the making of
investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances and repurchase agreements and purchase and
sale contracts and any similar instruments shall not be deemed to be the
making of a loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set forth in 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:
5
<PAGE>
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently allows the Fund to purchase the securities of other investment
companies if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company. Investments by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies. As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or registered unit
investment trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of
funds" provisions) of the Investment Company Act, at any time its shares
are owned by another investment company that is part of the same group of
investment companies as the Fund.
b. Make short sales of securities or maintain a short position except to
the extent permitted by applicable law. The Fund does not, however,
currently intend to engage in short sales, except short sales "against the
box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions, or which cannot otherwise be marketed,
redeemed, 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 over-the-
counter ("OTC") options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted
6
<PAGE>
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 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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager of
the Fund, including their ages and their principal occupations for at least the
last five years, is set forth below. Unless otherwise noted, the address of the
portfolio manager and of each executive officer and Director is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
7
<PAGE>
Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Manager
(which term as used herein includes its corporate predecessors) since 1997;
Chairman of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
Donald Cecil (71)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (71)--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 (66)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania, from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (60)--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), and Alexander's Inc. (real estate company).
Edward D. Zinbarg (63)--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 (57)--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 Merrill Lynch Funds Distributor,
Inc. ("MLFD" or the "Distributor") since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
A. Grace Pineda (41)--Senior Vice President and Portfolio Manager(1)(2)--
First Vice President of the Manager since 1997; Vice President of the Manager
from 1989 to 1997 and Senior Portfolio Manager thereof since 1989.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager since 1990.
8
<PAGE>
Gerald M. Richard (48)--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)--Vice President of the Manager since
1998; attorney associated with the Manager and FAM since 1994; associate at
Sullivan & Cromwell from 1990 to 1994.
At February 2, 1998, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of approximately 3.2% of the outstanding shares of
the Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and
the other officers of the Fund, owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.
- --------
(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.
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, 1997, fees and
expenses paid to such non-affiliated Directors aggregated $37,437.
The following table sets forth for the fiscal year ended November 30, 1997,
compensation paid by the Fund to the non-affiliated Directors, and for the
calendar year ended December 31, 1997, 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 $280,350
Edward H. Meyer................. $6,000 None $222,100
Charles C. Reilly............... $7,500 None $313,000
Richard R. West................. $7,500 None $290,000
Edward D. Zinbarg............... $7,500 None $133,500
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
Mr. Cecil (33 registered investment companies consisting of 33
portfolios); Mr. Meyer (33 registered investment companies consisting of
33 portfolios); Mr. Reilly (46 registered investment companies consisting
of 59 portfolios); Mr. West (47 registered investment companies consisting
of 69 portfolios) and Mr. Zinbarg (18 registered investment companies
consisting of 18 portfolios).
9
<PAGE>
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 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 years
ended November 30, 1996 and 1997, the total investment advisory fees earned by
the Manager pursuant to the Management Agreement aggregated $95,530, $97,346
and $85,890, respectively, all of which were voluntarily waived by the Manager.
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. For the period December 30, 1994
(commencement of operations) to November 30, 1995 and for the fiscal years
ended November 30, 1996 and 1997, no sub-advisory fees were paid by the Manager
to MLAM U.K. pursuant to such agreement.
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. 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."
10
<PAGE>
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. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will continue in effect for a period of two years from the
date of execution and will remain in effect from year to year thereafter if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contracts or "interested persons" (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of a majority of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share represents an identical interest in the
investment portfolio of the Fund, and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan).
The Merrill Lynch Select Pricing SM 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 use the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed 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."
11
<PAGE>
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
period December 30, 1994 (commencement of operations) to November 30, 1995 or
for the fiscal years ended November 30, 1996 or 1997. 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 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 fiscal
year ended November 30, 1997 were $6,296, of which the Distributor received
$637 and Merrill Lynch received $5,659.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or their own
account and single purchases by a trustee or other fiduciary purchasing shares
for a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that 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
12
<PAGE>
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 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
13
<PAGE>
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 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.
14
<PAGE>
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 that 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 that (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities at all times shall remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, that 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.
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
15
<PAGE>
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 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.
16
<PAGE>
The following table sets forth comparative information as of November 30,
1997, 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, 1997
---------------------------------------------------------------------------------
(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>
CLASS B SHARES, FOR THE PERIOD
DECEMBER 30, 1994
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1997:
Under NASD Rule as
Adopted................ $10,633 $665 $135 $800 $271 $529 $45
Under Distributor's
Voluntary Waiver....... $10,633 $665 $ 53 $718 $271 $447 $45
CLASS C SHARES, FOR THE PERIOD
DECEMBER 30, 1994
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1997:
Under NASD Rule as
Adopted................ $ 1,624 $101 $ 19 $120 $ 22 $ 98 $ 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.
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.
17
<PAGE>
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 any 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 certain
instances, including 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 in the case of such withdrawals 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 years
ended November 30, 1996 and 1997, with respect to redemptions of Class B
shares, the Distributor received CDSCs of $20,279, $54,951 and $45,331,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs payable
to the Distributor during the fiscal year ended November 30, 1997 may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs. For the period
December 30, 1994 (commencement of operations) to November 30, 1995 and for the
fiscal years ended November 30, 1996 and 1997, with respect to redemptions of
Class C shares, the Distributor received CDSCs of $800, $1,532 and $1,686,
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. 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 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. 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 fiscal year ended November
30, 1997, the Fund paid total brokerage commissions of $43,195, of which $2,930
or 6.78% was paid to Merrill Lynch for effecting 11.44% of the aggregate dollar
amount of transactions in which
18
<PAGE>
the Fund paid brokerage commissions. 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.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Board of Directors of the Fund
that either comply with rules adopted by the Commission or with interpretations
of the Commission staff. See "Investment Objective and Policies--Investment
Restrictions."
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable
19
<PAGE>
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 that they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with 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, Martin Luther King, Jr. 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. 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
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.
20
<PAGE>
Portfolio securities including ADRs, EDRs or GDRs that are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. 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 the 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
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.
21
<PAGE>
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) or 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. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Shareholders, at any time, may notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Fund's
Transfer Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's
account is maintained with the Transfer Agent 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.
22
<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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends-
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
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.
23
<PAGE>
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. 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. In the case of foreign taxes passed through by a RIC, the holding
period requirements referred to above must be met by both the shareholder and
the RIC. 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 and other information needed to claim the foreign tax credit.
For this purpose, the Fund will allocate foreign taxes and foreign source
income among the Class A, Class B, Class C and Class D shareholders according
to a method (which it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to 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.
24
<PAGE>
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 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 recent legislation
the Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares over
their adjusted basis and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge with respect
to 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.
25
<PAGE>
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.
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.
26
<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.
27
<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, 1997............... 13.77% $1,137.70 14.67% $1,146.70
Inception (December 30,
1994) to November 30,
1997................... 5.98% $1,184.90 6.21% $1,192.40
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year Ended November 30,
1997................... 22.43% $1,224.30 21.02% $1,210.20
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,
1997................... 18.49% $1,184.90 19.24% $1,192.40
<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, 1997............... 18.06% $1,180.60 13.32% $1,133.20
Inception (December 30,
1994) to November 30,
1997................... 6.93% $1,216.10 5.69% $1,175.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year Ended November 30,
1997................... 21.42% $1,214.20 21.95% $1,219.50
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,
1997................... 21.61% $1,216.10 17.53% $1,175.30
</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.
28
<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 were 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, 1997, is set forth
below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $988,906 $5,947,031 $722,374 $1,109,189
======== ========== ======== ==========
Number of Shares Outstanding......... 90,262 547,159 66,318 101,468
======== ========== ======== ==========
Net Asset Value Per Share (net assets
divided by number of shares out-
standing)........................... $ 10.96 $ 10.87 $ 10.89 $ 10.93
Sales Charge for Class A and Class D
Shares: 5.25% of offering price
(5.54% of net asset value per
share)*............................. .61 ** ** .61
-------- ---------- -------- ----------
Offering Price....................... $ 11.57 $ 10.87 $ 10.89 $ 11.54
======== ========== ======== ==========
</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.
29
<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 2, 1998.
30
<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, 1997, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the two-year
period 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, 1997, by correspondence with the custodians. 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 referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Middle East/Africa Fund, Inc. as of November 30, 1997, 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 14, 1998
31
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Botswana Multi-Industry 106,802 Sechaba Breweries Ltd. (e) $ 85,845 $ 112,356 1.3%
---------- ---------- ----------
Total Investments in Botswana 85,845 112,356 1.3
========== ========== ==========
Ghana Beverages & Tobacco 950,048 Guiness Ghana Ltd. 165,147 277,115 3.2
---------- ---------- ----------
Total Investments in Ghana 165,147 277,115 3.2
========== ========== ==========
Morocco Banking 3,428 Banque Marocaine du Commerce
Exterieure (GDR)(b) 116,045 208,474 2.4
Building Materials 2,000 Les Ciments de l'Oriental 87,576 160,502 1.8
---------- ---------- ----------
Total Investments in Morocco 203,621 368,976 4.2
========== ========== ==========
South Africa Banking 4,264 Nedcor Ltd. (GDR)(b)(d) 81,032 96,579 1.1
Beverages 10,231 South African Breweries Ltd. 298,069 250,770 2.9
Beverages & Tobacco 20,200 Rembrandt Group Ltd. 212,748 154,985 1.8
Broadcasting &
Publishing 14,600 Nasionale Pers Beperk 133,662 120,288 1.4
Diversified 26,300 Billiton PLC (c) 95,069 64,670 0.7
16,000 +Billiton PLC (ADR)(c) 58,450 39,200 0.4
19,596 Johnnies Industrial Corp., Ltd. 238,518 213,114 2.4
10,350 Rembrandt Controlling Investments
Ltd. 71,363 51,590 0.6
23,100 Sasol Ltd. 297,437 232,903 2.7
---------- ---------- ----------
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
760,837 601,477 6.8
Entertainment 435 Sun International (Bophuthatswana)
Ltd. 552 179 0.0
Financial Services 13,050 First National Bank Holdings Ltd. 80,725 110,206 1.3
Foreign Government ZAL 6,950,000 South African Bond, 12% due
Obligations 2/28/2005 1,416,938 1,293,246 14.7
Merchandising 34,620 Pick'n Pay Stores Ltd. 39,456 54,907 0.6
433 Pick'n Pay Stores Ltd. (N Shares) 603 598 0.0
--------- --------- ----
40,059 55,505 0.6
Metals -- Non-Ferrous 63,075 Gencor Limited 158,278 98,088 1.1
22,571 Gencor Limited (ADR)(a) 55,535 35,089 0.4
--------- --------- ----
213,813 133,177 1.5
Mining 2,660 Anglo American Corp. of South
Africa, Ltd. (ADR)(a) 167,591 108,727 1.2
2,400 De Beers Centenary AG 77,488 50,422 0.6
1,370 Gold Fields of South Africa Ltd. 35,013 20,317 0.2
36 JCI Company Limited 367 133 0.0
--------- --------- ----
280,459 179,599 2.0
Retail 113,690 Metro Cash & Carry Ltd. 99,977 106,548 1.2
13,494 Pepkor Ltd. (Ordinary) 63,714 83,382 1.0
--------- --------- ----
163,691 189,930 2.2
--------- --------- ----
Total Investments in South Africa 3,682,585 3,185,941 36.3
========= ========= ====
Zimbabwe Beverages & Tobacco 80,656 +Delta Corporation 49,265 84,842 1.0
Entertainment & Leisure 183,782 Zimbabwe Sun International 72,119 55,961 0.6
Real Estate 125,869 Hippo Valley Estates 47,302 100,173 1.1
--------- --------- ----
Total Investments in Zimbabwe 168,686 240,976 2.7
========= ========= ====
Total Investments in Africa 4,305,884 4,185,364 47.7
========= ========= ====
MIDDLE
EAST
Egypt Banking 5,110 Commercial International Bank
(Egypt) S.A.E. (CIB) 60,437 103,917 1.2
7,000 Commercial International Bank
(Egypt) S.A.E. (CIB) (GDR)(b) 185,500 142,625 1.6
--------- --------- ----
245,937 246,542 2.8
Beverages 8,989 +Al-Ahram (Pyramids) Beverages
(GDR)(b)(d) 139,329 267,423 3.0
Engineering & Construction 11,810 Torah Portland Cement Company,
Egypt 215,720 299,688 3.4
Housing 1,270 Nasr City Company for Housing &
Reconstruction 27,807 86,089 1.0
Industrial -- Other 24,300 +Paints & Chemicals Industries
(PACHIN) (GDR)(b) 285,525 243,000 2.8
--------- --------- ----
Total Investments in Egypt 914,318 1,142,742 13.0
========= ========= ====
Israel Banking 86,852 Bank Hapoalim Ltd. 139,943 212,350 2.4
102,072 Bank Leumi Le-Israel 143,402 163,197 1.9
--------- --------- ----
283,345 375,547 4.3
Food Chain 20,607 Supersol Ltd. 55,496 58,022 0.7
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Merchandising 17,458 +Blue Square Chain Stores Properties
and Investments Ltd. 95,151 159,571 1.8
--------- --------- ----
Total Investments in Israel 433,992 593,140 6.8
========= ========= ====
Jordan Transportation Services 6,406 +Aramex International Limited
(ADR)(a) 48,286 93,688 1.1
--------- --------- ----
Total Investments in Jordan 48,286 93,688 1.1
========= ========= ====
Lebanon Banking 6,300 Banque Audi (GDR)(b) 179,550 189,787 2.2
12,000 +Banque Libanaise (GDR)(b)(d) 145,500 231,000 2.6
--------- --------- ----
Total Investments in Lebanon 325,050 420,787 4.8
========= ========= ====
Turkey Banking 2,959,000 Akbank T.A.S. (Ordinary) 188,496 192,959 2.2
4,290,000 Yapi ve Kredi Bankasi A.S. 103,740 133,843 1.5
--------- --------- ----
292,236 326,802 3.7
Building & Construction 2,335,701 Adana Cimento Sanayii (Class A) 71,880 203,084 2.3
Building Products 1,823,053 Akcansa Cimento A.S. 274,573 317,020 3.6
Telecommunications 1,133,695 +Northern Electric Telekomunikasyon
& Equipment A.S. (NETAS) 427,433 446,474 5.1
--------- --------- ----
Total Investments in Turkey 1,066,122 1,293,380 14.7
========= ========= ====
Total Investments in the Middle
East 2,787,768 3,543,737 40.4
========= ========= ====
US Government US$ 815,000 Federal Home Loan Mortgage Corp.,
Agency Obligations* 5.63% due 12/01/1997 814,745 814,745 9.3
--------- --------- ----
Total Investments in Short-Term
Securities 814,745 814,745 9.3
========= ========= ====
Total Investments $7,908,397 8,543,846 97.4
========== ========= ====
Other Assets Less 223,654 2.6
Liabilities --------- ----
Net Assets $8,767,500 100.0%
========== =====
</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).
(c) Consistent with the general policy of the Securities and Exchange
Commission, the nationality or domicile of an issuer for determination
of foreign issuer status may be (i) the country under whose laws the
issue is organized, (ii) the country in which the issuer's securities
are principally traded, or (iii) the country in which the issuer derives
a significant proportion (at least 50%) of its revenue or profits from
goods produced or sold, investments made, or services performed in the
country, or in which at least 50% of the assets of the issuer are situated.
(d) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e) Formerly known as Sechaba Investment Trust.
+ Non-income producing securities.
See Notes to Financial Statements.
34
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of November 30, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $7,908,397)(Note 1a) $8,543,846
Cash 261
Foreign cash (Note 1b) 17,159
Receivables:
Interest $42,708
Securities sold 31,993
Dividends 23,557
Capital shares sold 5,683 103,941
-------- ----------
Deferred organization expenses (Note 1f) 124,774
Prepaid registration fees and other assets (Note 1f) 99,624
----------
Total assets 8,889,605
----------
Liabilities: Payables:
Capital shares redeemed 26,692
Distributor (Note 2) 5,434 32,126
-------- ----------
Accrued expenses and other liabilities 89,979
----------
Total liabilities 122,105
----------
Net Assets: Net assets $8,767,500
==========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $9,026
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 54,716
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 6,632
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 10,147
Paid-in capital in excess of par 8,358,173
Undistributed investment income -- net 236,136
Accumulated realized capital losses on investments and foreign currency
transactions -- net (Note 6) (540,418)
Unrealized appreciation on investments and foreign currency transactions
-- net 633,088
----------
Net assets $8,767,500
==========
Net Asset Class A -- Based on net assets of $988,906 and 90,262 shares outstanding $10.96
==========
Value:
Class B -- Based on net assets of $5,947,031 and 547,159 shares outstanding $10.87
==========
Class C -- Based on net assets of $722,374 and 66,318 shares outstanding $10.89
==========
Class D -- Based on net assets of $1,109,189 and 101,468 shares outstanding $10.93
==========
See Notes to Financial Statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1997
<S> <C> <C> <C>
Investment Interest and discount earned $241,400
Income Dividends (net of $7,960 foreign withholding tax) 178,710
----------
(Notes 1d & 1e):
Total income 420,110
----------
Expenses: Registration fees (Note 1f) $ 89,995
Investment advisory fees (Note 2) 85,890
Professional fees 73,600
Accounting services (Note 2) 66,132
Printing and shareholders reports 65,219
Account maintenance and distribution fees -- Class B (Note 2) 60,469
Amortization of organization expenses (Note 1f) 59,892
Custodian fees 49,741
Directors' fees and expenses 37,437
Transfer agent fees -- Class B (Note 2) 12,582
Account maintenance and distribution fees -- Class C (Note 2) 6,751
Pricing fees 3,862
Account maintenance fees -- Class D (Note 2) 2,614
Transfer agent fees -- Class D (Note 2) 1,782
Transfer agent fees -- Class C (Note 2) 1,478
Transfer agent fees -- Class A (Note 2) 1,384
Other 4,811
Total expenses before reimbursement 623,639
Reimbursement of expenses (Note 2) (510,888)
----------
Total expenses after reimbursement 112,751
----------
Investment income -- net 307,359
----------
Realized & Realized gain (loss) from:
Unrealized Gain (Loss) Investments -- net 139,643
On Investments & Foreign currency transactions -- net (36,938) 102,705
Foreign Currency ---------- ----------
Transactions -- Net Change in unrealized appreciation/depreciation on:
(Notes 1b, 1c, Investments -- net 990,420
1e & 3): Foreign currency transactions -- net 2,094 992,514
---------- ----------
Net realized and unrealized gain on investments and foreign currency
transactions 1,095,219
----------
Net Increase in Net Assets Resulting from Operations $1,402,578
==========
See Notes to Financial Statements.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
November 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $ 307,359 $ 324,969
Realized gain (loss) on investments and foreign currency transactions -- net 102,705 (723,989)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions -- net 992,514 (34,017)
---------- ------------
Net increase (decrease) in net assets resulting from operations 1,402,578 (433,037)
---------- ------------
Dividends & Investment income -- net:
Distributions to Class A (18,402) (51,662)
Shareholders Class B (194,967) (541,025)
(Note 1g): Class C (26,076) (71,137)
Class D (41,949) (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 (281,394) (812,389)
---------- ------------
Capital Share Net decrease in net assets derived from capital share transactions (112,890) (1,925,740)
Transactions (Note 4): --------- -----------
Net Assets: Total increase (decrease) in net assets 1,008,294 (3,171,166)
Beginning of year 7,759,206 10,930,372
---------- ------------
End of year* $8,767,500 $ 7,759,206
========== ============
*Undistributed investment income -- net (Note 1h) $ 236,136 $ 247,109
========== ============
See Notes to Financial Statements.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A Class B
For the For the
Period Period
The following per share data Dec. 30, Dec. 30,
and ratios have been derived For the Year 1994++ to For the Year 1994++ to
from information provided in Ended Nov. 30, Nov. 30, Ended Nov. 30, Nov. 30,
the financial statements. 1997+ 1996+ 1995 1997+ 1996+ 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of period $ 9.40 $10.66 $ 10.00 $ 9.31 $10.56 $ 10.00
------ ------ ----------- ------ ------ -----------
Performance:
Investment income -- net .48 .42 .57 .37 .32 .79
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net 1.52 (.80) .09 1.51 (.80) (.23)
------ ------ ----------- ------ ------ -----------
Total from investment operations 2.00 (.38) .66 1.88 (.48) .56
------ ------ ----------- ------ ------ -----------
Less dividends and distributions:
Investment income -- net (.44) (.85) -- (.32) (.74) --
Realized gain on investments -- net -- (.03) -- -- (.03) --
------ ------ ----------- ------ ------ -----------
Total dividends and distributions (.44) (.88) -- (.32) (.77) --
------ ------ ----------- ------ ------ -----------
Net asset value, end of period $10.96 $9.40 $10.66 $10.87 $9.31 $10.56
====== ====== =========== ====== ====== ===========
Total Investment Based on net asset value per share 22.43% (4.17%) 6.60%+++++ 21.02% (5.14%) 5.60%+++++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .47% .47% .00%* 1.51% 1.50% 1.01%*
Net Assets: ======== ======== ======== ======== ======== ========
Expenses 6.36% 4.84% 4.63%* 7.46% 5.90% 5.68%*
====== ====== =========== ====== ====== ===========
Investment income -- net 4.35% 4.24% 8.43%* 3.40% 3.15% 8.33%*
====== ====== =========== ====== ====== ===========
Supplemental Net assets, end of period (in thousands) $989 $399 $648 $5,947 $5,699 $7,701
====== ====== =========== ====== ====== ===========
Data:
Portfolio turnover 78.12% 46.36% 40.97% 78.12% 46.36% 40.97%
====== ====== =========== ====== ====== ===========
Average commission rate paid++ $.0012 $.0022 -- $.0012 $.0022 --
====== ====== =========== ====== ====== ===========
<CAPTION>
Class C Class D
For the For the
Period Period
The following per share data Dec. 30, Dec. 30,
and ratios have been derived For the Year 1994++ to For the Year 1994++ to
from information provided in Ended Nov. 30, Nov. 30, Ended Nov. 30, Nov. 30,
the financial statements. 1997+ 1996+ 1995 1997+ 1996+ 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Net asset value, beginning of period $ 9.31 $10.56 $ 10.00 $ 9.38 $10.63 $ 10.00
------ ------- ----------- ------ ------ -----------
Performance:
Investment income -- net .36 .31 .83 .46 .40 .77
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net 1.55 (.79) (.27) 1.50 (.80) (.14)
------ ------ ----------- ------ ------ -----------
Total from investment operations 1.91 (.48) .56 1.96 (.40) .63
------ ------ ----------- ------ ------ -----------
Less dividends and distributions:
Investment income -- net (.33) (.74) -- (.41) (.82) --
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Realized gain on investments -- net -- (.03) -- -- (.03) --
------ ------ ----------- ------ ------ -----------
Total dividends and distributions (.33) (.77) -- (.41) (.85) --
------ ------ ----------- ------ ------ -----------
Net asset value, end of period $10.89 $ 9.31 $ 10.56 $10.93 $ 9.38 $ 10.63
====== ====== =========== ====== ====== ===========
Total Investment Based on net asset value per share 21.42% (5.16%) 5.60%+++++ 21.95% (4.31%) 6.30%+++++
====== ====== =========== ====== ====== ===========
Return:**
Ratios to Average Expenses, net of reimbursement 1.52% 1.50% 1.01%* .72% .72% .25%*
====== ====== =========== ====== ====== ===========
Net Assets:
Expenses 7.47% 5.91% 5.67%* 6.67% 5.08% 4.89%*
====== ====== =========== ====== ====== ===========
Investment income -- net 3.33% 3.14% 8.45%* 4.18% 4.01% 9.07%*
====== ====== =========== ====== ====== ===========
Supplemental Net assets, end of period (in thousands) $ 723 $ 692 $ 1,012 $1,109 $ 969 $ 1,569
====== ====== =========== ====== ====== ===========
Data:
Portfolio turnover 78.12% 46.36% 40.97% 78.12% 46.36% 40.97%
====== ====== =========== ====== ====== ===========
Average commission rate paid++ $.0012 $.0022 -- $.0012 $.0022 --
====== ====== =========== ====== ====== ===========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average outstanding shares.
++ 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.
++++ Commencement of operations.
+++++ Aggregate total investment return.
See Notes to Financial Statements.
39
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc., November 30, 1997
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 Pricingsm 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 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.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss
on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
[bullet] Forward foreign exchange contracts -- The Fund is authorized
to enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on operations
is recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
[bullet] Foreign currency options and futures -- The Fund may also
purchase or sell listed or over-the-counter foreign currency options,
foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect
to hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to
be purchased by the Fund.
[bullet] Financial futures contracts -- The Fund may purchase or sell
stock index futures contracts and options on such futures contracts.
Upon entering into a contract, the Fund deposits and maintains as
40
<PAGE>
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
dates. Dividends from foreign securities where the ex-dividend date
may have passed are subsequently recorded when the Fund has determined
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.
(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 adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $36,938
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 and 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, 1997, MLAM earned fees of $85,890, all of
which was voluntarily waived. MLAM also reimbursed the Fund for
additional expenses of $424,998.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays
the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account 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, 1997, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales of
the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class D $637 $5,659
41
<PAGE>
For the year ended November 30, 1997, MLPF&S received contingent
deferred sales charges of $45,331 and $1,686 relating to transactions in
Class B and Class C Shares, respectively.
In addition, MLPF&S received $2,930 in commissions on the execution of
portfolio security transactions for the Fund for the year ended November
30, 1997.
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, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for year ended November 30, 1997 were $6,432,529 and $5,970,231,
respectively.
Net realized and unrealized gains (losses) as of November 30, 1997
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Long-term investments $139,643 $635,449
Foreign currency transactions (36,938) (2,361)
-------- ----------
Total $102,705 $633,088
==========
</TABLE>
As of November 30, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $635,449, of which $1,320,368 related
to appreciated securities and $684,919 related to depreciated
securities. The aggregate cost of investments at November 30, 1997
for Federal income tax purposes was $7,908,397.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$112,890 and $1,925,740 for the years ended November 30, 1997 and
November 30, 1996, respectively.
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended November 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 70,183 $ 762,817
Shares issued to shareholders in
reinvestment of dividends 770 6,712
-------- -----------
Total issued 70,953 769,529
Shares redeemed (23,107) (254,547)
-------- -----------
Net increase 47,846 $ 514,982
======== ===========
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 B Shares for the Year Dollar
Ended November 30, 1997 Shares Amount
Shares sold 139,528 $ 1,537,142
Shares issued to shareholders in
reinvestment of dividends 5,639 49,231
-------- -----------
Total issued 145,167 1,586,373
Shares redeemed (210,113) (2,174,324)
-------- -----------
Net decrease (64,946) $ (587,951)
======== ===========
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)
======== ===========
</TABLE>
42
<PAGE>
Class C Shares for the Year Dollar
Ended November 30, 1997 Shares Amount
Shares sold 40,916 $ 447,258
Shares issued to shareholders in
reinvestment of dividends 1,129 9,847
-------- -----------
Total issued 42,045 457,105
Shares redeemed (49,974) (503,688)
-------- -----------
Net decrease (7,929) $ (46,583)
======== ===========
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 D Shares for the Year Dollar
Ended November 30, 1997 Shares Amount
Shares sold 30,184 $ 334,924
Shares issued to shareholders in
reinvestment of dividends 1,282 11,183
-------- -----------
Total issued 31,466 346,107
Shares redeemed (33,347) (339,445)
-------- -----------
Net increase (decrease) (1,881) $ 6,662
======== ===========
Class D Shares for the Year Dollar
Ended 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)
======= =========
The total redemption fees for Merrill Lynch Middle East/Africa Fund,
Inc., amounted to $9,687 for the year ended November 30, 1997.
5. Commitments:
At November 30, 1997, the Fund had entered into foreign exchange
contracts under which it had agreed to sell various foreign currencies
with approximate values of $17,000.
6. Capital Loss Carryforward:
At November 30, 1997, the Fund had a net capital loss carryforward of
approximately $540,000, 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, 1997, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $.381436 per Class A Share,
$.274264 per Class B Share, $.283183 per Class C Share, and $.357533
per Class D Share, payable on December 29, 1997 to shareholders of
record as of December 18, 1997.
43
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Other Investment Policies and Practices.................................. 2
Investment Restrictions.................................................. 4
Management of the Fund.................................................... 7
Directors and Officers................................................... 7
Compensation of Directors................................................ 9
Management and Advisory Arrangements..................................... 10
Purchase of Shares........................................................ 11
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 12
Reduced Initial Sales Charges............................................ 13
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 15
Distribution Plans....................................................... 15
Limitations on the Payment of Deferred Sales Charges..................... 16
Redemption of Shares...................................................... 17
Deferred Sales Charges--
Class B and Class C Shares.............................................. 18
Portfolio Transactions and Brokerage...................................... 18
Determination of Net Asset Value.......................................... 20
Shareholder Services...................................................... 21
Investment Account....................................................... 21
Automatic Investment Plans............................................... 22
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 22
Taxes..................................................................... 23
Tax Treatment of Futures, Options and Forward Foreign Exchange
Transactions............................................................ 25
Special Rules for Certain Foreign Currency Transactions.................. 26
Performance Data.......................................................... 27
General Information....................................................... 28
Description of Shares.................................................... 28
Computation of Offering Price Per Share.................................. 29
Independent Auditors..................................................... 30
Custodian................................................................ 30
Transfer Agent........................................................... 30
Legal Counsel............................................................ 30
Reports to Shareholders.................................................. 30
Additional Information................................................... 30
Independent Auditors' Report.............................................. 31
Financial Statements...................................................... 32
</TABLE>
Code # 18412-0398
[LOGO]MERRILL LYNCH
MERRILL LYNCH
MIDDLE EAST/AFRICA
FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
MARCH 4, 1998
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 each of the years in the two year period
ended November 30, 1997 and the period December 30, 1994
(commencement of operations) to November 30, 1995.
Contained in Part B:
Schedule of Investments as of November 30, 1997.
Statement of Assets and Liabilities as of November 30, 1997.
Statement of Operations for the year ended November 30, 1997.
Statements of Changes in Net Assets for each of the years in the two
year period ended November 30, 1997.
Financial Highlights for each of the years in the two year period
ended November 30, 1997 and 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.(c)
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.(c)
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 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P.(d)
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.(e)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(e)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.(e)
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares.(e)
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.(f)
</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 March 25, 1997 as an Exhibit to Post-Effective Amendment No. 4 to
the Registration Statement.
(d) Filed on December 22, 1994 as an Exhibit to Pre-Effective Amendment No. 2
to the Registration Statement.
(e) Filed on June 22, 1995 as an Exhibit to Post-Effective Amendment No. 2 to
the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
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 JANUARY 31, 1998*
-------------- -----------------
<S> <C>
Class A Common Stock, par value $0.10 per share............... 107
Class B Common Stock, par value $0.10 per share............... 760
Class C Common Stock, par value $0.10 per share............... 131
Class D Common Stock, par value $0.10 per share............... 132
</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 ("Merrill Lynch").
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, the Prospectus or the 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
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch 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 Growth 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 Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley,
a division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end registered 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
C-4
<PAGE>
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund
III, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Fund,
Inc., MuniHoldings Fund II, Inc., MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of 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 and
director or trustee, 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 Services...... General Partner General Partner of FAM
Arthur Zeikel........... Chairman Chairman of FAM since 1997; President
of MLAM and FAM from 1977 to 1997;
Chairman of Princeton Services since
1997; Director of Princeton Services
since 1993; President of Princeton
Services from 1993 to 1997;
Executive Vice President of ML & Co.
since 1990
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) OTHER SUBSTANTIAL BUSINESS,
NAME WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ---------------- ----------------------------------
<S> <C> <C>
Jeffrey M. Peek......... President President of FAM since 1997;
President and Director of Princeton
Services since 1997; 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.
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice
President of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
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 Secretary of FAM;
General Counsel Senior Vice President,
and Secretary General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Debra W. Landsman- Senior Vice President Senior Vice President of FAM; Senior
Yaros.................. Vice President of Princeton
Services; Vice President of MLFD
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
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) OTHER SUBSTANTIAL BUSINESS,
NAME WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ---------------- ----------------------------------
<S> <C> <C>
Richard L. Senior Vice President Senior Vice President of FAM; Senior
Reller........... Vice President of Princeton
Services; Director of MLFD
Gerald M. Senior Vice President Senior Vice President and Treasurer
Richard.......... and Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Gregory D. Upah... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Ronald L. Senior Vice President Senior Vice President of FAM; Senior
Welburn.......... Vice President of Princeton Services
</TABLE>
(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., Corporate High Yield Fund III,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Consults International Portfolio, Merrill Lynch
Convertible Fund, Inc., 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 Growth 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 Real Estate 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, 1995, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert and Richard are officers of one or
more of the registered investment companies listed in the first two paragraphs
of this Item 28:
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman Chairman of the Manager and FAM;
Chairman and Director of Princeton
Services; President of Princeton
Services from 1993 to 1997;
President of the Manager and FAM
from 1977 to 1997; Executive Vice
President of ML & Co.
Alan J. Albert.......... Senior Managing Vice President of the Manager
Director
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
of the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
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 registered 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 registered 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,
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............. President and Director Executive Vice President
Richard L. Reller.......... Director None
Thomas J. Verage........... Director None
William E. Aldrich......... Senior Vice President None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Michael G. Clark........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
</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>
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 its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its 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 4th day of March
1998.
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 Post-
Effective Amendment to the 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
- ------------------------------------- Director
(ARTHUR ZEIKEL) (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
*By: ________________________________ March 4, 1998
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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> 001
<NAME> MERRILL LYNCH MIDDLE EAST AFRICA FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 7908397
<INVESTMENTS-AT-VALUE> 8543846
<RECEIVABLES> 103941
<ASSETS-OTHER> 241818
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8889605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 122105
<TOTAL-LIABILITIES> 122105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8438694
<SHARES-COMMON-STOCK> 90262
<SHARES-COMMON-PRIOR> 42416
<ACCUMULATED-NII-CURRENT> 236136
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (540418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 633088
<NET-ASSETS> 988906
<DIVIDEND-INCOME> 178710
<INTEREST-INCOME> 241400
<OTHER-INCOME> 0
<EXPENSES-NET> (112751)
<NET-INVESTMENT-INCOME> 307359
<REALIZED-GAINS-CURRENT> 102705
<APPREC-INCREASE-CURRENT> 992514
<NET-CHANGE-FROM-OPS> 1402578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18402)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 70183
<NUMBER-OF-SHARES-REDEEMED> (23107)
<SHARES-REINVESTED> 770
<NET-CHANGE-IN-ASSETS> 1008294
<ACCUMULATED-NII-PRIOR> 247109
<ACCUMULATED-GAINS-PRIOR> (680061)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 623639
<AVERAGE-NET-ASSETS> 823536
<PER-SHARE-NAV-BEGIN> 9.40
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> 1.52
<PER-SHARE-DIVIDEND> (.44)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.96
<EXPENSE-RATIO> 6.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH MIDDLE EAST AFRICA FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 7908397
<INVESTMENTS-AT-VALUE> 8543846
<RECEIVABLES> 103941
<ASSETS-OTHER> 241818
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8889605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 122105
<TOTAL-LIABILITIES> 122105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8438694
<SHARES-COMMON-STOCK> 547159
<SHARES-COMMON-PRIOR> 612105
<ACCUMULATED-NII-CURRENT> 236136
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (540418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 633088
<NET-ASSETS> 5947031
<DIVIDEND-INCOME> 178710
<INTEREST-INCOME> 241400
<OTHER-INCOME> 0
<EXPENSES-NET> (112751)
<NET-INVESTMENT-INCOME> 307359
<REALIZED-GAINS-CURRENT> 102705
<APPREC-INCREASE-CURRENT> 992514
<NET-CHANGE-FROM-OPS> 1402578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (194967)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139528
<NUMBER-OF-SHARES-REDEEMED> (210113)
<SHARES-REINVESTED> 5639
<NET-CHANGE-IN-ASSETS> 1008294
<ACCUMULATED-NII-PRIOR> 247109
<ACCUMULATED-GAINS-PRIOR> (680061)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 623639
<AVERAGE-NET-ASSETS> 6063534
<PER-SHARE-NAV-BEGIN> 9.31
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> 1.51
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.87
<EXPENSE-RATIO> 7.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH MIDDLE EAST AFRICA FUND, INC. CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 7908397
<INVESTMENTS-AT-VALUE> 8543846
<RECEIVABLES> 103941
<ASSETS-OTHER> 241818
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8889605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 122105
<TOTAL-LIABILITIES> 122105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8438694
<SHARES-COMMON-STOCK> 66318
<SHARES-COMMON-PRIOR> 74247
<ACCUMULATED-NII-CURRENT> 236136
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (540418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 633088
<NET-ASSETS> 722374
<DIVIDEND-INCOME> 178710
<INTEREST-INCOME> 241400
<OTHER-INCOME> 0
<EXPENSES-NET> (112751)
<NET-INVESTMENT-INCOME> 307359
<REALIZED-GAINS-CURRENT> 102705
<APPREC-INCREASE-CURRENT> 992514
<NET-CHANGE-FROM-OPS> 1402578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26076)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40916
<NUMBER-OF-SHARES-REDEEMED> (49974)
<SHARES-REINVESTED> 1129
<NET-CHANGE-IN-ASSETS> 1008294
<ACCUMULATED-NII-PRIOR> 247109
<ACCUMULATED-GAINS-PRIOR> (680061)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 623639
<AVERAGE-NET-ASSETS> 676948
<PER-SHARE-NAV-BEGIN> 9.31
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> 1.55
<PER-SHARE-DIVIDEND> (.33)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> 7.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH MIDDLE EAST AFRICA FUND, INC. CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 7908397
<INVESTMENTS-AT-VALUE> 8543846
<RECEIVABLES> 103941
<ASSETS-OTHER> 241818
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8889605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 122105
<TOTAL-LIABILITIES> 122105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8438694
<SHARES-COMMON-STOCK> 101468
<SHARES-COMMON-PRIOR> 103349
<ACCUMULATED-NII-CURRENT> 236136
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (540418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 633088
<NET-ASSETS> 1109189
<DIVIDEND-INCOME> 178710
<INTEREST-INCOME> 241400
<OTHER-INCOME> 0
<EXPENSES-NET> (112751)
<NET-INVESTMENT-INCOME> 307359
<REALIZED-GAINS-CURRENT> 102705
<APPREC-INCREASE-CURRENT> 992514
<NET-CHANGE-FROM-OPS> 1402578
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (41949)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30184
<NUMBER-OF-SHARES-REDEEMED> (33347)
<SHARES-REINVESTED> 1282
<NET-CHANGE-IN-ASSETS> 1008294
<ACCUMULATED-NII-PRIOR> 247109
<ACCUMULATED-GAINS-PRIOR> (680061)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 623639
<AVERAGE-NET-ASSETS> 1048562
<PER-SHARE-NAV-BEGIN> 9.38
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> 1.50
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.93
<EXPENSE-RATIO> 6.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Middle East/Africa Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-55843 of our report dated January 14, 1998 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.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
February, 26 1998
