<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
SECURITIES ACT FILE NO. 33-55843
INVESTMENT COMPANY ACT FILE NO. 811-07155
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 6 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 9 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE 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:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: MICHAEL J. HENNEWINKEL, 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.
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/x/ 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: Common Stock, par value $.10 per
share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION STATEMENT
CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
Prospectus
[LOGO] Merrill Lynch
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 29, 1999
Merrill Lynch Middle East/Africa Fund, Inc.
March , 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[GRAPHIC] KEY FACTS
---------------------------------------------------------------------
The Merrill Lynch Middle East/Africa Fund at a Glance.... 2
Risk/Return Bar Chart.................................... 3
Fees and Expenses........................................ 5
[GRAPHIC] DETAILS ABOUT THE FUND
---------------------------------------------------------------------
How the Fund Invests..................................... 7
Investment Risks......................................... 8
[GRAPHIC] YOUR ACCOUNT
---------------------------------------------------------------------
Merrill Lynch Select Pricing(Service Mark) System........ 22
How to Buy, Sell, Transfer and Exchange Shares........... 27
Participation in Merrill Lynch Fee-Based Programs........ 31
[GRAPHIC] MANAGEMENT OF THE FUND
---------------------------------------------------------------------
Merrill Lynch Asset Management........................... 33
Financial Highlights..................................... 34
[GRAPHIC] FOR MORE INFORMATION
---------------------------------------------------------------------
Shareholder Reports...................................... Back Cover
Statement of Additional Information...................... Back Cover
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. 1
<PAGE>
[GRAPHIC] KEY FACTS
THE MERRILL LYNCH MIDDLE EAST/AFRICA FUND AT A GLANCE
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
Capital Appreciation -- increase in value of investments.
What are the Fund's objective and goals?
The Fund's investment objective is to seek long term capital appreciation by
investing primarily in equity and debt securities of corporate and governmental
issuers located in the Middle East and Africa.
What are the Fund's main investment strategies?
Under normal market conditions, the Fund expects to invest at least 65% of its
assets in equity and debt securities of issuers located in Middle
Eastern/African countries. The Fund currently expects to focus on investments
in Botswana, Ghana, Morocco, Jordan, South Africa, Turkey, Israel and Zimbabwe.
The Fund may also invest in other Middle Eastern/African countries.
Fund management chooses equity securities using a combination of "top down" and
"bottom up" investment styles. "Top down" means that the Fund seeks to allocate
its investments to equity markets that Fund management believes have the
potential to outperform other equity markets due to economic factors, such as
government fiscal policies and the direction of interest rate and currency
movements. "Bottom up" means that the Fund also selects investments based on
Fund management's assessment of the earning prospects of individual companies.
When assessing individual companies, Fund management seeks to identify
companies engaged in businesses with attractive earnings prospects, sound
management and a record of creating value for investors. Fund management then
further considers which of the companies meeting its criteria would be most
likely to benefit from the economic circumstances anticipated by Fund
management. Because of the difficulty of investing substantial sums in many
Middle Eastern and African markets, however, in certain markets Fund management
believes to be attractive on a "top down" basis the Fund may limit its
investments to a relatively small number of large, actively-traded companies.
The Fund can invest in securities denominated in the currencies of Middle
Eastern and African countries or in other currencies. Under most circumstances
the Fund's investments will primarily be denominated in foreign currencies.
We cannot guarantee that the Fund will achieve its goals.
2
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
What are the main risks of investing in the Fund?
As with any fund, the value of the Fund's investments-and therefore the value of
Fund shares-may go up or down. These changes may occur because particular stock
or bond markets are rising or falling, or in response to interest rate changes.
At other times, there are specific factors that may affect the value of a
particular investment. If the value of the Fund's investments goes down, you may
lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks-including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets such as the Middle East and Africa.
The Fund is a nondiversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for capital appreciation for long term goals, such as
retirement or funding a child's education.
o Want a professionally managed portfolio.
o Are willing to accept the risk that the value of your investment
may decline in order to seek potentially higher long term returns.
o Are looking for exposure to markets in the Middle East and Africa.
o Are willing to accept the risks of foreign investing in order to
seek potentially higher long term returns.
o Are not looking for a significant amount of current income.
3
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[Logo] Key Facts
RISK/RETURN BAR CHART
- -------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each complete calendar year since the Fund's inception.
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Fund's shares for the periods
shown with those of the Morgan Stanley Capital International (MSCI) indices for
Israel, Turkey and South Africa. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the future.
[Bar Chart]
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
9.00% -8.22% 19.95% -22.42%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
22.74% (quarter ended March 31, 1997) and the lowest return for a quarter was
- -18.95% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
Average Annual Total
Returns (as of the
calendar year ended Past Since
December 31, 1998) One Year Inception+
- ----------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch Middle East/
Africa Fund* A -27.19% -2.04%
B -27.02% -1.77%
C -24.71% -1.69%
D -27.38% -2.32%
MSCI Israel** -5.10% 9.40%
MSCI Turkey** -52.51% 8.33%
MSCI South Africa** -27.56% -10.06%
- ----------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** These unmanaged indices measure the total returns of the countries within
the Middle East/Africa region. Past performance is not predictive of future
performance.
+ Inception date is December 30, 1994 for all classes of shares.
4
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the
shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the
shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Manager for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers for account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment): Class A Class B(a) Class C Class D
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 5.25%(b) None None 5.25%(b)
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee (as a pecentage of net asset value of
shares redeemed within 12 months of purchase) 2.0% 2.0% 2.0% 2.0%
Exchange Fee None None None None
Maximum Account Fee None None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
Management Fee 1.00% 1.00% 1.00% 1.00%
Distribution and/or Service (12b-1) Fees(d) None 1.00% 1.00% 0.25%
Other Expenses (including transfer agency fees)(e) 5.51% 5.51% 5.45% 5.45%
Total Annual Fund Operating Expenses (f) 6.51% 7.51% 7.45% 6.70%
</TABLE>
(a) Class B shares automatically convert to Class D shares about eight
years after you buy them and will no longer be subject to distribution
fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more
and you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in
all other Fund materials. If you hold Class B or Class C shares for a
long time, it may cost you more in distribution (12b-1) fees than the
maximum sales charge that you would have paid if you had bought one of
the other classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C
shareholder account and reimburses the Transfer Agent's out-of-pocket
expenses. The Fund pays a 0.10% fee for certain accounts that
participate in the Merrill Lynch Mutual Fund Advisor program. The Fund
also pays a $0.20 monthly closed account charge, which is assessed
upon all accounts that close during the year. This fee begins the
month following the month the account is closed and ends at the end of
the calendar year. For the fiscal year ended November 30, 1998, the
Fund paid the Transfer Agent fees totaling $16,961. The Manager
provides accounting services to the Fund at its cost. For the fiscal
year ended November 30, 1998, the Fund reimbursed the Manager $73,144
for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee
(currently $5.35) when a client buys or redeems shares. For the fiscal
year ended November 30, 1998, the Manager voluntarily waived the entire
management fee due and voluntarily reimbursed the Fund for a portion of
other expenses (excluding Rule 12b-1 fees). Total Annual Fund Operating
Expenses, after giving effect to the waiver of fees and reimbursement of
expenses, were 0.47% for Class A shares, 1.51% for Class B shares, 1.53%
for Class C shares and 0.72% for Class D shares. The fee waiver and
expense reimbursement may be discontinued or reduced by the Manager at any
time without notice.
5
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[Logo] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $1,327* $2,334 $3,495 $6,247
Class B $1,342* $2,369 $3,526 $6,521**
Class C $1,036* $2,154 $3,503 $6,598
Class D $1,344* $2,381 $3,567 $6,359
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $1,137 $2,334 $3,495 $6,247
Class B $ 742 $2,169 $3,526 $6,521**
Class C $ 736 $2,154 $3,503 $6,598
Class D $1,154 $2,381 $3,567 $6,359
</TABLE>
* Reflects the 2.0% redemption fee charged on redemptions made within
one year of purchase.
** Assumes conversion to Class D shares approximately eight years after
purchase. See note (a) to the Fees and Expenses table above.
6
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Details About the Fund
ABOUT THE
PORTFOLIO MANAGER
A. Grace Pineda is a Senior Vice President and the portfolio manager of the
Fund. Ms. Pineda has been a First Vice President of Merrill Lynch Asset
Management since 1997 and was a Vice President of Merrill Lynch Asset
Management from 1989 to 1997.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's investment objective 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. In other words, the main goal of
the Fund is to achieve capital growth over the long term. Under normal
conditions, the Fund's management tries to do this by investing at least 65% of
the Fund's assets in equity and debt securities of issuers located in Middle
Eastern/African countries. We cannot guarantee that the Fund will meet its
objective.
Although the economies of the Middle East and Africa have experienced
significant turmoil over the last few years, Fund management believes that the
economies and securities markets of the region present attractive long term
investment opportunities. The Fund can invest in all of the countries in Africa
and the Middle East where foreign investment is allowed and where the Fund, as a
U.S. registered investment company, is legally allowed to hold its assets. The
Fund currently intends to focus on the following countries:
o Botswana
o Ghana
o Morocco
o Jordan
o South Africa
o Turkey
o Israel
o Zimbabwe
The Fund is nondiversified, which means that the Fund can invest more than 5%
of its assets in the securities of a single company or issuer. The Fund will,
however, usually try to diversify its investments geographically over the
Middle East and Africa. The Fund considers an issuer to be located in the
Middle East or Africa if at least 50% of the issuer's assets, gross revenues or
profits in the last two years are from activities in the Middle East and
Africa. Under certain market conditions, Fund management may restrict the
Fund's investments in certain countries. In addition, under unusual market
conditions, Fund management may invest the Fund's assets without percentage
limitation in short term securities or cash as a temporary defensive measure.
Short term investments and temporary defensive positions may limit the potential
of the Fund to achieve its goal of long term capital appreciation.
7
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Details About the Fund
Equity Securities -- Although the Fund is not required to have any set
percentage of its assets invested in equity securities, the Fund will tend to
be invested primarily in equity securities in order to achieve its goal of long
term capital appreciation. The Fund can invest in all types of equity
securities, including common stock, preferred stock, warrants and stock purchase
rights. The Fund may purchase securities of companies directly in the securities
markets in the Middle East and Africa or through American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs) or Global Depositary Receipts
(GDRs).
Debt Securities -- The Fund will also seek capital appreciation by investing in
government and corporate debt securities in Middle Eastern/African countries.
The debt securities of governments and companies in the Middle East and Africa
may be lower rated and can have a relatively high degree of risk. However, they
often trade at significant discounts in the secondary market and offer the
potential for capital appreciation if there is a favorable change in the credit
quality of the issuer. The Fund may also invest in these debt securities
because the relatively high yield of Middle Eastern and African debt securities
when compared to debt securities of U.S. issuers can be used to offset the
Fund's operating expenses. The Fund can also buy "distressed securities."
Distressed securities are securities that are in default on payments of
interest or principal at the time the Fund buys the securities. These debt
securities involve a number of investment risks that are described below in
"Distressed Securities" and in the Fund's Statement of Additional Information.
Options, Futures and Other Derivatives -- The Fund may use options, futures and
forward contracts to hedge, or protect, the value of its assets against adverse
movements in currency exchange rates and interest rates and movements in the
securities markets. The use of options, futures and forward contracts can be
effective in protecting or enhancing the value of the Fund's assets. While
these instruments involve certain risks, the Fund will not engage in certain
strategies that are considered highly risky and speculative. A full description
of the Fund's use of options, futures, forwards and other derivatives is
included in the Statement of Additional Information.
8
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
Market and Selection Risk -- Market risk is the risk that the stock or bond
markets will go down in value, including the possibility that the markets will
go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform the stock or bond
markets or other funds with similar investment objectives and investment
strategies.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because stocks traded on foreign markets have often (though not
always) performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.
Investments in foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of com-
panies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security prices,
impair the Fund's ability to purchase or sell foreign securities or transfer
the Fund's assets or income back into the United States, or otherwise adversely
affect the Fund's operations.
9
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Details About the Fund
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Currency Risk -- Securities in which the Fund invests are usually denominated
or quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
non-public information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for the Fund's management to completely
and accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or
10
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
any of their agents, goes bankrupt. In addition, it is often more expensive for
the Fund to buy, sell and hold securities in certain foreign markets than in the
U.S. The increased expense of investing in foreign markets reduces the amount
the Fund can earn on its investments and typically results in a higher operating
expense ratio for the Fund than investment companies invested only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
and clearance procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically involved
with the settlement of U.S. investments. Communications between the United
States and emerging market countries may be unreliable, increasing the risk of
delayed settlements or losses of security certificates. Settlements in certain
foreign countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Emerging Markets Risk -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries, including Middle
Eastern/African countries, have far lower trading volumes and less liquidity
than developed markets. Since these markets are so small, they may be more
likely to suffer sharp and frequent price changes or long term price depression
because of adverse publicity, investor perceptions or the actions of a few large
investors. In addition, traditional measures of investment value used in the
United States, such as price to earnings ratios, may not apply to certain small
markets.
11
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Details About the Fund
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Risks of Investing 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. 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 well capitalized than brokers in the United States. 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.
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. These economies therefore are vulnerable to changes in
commodity prices, which in turn may be affected by a variety of factors. In
addition, many Middle Eastern/African governments 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. This could affect private sector companies and the Fund, as well as
the value of securities in the Fund's portfolio.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
The legal systems in certain Middle Eastern/African countries also may have an
adverse impact on the Fund. For example, 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. However,
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 that 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.
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 currencies. Certain Middle Eastern/African countries
face serious exchange constraints.
There is a relative lack of publicly available information about Middle
Eastern/African issuers, and such issuers may not be subject to the same
accounting, auditing and financial reporting standards as U.S. issuers. In
addition, inflation accounting rules in some Middle Eastern/African countries
require, for issuers that keep accounting records in the local currency, 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. The
requirement is for both tax and accounting purposes. Inflation accounting
indirectly may generate losses or profits for certain Middle Eastern/African
issuers.
Fund management may determine that, even though investment criteria are
otherwise favorable, 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 Fund management, have had no or limited
prior experience.
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. For example, 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. They
may also limit the investment by foreign persons to only a specific class of
securities of an issuer that may have less advantageous terms (including price)
than securities of
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Details About the Fund
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 those securities
may have an adverse effect on the value of those 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 Middle
Eastern/African countries, as well as limitations on those investments, may
have an adverse impact on the operations of the Fund. For example, the Fund may
be required in certain of these countries to invest initially through a local
broker or other entity and then have the shares that were purchased
reregistered in the name of the Fund. Reregistration in some instances may not
be possible on a timely basis. This may result in a delay during which the Fund
may be denied certain of its rights as an investor, including rights as to
dividends or to be made aware of certain corporate actions. There also may be
instances where the Fund places a purchase order but is subsequently informed,
at the time of reregistration, 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. A credit risk may also be 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
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 Middle Eastern/African 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 "Illiquid Securities" below.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
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
these countries in pooled vehicles that resemble open end investment companies.
Under the Investment Company Act, the Fund may invest up to 10% of its total
assets in shares of other investment companies and up to 5% of its total assets
in any one investment company, provided that the investment does not represent
more than 3% of the voting stock of the related acquired investment company.
This restriction on investments in securities of investment companies may limit
opportunities for the Fund to invest indirectly in certain Middle
Eastern/African 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 will bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of these investment companies or venture capital funds. Investment
in venture capital funds involves substantial risk of loss to the Fund of its
entire investment. 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." Since banks may engage in these activities in many countries, the
Fund's ability to invest in banks may be limited. Investment Company Act
provisions also may restrict the Fund's investments in certain foreign banks
and other financial institutions.
Risks associated with certain types of securities in which the Fund may invest
include:
Debt Securities -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest
rates than the market price of shorter term securities.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
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Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject the Fund to the risk that a government entity may
delay or refuse to pay interest or repay principal on its sovereign debt.
Reasons may include cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of the entity's debt position to
its economy or its failure to implement economic reforms required by the
International Monetary Fund or other multilateral agencies. If a government
entity defaults, it may ask for more time in which to pay or for further loans.
There is no legal process for collecting sovereign debts that a government does
not pay and no bankruptcy proceeding by which all or part of a sovereign debt
that a government entity has not repaid may be collected. The Fund may not
invest more than 25% of its total assets in the sovereign debt securities of any
particular Middle Eastern/African country.
Depositary Receipts -- The Fund may purchase sponsored or unsponsored ADRs,
EDRs or GDRs, known generally as Depositary Receipts. 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.
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.
Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
Restricted securities may be illiquid. The Fund may be unable to resell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
Rule 144A: Description and Risk Mitigation -- Rule 144A securities are
restricted securities that can be resold to qualified institutional buyers but
not to the general public. Rule 144A securities may have an active trading
market, but carry the risk that the active trading market may not continue.
Junk Bonds -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher
rated debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.
Distressed Securities -- Distressed securities are securities that are subject
to bankruptcy proceedings or are in default, or at risk of being in default.
Distressed securities are speculative and involve substantial risks. Generally,
the Fund will invest in distressed securities when Fund management believes
they offer significant potential for higher returns or can be exchanged for
other securities that offer this potential. However, there can be no assurance
that the issuer will make an exchange offer or adopt a plan of reorganization.
The Fund will generally not receive interest payments on the distressed
securities and may incur costs to protect its investment. In addition, the
Fund's principal may not be repaid. Distressed securities and any securities
received in an exchange may be difficult to sell and may be subject to
restriction on resale.
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Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like regular debt securities; that is, if market
interest rates rise, the value of a convertible usually falls. Since it is
convertible into common stock, the convertible also has the same types of
market and issuer risk as the value of the underlying common stock.
Warrants -- A warrant gives the Fund the right to buy a quantity of stock. The
warrant specifies the amount of underlying stock, the purchase (or "exercise")
price, and the date the warrant expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises it before it expires. If the
price of the underlying stock does not rise above the exercise price before the
warrant expires, the warrant generally expires without any value and the Fund
loses any amount it paid for the warrant. Thus, investments in warrants may
involve substantially more risk than investments in common stock. Warrants may
trade in the same markets as their underlying stock; however, the price of the
warrant does not necessarily move with the price of the underlying stock.
Derivatives -- The Fund may use derivative instruments including futures,
forwards, options, indexed securities and inverse securities. Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as oil or gold) or an index, such as the S&P 500. Derivatives allow the
Fund to increase or decrease its risk exposure more quickly and efficiently
than other types of instruments. Derivatives are volatile and involve
significant risks, including:
Leverage risk -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of
an investment.
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.
The Fund may also invest in certain derivative instruments, such as indexed and
inverse securities, to enhance its return.
Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of other fixed rate
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.
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<PAGE>
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Details About the Fund
Securities Lending -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.
Standby Commitment Agreements -- Standby commitment agreements involve the risk
that the security the Fund buys will lose value prior to its delivery to the
Fund. There is also the risk that if the security goes up in value, the
counterparty will decide not to issue the security. If this occurs, the Fund
will lose the investment opportunity for the assets it has set aside to pay for
the security and any gain in the security's price.
When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery to
the Fund. There is also the risk that the security will not be issued or that
the other party will not meet its obligation. If this occurs, the Fund will
lose the investment opportunity for the assets it has set aside to pay for the
security and any gain in the security's price.
Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward commitments,
options, warrants and reverse repurchase agreements.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
Repurchase Agreements; Purchase and Sale Contracts -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed upon
time and price. This insulates the Fund from changes in the market value of the
security during the period, except for currency fluctuations. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts provide that the purchaser receives any interest on the security paid
during the period. If the seller fails to repurchase the security in either
situation and the market value declines, the Fund may lose money.
Investment in Other Investment Companies and Venture Capital Funds -- If the
Fund acquires shares of investment companies or of venture capital funds,
shareholders will bear both their proportionate share of expenses in the Fund
(including management and advisory fees) and, indirectly, the expenses of these
investment companies or venture capital funds. Investment in venture capital
funds involves substantial risk of loss to the Fund of its entire investment.
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Your Account
MERRILL LYNCH SELECT PRICING (Service Mark) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund is designed for long term investors. If you sell shares of the Fund
within 12 months of purchase, you will be subject to a redemption fee of
2.0%,of the net asset value of the shares redeemed. The aim of this fee is to
discourage short term trading in shares of the Fund.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select
Pricing (Service Mark) System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill
o Current Class A Lynch. Limited Lynch. Limited Lynch. Limited
shareholders availability through availability through availability through
o Certain Retirement other securities other securities other securities
Plans dealers. dealers. dealers.
o Participants in
certain Merrill
Lynch sponsored
programs
o Certain affiliates
of Merrill Lynch.
Initial Sales Charge? Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
Redemption Yes. Payable if you Yes. Payable if you Yes. Payable if you Yes. Payable if you
Fee? redeem within 12 redeem within 12 redeem within 12 redeem within 12
months of purchase. months of purchase. months of purchase. months of purchase.
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.75% Distribution 0.75% Distribution No Distribution Fee.
Fee. Fee.
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
[LOGO]
Your Account
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
Class A And Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- -------------------------------------------------------------------------------
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%
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may
not pay an initial sales charge. However, if you redeem your shares
within one year after purchase, you may be charged a deferred sales
charge. This charge is 1% of the lesser of the original cost of the
shares being redeemed or your redemption proceeds. 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.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent.
o TMA (Service Mark) Managed Trusts.
o Certain Merrill Lynch investment or central asset accounts.
o Certain employer-sponsored retirement or savings plans.
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
o Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.
o Certain Merrill Lynch fee-based programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase,
you may be required to pay a deferred sales charge. You will also pay
distribution fees of 0.75% and account maintenance fees of 0.25% each year
under distribution plans that the Fund has adopted under Rule 12b-1. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees increase the cost of your investment and may cost you more than
paying an initial sales charge. The Distributor uses the money that it receives
from the deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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Your Account
Years Since Purchase Sales Charge*
0 - 1 4.00%
1 - 2 3.00%
2 - 3 2.00%
3 - 4 1.00%
4 and thereafter 0.00%
* The percentage charge will apply to the lesser of the original cost of
the shares being redeemed or the proceeds of your redemption. Shares
acquired through reinvestment of dividends or distributions are not
subject to a deferred sales charge. Not all Merrill Lynch funds have
identical deferred sales charge schedules. If you exchange your shares
for shares of another fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.
o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers.
o Redemption in connection with participation in certain Merrill
Lynch fee-based programs.
o Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held.
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of
up to 10% per year of your Class B account value at the time the
plan is established.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.
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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange your Class B shares in the Fund
for Class B shares of a fund with a longer conversion schedule, the other
fund's conversion schedule will apply. The length of time that you hold both
the original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with participation in certain Merrill Lynch fee-based programs, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- -------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
27
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 23. Be sure to
appropriate for you read this prospectus carefully.
Next, determine the amount The minimum initial investment for the Fund is $1,000 for all
of your investment accounts except:
o $250 for certain Merrill Lynch fee-based programs
o $100 for retirement plans
(The minimums for initial investments may be waived or
reduced under certain circumstances.)
Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. Any purchase orders placed within
securities dealer submit your fifteen minutes after the close of business on the New York Stock
purchase order Exchange will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase.
This fee is currently $5.35.
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at 1-800-MER-
FUND and request a purchase order. Mail the completed purchase
order to the Transfer Agent at the address on the inside back cover
of this prospectus.
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for all
Investment accounts except that retirement plans have a minimum additional
purchase of $1.
(The minimums for additional purchases may be waived under
certain circumstances.)
Acquire additional shares All dividends and capital gains distributions are automatically
through the automatic reinvested without a sales charge.
dividend reinvestment plan
Participate in the automatic You may invest a specific amount on a periodic basis through certain
investment plan Merrill Lynch investment or central asset accounts.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities dealer
Another Securities securities dealer that has entered into an agreement with Merrill Lynch. All
Dealer shareholder services will be available for the transferred shares. You
may only purchase additional shares of funds previously owned
before the transfer. All future trading of these assets must be
coordinated by the receiving firm.
Transfer to a You must either:
non-participating securities o Transfer your shares to an account with the Transfer Agent; or
dealer o Sell your shares.
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within fifteen minutes after that
day's close of business on the New York Stock Exchange (generally
closes at 4:00 p.m. Eastern time). Any redemption request placed
after that time will be priced at the net asset value at the close of
business on the next business day. Dealers must submit redemption
requests to the Fund not more than thirty minutes after the close of
business on the New York Stock Exchange on the day the request
was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. No processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certficiates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill Lynch
CMA(R), CBA(R) or Retirement Account you can arrange for systematic
redemptions of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain conditions.
Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of the
value of your shares at the time your plan is established. The
deferred sales charge is waived for systematic redemptions. Ask your
Merrill Lynch Financial Consultant for details.
Exchange Your Select the fund into which You can exchange your shares of the Fund for shares of many other
Shares you want to exchange. Be Merrill Lynch mutual funds. You must have held the shares used in
sure to read that fund's the exchange for at least 15 calendar days before you can exchange
prospectus to another fund.
Each class of Fund shares is generally exchangeable for shares of the
same class of another fund. If you own Class A shares and wish to
exchange into a fund in which you have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial or
deferred sales charge schedule. If you exchange Class A or D shares
for shares of a fund with a higher initial sales charge than you
originally paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher schedule will
apply. The time you hold Class B or C shares in both funds will count
when determining your holding period for calculating a deferred
sales charge at redemption. If you exchange Class A or D shares for
money market fund shares, you will receive Class A shares of Summit
Cash Reserves Fund. Class B or C shares of the Fund will be
exchanged for Class B shares of Summit.
Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- -------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed. Foreign securities owned by the Fund may trade
on weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- -------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
31
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Your Account
Dividends -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.
Distributions -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax adviser.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income and any net realized long or
short term capital gains at least annually. The Fund may also pay a special
distribution at or about the end of the calendar year to comply with Federal
tax requirements. If your account is with Merrill Lynch and you would like to
receive dividends and distributions in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the Transfer Agent and you would
like to receive dividends and distributions in cash, contact the Transfer
Agent.
You will pay tax on dividends and distributions from the Fund whether you
receive them in cash or additional shares. If you redeem Fund shares or
exchange them for shares of another fund, any gain on the transaction may be
subject to tax. The Fund intends to make distributions that will either be
taxed as ordinary income or capital gains. Capital gains are generally taxed
at different rates than ordinary income.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
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. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund
if certain requirements are met.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
32
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Management of the Fund
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws. The Fund's Statement of
Additional Information has more information about taxes.
MERRILL LYNCH ASSET MANAGEMENT
- -------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Manager, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Manager has the responsibility for making all
investment decisions for the Fund. The Manager has a sub-advisory agreement
with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the
Manager may pay a fee for services it receives. The Fund has agreed to pay the
Manager a fee at the annual rate of 1.00% of the average daily net assets of
the Fund. For the fiscal year ended November 30, 1998, the Manager voluntarily
waived the entire management fee due and voluntarily reimbursed the Fund for a
portion of other expenses (excluding Rule 12b-1 fees). The Manager may
discontinue or reduce this waiver of fees at any time without notice.
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $501 billion in investment company and other portfolio
assets under management as of December 1998. This amount includes assets
managed for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests, and this could hurt the Fund's investment returns.
33
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Management of the Fund
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects the
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------- -------------------------------------------
For the Period For the Period
Dec. 30, 1994+ Dec. 30, 1994+
For the Year Ended Nov. 30, to Nov. 30, For the Year Ended Nov. 30, to Nov. 30,
------------------------------ --------------------------
Increase (Decrease) In Net Asset Value: 1998++ 1997++ 1996++ 1995 1998++ 1997++ 1996++ 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.96 $ 9.40 $ 10.66 $ 10.00 $ 10.87 $ 9.31 $ 10.56 $ 10.00
Investment income--net .40 .48 .42 .57 .29 .37 .32 .79
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (2.80) 1.52 (.80) .09 (2.78) 1.51 (.80) (.23)
Total from investment operations (2.40) 2.00 (.38) .66 (2.49) 1.88 (.48) .56
Less dividends and distributions:
Investment income--net (.38) (.44) (.85) -- (.27) (.32) (.74) --
Realized gain on investments--net -- -- (.03) -- -- -- (.03) --
Total dividends and distributions (.38) (.44) (.88) -- (.27) (.32) (.77) --
Net asset value, end of period $ 8.18 $ 10.96 $ 9.40 $ 10.66 $ 8.11 $ 10.87 $ 9.31 $ 10.56
Total Investment Return:**
Based on net asset value per share (22.59)% 22.43% (4.17)% 6.60%# (23.40)% 21.02% (5.14)% 5.60%#
Ratios to Average Net Assets:
Expenses, net of reimbursement .47% .47% .47% .00%* 1.51% 1.51% 1.50% 1.01%*
Expenses 6.51% 6.36% 4.84% 4.63%* 7.51% 7.46% 5.90% 5.68%*
Investment income--Net 3.93% 4.35% 4.24% 8.43%* 2.91% 3.40% 3.15% 8.33%*
Supplemental Data:
Net assets, end of period
(in thousands) $ 563 $ 989 $ 399 $ 648 $3,096 $ 5,947 $ 5,699 $7,701
Portfolio turnover 17.03% 78.12% 46.36% 40.97% 17.03% 17.03% 46.36% 40.97%
</TABLE>
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
34
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class D
---------------------------------------------- -------------------------------------------
For the Period For the Period
Dec. 30, 1994+ Dec. 30, 1994+
For the Year Ended Nov. 30, to Nov. 30, For the Year Ended Nov. 30, to Nov. 30,
------------------------------ --------------------------
Increase (Decrease) In Net Asset Value: 1998++ 1997++ 1996++ 1995 1998++ 1997++ 1996++ 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.89 $ 9.31 $ 10.56 $ 10.00 $ 10.93 $ 9.38 $ 10.63 $ 10.00
Investment income--net .30 .36 .31 .83 .37 .46 .40 .77
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (2.79) 1.55 (.79) (.27) (2.79) 1.50 (.80) (.14)
Total from investment operations (2.49) 1.91 (.48) .56 (2.42) 1.96 (.40) .63
Less dividends and distributions:
Investment income--net (.28) (.33) (.74) -- (.36) (.41) (.82) --
Realized gain on investments--net -- -- (.03) -- -- (.03) --
Total dividends and distributions (.28) (.33) (.77) -- (.36) (.41) (.85) --
Net asset value, end of period $ 8.12 $ 10.89 $ 9.31 $ 10.56 $ 8.15 $ 10.93 $ 9.38 $ 10.63
Total Investment Return:**
Based on net asset value per share (23.38)% 21.42% (5.16)% 5.60%# (22.84)% 21.95% (4.31)% 6.30%#
Ratios to Average Net Assets:
Expenses, net of reimbursement 1.53% 1.52% 1.50% 1.01%* .72% .72% .72% .25%*
Expenses 7.45% 7.47% 5.91% 5.67%* 6.70% 6.67% 5.08% 4.89%*
Investment income--Net 2.90% 3.33% 3.14% 8.45%* 3.69% 4.18% 4.01% 9.07%*
Supplemental Data:
Net assets, end of period
(in thousands) $ 317 $ 723 $ 692 $ 1,012 $ 550 $ 1,109 $ 969 $ 1,569
Portfolio turnover 17.03% 78.12% 46.36% 40.97% 17.03% 78.12% 46.36% 40.97%
</TABLE>
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
35
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO]
Management of the Fund
<TABLE>
<S> <C>
________________________________
| |
| POTENTIAL |
________________________| INVESTORS |________________________
| | | |
| | Open an account (two options). | |
__|__ |________________________________| __|__
\ 1 / \ 2 /
_________\ /__________ ______\ /_______
| | | |
____________| MERRILL LYNCH |____________ _______________| TRANSFER AGENT |______________
| | FINANCIAL CONSULTANT | | | |________________| |
| | OR SECURITIES DEALER | | | |
| |______________________| | | Financial Data Services, Inc. |
| | | P.O. Box 45289 |
| Advises shareholders on their Fund investments.| | Jacksonville, Florida 32232-5289 |
|________________________________________________| | |
/|\ | Performs recordkeeping and reporting services.|
| |_______________________________________________|
| _________________________________________________ /|\
| | | |
| | DISTRIBUTOR | |
| | | |
| | Merrill Lynch Funds Distributor, | |
|_______________| a division of Princeton Funds Distributor, Inc.|_____________________|
| P.O. Box 9081 |
| Princeton, New Jersey 08543-9081 |
| |
| Arranges for the sale of Fund shares. |
|_________________________________________________|
|
|
___________ \|/ _____________
| | ________________________ | |
__________| COUNSEL |____________ | | _____________| CUSTODIAN |_____________
| |___________| | | THE FUND | | |_____________| |
| | | | | |
| Brown & Wood LLP |__________ | The Board of Directors | ________| Brown Brothers Harriman & Co. |
| One World Trade Center | | oversees the Fund. | | 40 Water Street |
| New York, New York 10048-0557 | |________________________| | Boston, Massachusetts 02109 |
| | | |
| Provides legal advice to the Fund.| / \ | Holds the Fund's assets for safekeeping.|
|___________________________________| / \ |_________________________________________|
/ \
________________/_____ ______\_____________
| | | |
______| INDEPENDENT AUDITORS |_______ _________| INVESTMENT ADVISER |____________
| |______________________| | | |____________________| |
| | | |
| Deloitte & Touche LLP | | Merrill Lynch Asset |
| 117 Campus Drive | | Management, L.P. |
| Princeton, New Jersey 08540-6400 | | |
| | | ADMINISTRATIVE OFFICES |
| Audits the financial | | 800 Scudders Mill Road |
| statements of the Fund on behalf of | | Plainsboro, New Jersey 08536 |
| the shareholders. | | |
|_____________________________________| | MAILING ADDRESS |
| P.O. Box 9011 |
| Princeton, New Jersey 08543-9011 |
| |
| TELEPHONE NUMBER |
| 1-800-MER-FUND |
| |
| Manages the Fund's day-to-day activities. |
|___________________________________________|
</TABLE>
36
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
[LOGO] [LOGO]
For More Information Merrill Lynch
Merrill Lynch
Middle East/Africa
Fund, Inc.
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800 SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-07155
Code #18415-03-99
(Copyright)Merrill Lynch Asset Management, L.P.
March , 1999
Prospectus
<PAGE>
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION, DATED JANUARY 29, 1999
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
------------------------
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-end 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"). The Fund expects that under normal market
conditions at least 65% of the Fund's total assets will be invested in such
securities. 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
objectives and policies, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) 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 "Purchase of Shares."
------------------------
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
[ ], 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is March [ ], 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................................................... 2
Foreign Investment Risks................................................................................. 3
Debt Securities.......................................................................................... 4
Derivatives.............................................................................................. 7
Other Investment Policies, Practices and Risk Factors.................................................... 11
Investment Restrictions.................................................................................. 14
Portfolio Turnover....................................................................................... 16
Management of the Fund..................................................................................... 17
Directors and Officers................................................................................... 17
Compensation of Directors................................................................................ 18
Management and Advisory Arrangements..................................................................... 19
Code of Ethics........................................................................................... 20
Purchase of Shares......................................................................................... 21
Initial Sales Charge Alternatives--Class A and Class D Shares............................................ 21
Deferred Sales Charge Alternatives--Class B and Class C Shares........................................... 25
Distribution Plans....................................................................................... 28
Limitations on the Payment of Deferred Sales Charges..................................................... 29
Redemption of Shares....................................................................................... 31
Redemption............................................................................................... 31
Repurchase............................................................................................... 31
Reinstatement Privilege--Class A and Class D Shares...................................................... 32
Pricing of Shares.......................................................................................... 32
Determination of Net Asset Value......................................................................... 32
Computation of Offering Price Per Share.................................................................. 33
Portfolio Transactions and Brokerage....................................................................... 34
Transactions in Portfolio Securities..................................................................... 34
Shareholder Services....................................................................................... 36
Investment Account....................................................................................... 36
Exchange Privilege....................................................................................... 36
Fee-Based Programs....................................................................................... 38
Retirement Plans......................................................................................... 38
Automatic Investment Plans............................................................................... 39
Automatic Dividend Program............................................................................... 39
Systematic Withdrawal Plan............................................................................... 39
Distributions and Taxes.................................................................................... 40
Dividends and Distributions.............................................................................. 40
Taxes.................................................................................................... 41
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions.............................. 43
Special Rules for Certain Foreign Currency Transactions.................................................. 43
Performance Data........................................................................................... 45
General Information........................................................................................ 47
Description of Shares.................................................................................... 47
Independent Auditors..................................................................................... 48
Custodian................................................................................................ 48
Transfer Agent........................................................................................... 48
Legal Counsel............................................................................................ 48
Reports to Shareholders.................................................................................. 48
Shareholder Inquiries.................................................................................... 48
Additional Information................................................................................... 48
Financial Statements....................................................................................... 49
Appendix A--Ratings of Debt Securities..................................................................... A-1
</TABLE>
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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.
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 of 1940, as amended (the "Investment Company Act").
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. In managing the Fund's 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.
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.
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 subsidaries) assets or activities located in such countries. The Fund
may acquire securities of companies or governments in Middle Eastern/African
countries that are denominated in currencies other than a Middle Eastern/African
country's currency. The Fund also may consider a debt security that is
denominated in a Middle Eastern/African country's currency to be a security of
an issuer in a Middle Eastern/African country without reference to the principal
trading market of the security or to the location of its issuer. Additionally,
the Fund may consider a derivative product tied to securities or issuers located
in Middle Eastern/African countries to be the security of a Middle
Eastern/African issuer. The Fund may consider investment companies or other
pooled
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investment vehicles to be located in the country or countries in which they
primarily make their porfolio investments.
The Fund reserves the right, as a temporary defensive measure or in
anticipation of investments 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").
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 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. Also, the Fund may
invest in certain derivative instruments, such as indexed and inverse
securities, to enhance its return.
The Fund has express limitations on the percentage of its assets that may
be committed to certain of such derivative 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.
FOREIGN INVESTMENT RISKS
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 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.
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DEBT SECURITIES
In addition to making equity investments, the Fund seeks capital
appreciation through investments 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 guranteed by foreign governments, their agencies, instrumentalities
and political subdivisions and by entities controlled or sponsored by such
governments. Since such debt securities frequently trade in the secondary
markets at substantial discounts, there is opportunity for capital appreciation
to the extent there is a favorable change in the market perception of the
creditworthiness of the issuer. Capital appreciation in debt securities also may
arise as a result of a favorable change in relative foreign exchange rates or in
relative interest rate levels. In accordance with its investment objective, the
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The receipt of income from such debt securities is
incidental to the Fund's objective of long-term capital appreciation. The Fund,
from time to time, may invest in debt securities with relatively high yields (as
compared with other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund. Debt securities with relatively
high yields usually are subject to a greater risk of default than other
comparable debt securities with lower yields.
High Yield/High Risk Securities (Junk Bonds). 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 ("S&P") and Moody's Investors Service,
Inc. ("Moody's"), and unrated securities of comparable quality are referred to
herein as "high yield/high risk securities" or "junk bonds." See Appendix A to
this Statement of Additional Information--"Ratings of Debt Securities." 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.
Although junk bonds generally pay higher rates of interest than investment
grade bonds, they are high risk investments that may cause income and principal
losses for the Fund. The major risks in junk bond investments include:
o Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their
interest or principal payment obligations because of an economic
downturn, specific issuer developments or the unavailability of
additional financing.
o The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the
issuer experiences financial stress, it may be unable to meet its debt
obligations. The issuer's ability to pay its debt obligations also may be
lessened by specific issuer developments or the unavailability of
additional financing.
o Junk bonds are frequently ranked junior to claims of other creditors. If
the issuer cannot meet its obligations, the senior obligations are
generally paid off before the junior obligations.
o Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer
redeems the junk bonds, the Fund may have to invest the proceeds in bonds
with lower yields and may lose income.
o Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk
bonds than on other higher rated fixed-income securities.
o Junk bonds may be less liquid than higher rated fixed-income securities
even under normal economic conditions. There are fewer dealers in the
junk bond market, and there may be significant differences in
4
<PAGE>
the prices quoted for junk bonds by the dealers. Because they are less
liquid, judgment may play a greater role in valuing certain of the Fund's
portfolio securities than is the case with securities trading in a more
liquid market.
o The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Distressed Securities. The Fund may invest in distressed securities, which
are debt securities of corporate or governmental issues that are the subject of
bankruptcy proceedings, or are otherwise in default as to the repayment of
principal or interest at the time of acquisition by the Fund, or are rated in
the lower rating categories (Ca or lower by Moody's and CC or lower by S&P), or
which, if unrated, are in the judgment of the Manager of equivalent quality.
Investment in distressed securities is speculative and involves significant
risks.
The Fund will generally make such investments only when the Manager
believes it is reasonably likely that the issuer of the distressed securities
will make an exchange offer or will be the subject of a plan of reorganization
pursuant to which the Fund will receive new securities. However, there can be no
assurance that such an exchange offer will be made or that such a plan of
reorganization will be adopted. In addition, a significant period of time may
pass between the time at which the Fund makes its investment in distressed
securities and the time that any such exchange offer or plan of reorganization
is completed. During this period, it is unlikely that the Fund will receive any
interest payments on the distressed securities, the Fund will be subject to
significant uncertainty as to whether or not the exchange offer or plan of
reorganization will be completed, and the Fund may be required to bear certain
extraordinary expenses to protect and recover its investment. Therefore, to the
extent the Fund pursues its secondary objective of capital appreciation through
investment in distressed securities, the Fund's ability to achieve current
income for its shareholders may be diminished.
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 may have been anticipated when the
investment was made. Moreover, any securities received by the Fund upon
completion of an exchange offer or a 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 restricted from disposing of such
securities.
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 above and are subject to many of the
same risks as such securities. In addition, the Fund's investments in non-dollar
denominated sovereign debt
5
<PAGE>
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.
Convertible Securities. Convertible securities entitle the holder to
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider both the
yield on the convertible security and the potential capital appreciation that is
offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Fund are denominated in United States dollars, the underlying equity
securities may be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
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Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
DERIVATIVES
The Fund may use instruments referred to as "derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Derivatives allow the Fund to
increase or decrease the level of risk to which the Fund is exposed more quickly
and efficiently than transactions in other types of instruments.
The Fund may use derivatives for hedging purposes. Hedging is a strategy in
which a derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially reduced
by gains on a derivative that reacts in an opposite manner to market movements.
While hedging can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund or if the cost
of the derivative outweighs the benefit of the hedge. Hedging also involves the
risk that changes in the value of the derivative will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. This risk is known as "correlation
risk."
The Fund may use the following types of derivative instruments and trading
strategies:
Indexed and Inverse Securities
The Fund may invest in securities the potential return of which is based on
an index. As an illustration, the Fund may invest in a debt security that pays
interest based on the current value of an interest rate index, such as the prime
rate. The Fund may also invest in a debt security which returns principal at
maturity based on the level of a securities index or a basket of securities, or
based on the relative changes of two indices. In addition, the Fund may invest
in securities the potential return of which is based inversely on the change in
an index (that is, a security the value of which will move in the opposite
direction of changes to an index). For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices. Indexed and
inverse securities involve credit risk, and certain indexed and inverse
securities may involve leverage risk, liquidity risk and currency risk. Fund
management 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. When used for hedging purposes, indexed securities involve
correlation risk.
Options on Securities and Securities Indices
Purchasing Options. The Fund may purchase put options on securities held
in its portfolio or securities or interest rate indices which are correlated
with securities held in its portfolio. When the Fund purchases a put option, in
consideration for an upfront 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. If the market value of the portfolio holdings associated with the put
option increases
7
<PAGE>
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. Purchasing a put option may
involve correlation risk, and may also involve liquidity and credit risk.
The Fund may also purchase call options on securities it intends to
purchase or securities or interest rate indices, which are correlated with 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. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
The Fund is also authorized to 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 may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates 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
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. 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. Writing a call option may
involve correlation risk.
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 an amount based on 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 rights 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, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. 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 will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put 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"). Writing a put option may
involve substantial leverage risks.
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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 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 option on a securities index, securities which
substantially correlate with 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 OTC markets. In
general, exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against their
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 credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. 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. Futures involve substantial leverage risk.
The sale of a futures contract 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 futures contract's expiration date. 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 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 relating to 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 purposes of hedging
against the decline in the value of currencies in which its portfolio holdings
are denominated against the U.S. dollar.
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 purposes of hedging either a specific
transaction or a
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portfolio position. The Fund may enter into a foreign exchange transaction for
purposes of hedging a specific transaction by, for example, purchasing a
currency needed to settle a security transaction or selling a currency in which
the Fund has received or anticipates receiving a dividend or distribution. The
Fund may enter into a 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 purchasing 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 U.S. dollar through 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.
Currency futures involve substantial currency risk, and also involve leverage
risk.
The Fund may also hedge against the decline in the value of a currency
against the U.S. 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 "Types of Options" above and "Additional
Risk Factors of OTC Transactions" below. Currency options involve substantial
currency risk, and may also involve credit, leverage or liquidity risk.
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. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. 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 decrease 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.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit risk--the risk that the counterparty on a derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency risk--the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk--the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
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Liquidity risk--the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of derivatives for hedging purposes involves correlation risk. If the
value of the derivative 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 into transactions involving derivatives 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." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a derivative 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 derivative without incurring
substantial losses, if at all.
Certain transactions in derivatives (such as futures transactions or sales
of put options) involve a substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. 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
Derivatives
Certain derivatives traded in OTC markets, including indexed securities and
OTC options, involve substantial liquidity risk. 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.
Because derivatives 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
derivatives 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.
OTHER INVESTMENT POLICIES, PRACTICES AND RISK FACTORS
Depositary Receipts. 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.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). To qualify, the Fund
will comply with certain requirements, including limiting its investments so
that at the close
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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.
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction
(4) below). In return, the Fund receives collateral in an amount equal to at
least 100% of the current market value of the loaned securities in cash or
securities issued or guaranteed by the United States Government. The Fund
receives securities as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by the Fund for
the loaned securities, which increases the Fund's yield. The Fund may receive a
flat fee for its loans. The loans are terminable at any time and the borrower,
after notice, is required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, 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.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net 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 would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. 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 where 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.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between issuers and purchasers, and may be neither listed on an exchange nor
traded in other established markets. In many cases, privately placed securities
may not be freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. As a result of the absence of a
public trading market, privately placed securities may be less liquid and more
difficult to value than publicly traded securities. To the extent that privately
placed securities may be resold in privately negotiated transactions, the prices
realized from the sales, due to illiquidity, could be less than those originally
paid by the Fund or less than their fair market value. In addition, issuers
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses
of registration. Certain of the Fund's investments in private placements may
consist of direct investments and may include investments in smaller,
less-seasoned issuers, which may involve greater risks. These issuers may have
limited product lines, markets or financial resources, or they may be dependent
on a limited management group. In making investments in such securities, the
Fund may obtain access to material nonpublic information which may restrict the
Fund's ability to conduct portfolio transactions in such securities.
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144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) debt securities which the Fund's management determines are as
liquid as publicly registered non-investment grade debt securities. The Board of
Directors has adopted guidelines and delegated to the Fund's management 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. Since it is not possible to
predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will continue to develop, the Board of Directors
will carefully monitor the Fund's investments in these securities. This
investment practice 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.
Warrants. Buying a warrant does not make the Fund a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason investment in warrants may be more speculative than other
equity-based investments.
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will have
to pay on the borrowings, the Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to the Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Manager in its best judgment nevertheless may determine to maintain the Fund's
leveraged position if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such covenants not cured within the specified cure
period may result in acceleration of outstanding indebtedness and require the
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Manager, provided that
the terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace.
When-Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when-issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis. The Fund may also purchase or sell securities through
a forward commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and delivery taking
place in the future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into the
transaction. The Fund has not established any limit on the percentage of its
assets that may be committed in connection with these transactions. When the
Fund purchases securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
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Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price 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.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that 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 will limit its investment in such commitments so
that the aggregate purchase price of 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 net assets
taken at the time of the commitment. The Fund segregates liquid assets in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Suitability. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Manager and its
affiliates. Because of its emphasis on foreign securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in foreign securities, including the risk of loss of principal.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities.
The fundamental policies set forth below may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more than
50% of the Fund's 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
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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 (i) the Fund 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 in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that 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.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Directors without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. 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 currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities that cannot be readily resold because of legal
or contractual restrictions, or that cannot otherwise be marketed, redeemed
or put to the issuer or 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 that mature within seven days or
securities that 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
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borrowed funds are subject to interest costs which will reduce net income.
The Fund will not purchase securities while borrowings exceed 5% of its
total assets.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on financial futures
contracts exceeds 15% of the net 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 net 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 Manager, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch or its affiliates
except for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage." Without such an exemptive order the Fund would be prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal.
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 its investment policies, the Fund may engage in a
substantial number of portfolio transactions and the Fund's portfolio turnover
rate may be higher than that of other investment companies. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. A high
portfolio turnover rate involves certain tax consequences and correspondingly
greater transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the Fund.
16
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of seven individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Directors are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Directors, the executive officers and the 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 each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66)--President and Director(1)(2)--Chairman of the Manager
and Fund Asset Management, L.P. ("FAM") (which terms as used herein include
their 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 (72)--Director(2)(3)--1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
ROLAND M. MACHOLD (62)--Director(2)(3)--1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1988; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.
EDWARD H. MEYER (72)--Director(2)(3)--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 (67)--Director(2)(3)--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 from 1986 to 1997.
RICHARD R. WEST (61)--Director(2)(3)--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
Realty Trust, Inc. (real estate holding company) and Alexander's, Inc. (real
estate company).
EDWARD D. ZINBARG (63)--Director(2)(3)--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 (58)--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 Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (65)--Senior Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
17
<PAGE>
A. GRACE PINEDA (42)--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 (38)--Vice President and Treasurer(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.
PHILLIP S. GILLESPIE (35)--Secretary(1)(2)--Attorney associated with the
Manager and FAM since 1998; Assistant General Counsel of Chancellor LGT Asset
Management, Inc. from 1997 to 1998; Senior Counsel and Attorney in the Division
of Investment Management and the Office of General Counsel at the U.S.
Securities and Exchange Commission from 1993 to 1997.
- ------------------------
(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 FAM acts as the investment
adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested directors.
As of March , 1999, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% 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.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, a fee of $500 per meeting attended. The Fund pays the
Chairman of the Committee an additional fee of $250 per meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended November 30, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, FAM ("MLAM/FAM-advised funds"), for the calendar
year ended December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL FUND AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ------------------------------------- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil......................... Director $8,500 None None $ 277,808
Roland M. Machold.................... Director $ 792 None None $ 39,208(2)
Edward H. Meyer...................... Director $5,500 None None $ 214,558
Charles C. Reilly.................... Director $7,500 None None $ 362,858
Richard R. West...................... Director $7,500 None None $ 334,125
Edward D. Zinbarg.................... Director $7,500 None None $ 133,959
</TABLE>
- ------------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows:
Mr. Cecil (34 registered investment companies of 34 portfolios);
Mr. Machold (19 registered investment companies consisting of 19
portfolios); Mr. Meyer (34 registered investment companies consisting of 34
portfolios); Mr. Reilly (54 registered investment companies consisting of 67
portfolios); Mr. West (56 registered investment companies consisting of 81
portfolios); and Mr. Zinbarg (19 registered investment companies consisting
of 19 portfolios).
(2) Mr. Machold was elected a Director of the Fund and certain other
MLAM/FAM-advised funds on October 20, 1998.
18
<PAGE>
Directors of the Fund, members of the Boards of other MLAM-advised
investment companies, 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.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the Board of
Directors, the Manager is responsible for the actual management of the Fund's
portfolio and constantly reviews the Fund's holdings in light of its own
research analysis and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Manager. The Manager performs certain of the other administrative services and
provides all the office space, facilities, equipment and necessary personnel for
management of the Fund.
Management Fee. The Fund has entered into a management agreement with the
Manager (the "Management Agreement"), pursuant to which 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 table below sets forth information
about the total investment advisory fees payable by the Fund to the Manager for
the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, INVESTMENT ADVISORY FEE
- ------------------------------------------------- -----------------------
<S> <C>
1998............................................. $70,739*
1997............................................. $85,890*
1996............................................. $97,346*
</TABLE>
- ------------------------
* All of which was voluntarily waived by the Manager. The fees listed in the
table above have not been adjusted to reflect these waivers because the waivers
are voluntary and can be retracted at any time. For the fiscal years ended
November 30, 1996, 1997 and 1998, the Manager also voluntarily waived $331,565,
$424,998 and $353,413, respectively, representing reimbursement of additional
expenses.
The management fee 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.
The Manager has entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K. provides
investment advisory services to the Manager with respect to the Fund. The Fund
paid no fees to MLAM U.K. for the fiscal years ended November 30, 1996, 1997 and
1998.
Payment of Fund Expenses. 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, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor"); charges of the custodian and the 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-interested
Directors; accounting and pricing costs (including the daily calculations 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 for the Fund by the Manager and the
Fund reimburses the Manager for its costs in connection with such services. See
"Purchase of Shares--Distribution Plans."
19
<PAGE>
Organization of the Manager. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, 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.
The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (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 a fee of
$11.00 per Class A or Class D account and $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 the Transfer Agent 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.
Distribution Expenses. 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 above.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under 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 pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security 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).
20
<PAGE>
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) 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 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 (also known as service 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 contingent deferred sales charges
("CDSCs"), distribution fees 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 do 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.
Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
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 Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 registered investment companies advised by MLAM or FAM. Funds advised by MLAM
or FAM that utilize the Merrill Lynch Select Pricing(Service Mark) System are
referred to herein as "Select Pricing Funds."
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. 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.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares because
there is an account maintenance fee imposed on Class D shares. Investors
qualifying for significantly reduced initial sales charges may find the initial
sales charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect 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 who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing Funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charge 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.
21
<PAGE>
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, 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, her or their own account and to
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 which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A shares are
entitled to purchase additional Class A shares of the Fund in that account.
Certain Employer Sponsored Retirement or Savings Plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(Service Mark) 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 certain 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 investment companies. Certain persons who
acquired shares of certain MLAM-advised closed-end funds in their initial
offerings 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 are met. In addition, Class A shares of
the Fund and certain other Select Pricing Funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions 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 Select Pricing Funds.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------------------------------------
GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
FOR THE FISCAL YEAR CHARGES RETAINED BY PAID TO REDEMPTION OF
ENDED NOVEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ---------------------------------- ----------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $ 0 $ 0 $ 0 $5,604
1997 0 0 0 0
1996 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES
- --------------------------------------------------------------------------------------------------------------
GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
FOR THE FISCAL YEAR CHARGES RETAINED BY PAID TO REDEMPTION OF
ENDED NOVEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ---------------------------------- ----------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $ 1,426 $ 178 $ 1,348 $ 730
1997 $ 6,296 $ 637 $ 5,659 0
1996 $ 2,418 $ 157 $ 2,261 0
</TABLE>
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.
22
<PAGE>
REDUCED INITIAL SALES CHARGES
Reinvested Dividends and Capital Gains. 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.
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 public offering price of the shares 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 Select Pricing 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. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent 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 and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the 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 Intent (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 at least 5.0% of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise 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 further reduced percentage
sales charge that 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 charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(Service Mark) Managed Trusts. Class A shares are offered at net asset
value to TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services.
Employee Access(Service Mark) Accounts. Provided applicable threshold
requirements are met, either Class A or Class D shares are offered at net asset
value to Employee Access(Service Mark) Accounts available through authorized
employers. The initial minimum investment for such accounts is $500, except that
the initial minimum investment for shares purchased for such accounts pursuant
to the Automatic Investment Program is $50.
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
23
<PAGE>
aggregate amount invested by the plan in specified investments and/or the
services provided by Merrill Lynch to the plan. 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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised funds, 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 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 that 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
shares 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 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 are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that 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 the 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.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(Service Mark) 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 a 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 Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A 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 continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders
24
<PAGE>
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 CDSC (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.
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 personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that 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 shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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 Select Pricing 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. See "Pricing of Shares--Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the 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 that do not qualify for
the 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.
CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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
25
<PAGE>
dividends or capital gains distributions. 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. 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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A PERCENTAGE
PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------------ --------------------
<S> <C>
0-1..................................................................... 4.0%
1-2..................................................................... 3.0%
2-3..................................................................... 2.0%
3-4..................................................................... 1.0%
4 and thereafter........................................................ None
</TABLE>
To provide an example, assume an investor purchased 100 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 a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge 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 may be 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 Internal Revenue Code of 1986, as amended) of a shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability, or, if later, reasonably promptly following
completion of probate. The Class B CDSC also is waived on redemptions of shares
by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also be
waived for any Class B shares that are purchased by eligible 401(k) or eligible
401(a) plans that 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 is waived for any Class B shares that were acquired and held at the
time of the redemption in an Employee Access(Service Mark) Account available
through employers providing eligible 401(k) plans. The Class B CDSC may also be
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 may be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services--Fee-Based Programs" and "--Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, 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. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing 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.
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 value of the shares of
the two
26
<PAGE>
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 shares 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 the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B shares
with a ten-year Conversion Period, or vice versa, 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 on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services--Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services --Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
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 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.
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. 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. 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.
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.
The Class C CDSC may be waived in connection with certain fee-based programs,
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services--Fee-Based Programs" and "--Systematic Withdrawal Plan."
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
- -------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED NOVEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
1998 $35,620 $35,620
1997 $45,331 $45,331
1996 $54,951 $54,951
</TABLE>
* Additional Class B CDSCs payable to the Distributor with respect to the fiscal
years ended November 30, 1997 and 1998 may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs.
27
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES
- -------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED NOVEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
1998 $ 831 $ 831
1997 $1,686 $1,686
1996 $1,532 $1,532
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. 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.
See "Distribution Plans" below. 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.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" 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.
The Distribution Plans for Class B, Class C and Class D shares each
provides 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 with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the 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 Distribution Plans for Class B and Class C shares each provides 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 shareholder and 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 relating 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
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 reasonable
likelihood that each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can 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 Directors, including a majority of the Independent
Directors who have no
28
<PAGE>
direct or indirect financial interest in the Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place.
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 and/or distribution fees paid to the
Distributor. 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 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
promotion and marketing 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.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual revenues by approximately $78,000
(1.35% of Class B net assets at that date). As of November 30, 1998, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $226,873 (7.33% of Class B net assets at that
date). As of December 31, 1997, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class C shares exceeded the fully allocated accrual revenues by
approximately $8,000 (1.16% of Class C net assets at that date). As of
November 30, 1998, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $24,043 (7.59% of
Class C net assets at that date).
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$47,619 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately
$4.7 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, 1998, the Fund paid the
Distributor $5,607 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$0.6 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, 1998, the Fund paid the
Distributor $2,269 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$0.9 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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 has
voluntarily 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
29
<PAGE>
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 payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of November 30,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
DATA CALCULATED AS OF NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE 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, 1998
Under NASD Rule as Adopted............ $ 10,883 $ 680 $185 $ 865 $342 $ 523 $ 23
Under Distributor's Voluntary
Waiver.............................. $ 10,883 $ 680 $ 55 $ 735 $342 $ 393 $ 23
CLASS C SHARES, FOR THE PERIOD
DECEMBER 30, 1994 (COMMENCEMENT OF
OPERATIONS) TO NOVEMBER 30, 1998
Under NASD Rule as Adopted............ $ 1,668 $ 104 $ 28 $ 132 $ 27 $ 105 $ 2
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA(Service Mark)) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
30
<PAGE>
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon 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 shares redeemed during the
first year after purchase will be subject to the redemption fee discussed below.
Except for any CDSC and redemption fee that 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 reinvested through the date of redemption.
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.
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 any period 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 may by order permit
for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities held
by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
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. Redemption requests should not be
sent to the Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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, payments 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 (e.g., cash, Federal funds or certified check
drawn on a United States bank). 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, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to
31
<PAGE>
fifteen minutes after the regular close of business on the NYSE (generally, the
NYSE closes at 4:00 p.m., Eastern time), and 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
CDSC). 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 Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business on
the NYSE on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m., Eastern time. 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 NYSE is not open for trading 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.
Net asset value is computed by dividing the value of the securities held by
the Portfolio 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, rounded to the nearest
cent. Expenses, including the fees payable to the Manager and Distributor, 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 the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of 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
32
<PAGE>
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities, including ADRs, EDRs and 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 Trustees 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. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market. 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. When the Fund writes an option, the amount of the premium received
is recorded on the books of the Fund as an asset and an equivalent liability.
The amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. Other investments, including financial
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
Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Directors.
Generally, trading in non-U.S. 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 that 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 Trustees.
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, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets....................................... $ 563,112 $ 3,095,940 $ 316,932 $ 549,894
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Number of Shares Outstanding..................... 68,847 381,876 39,050 67,438
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Net Asset Value Per Share (net assets divided by
number of shares outstanding).................. $ 8.18 $ 8.11 $ 8.12 $ 8.15
Sales Charge (for Class A and Class D shares:
5.25% of offering price; 5.54% of net asset
value per share)*.............................. .45 ** ** .45
------------ ------------ ----------- ------------
Offering Price................................... $ 8.63 $ 8.11 $ 8.12 $ 8.60
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent; assumes 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 of shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Contingent Deferred Sales Charges--Class B Shares" and "--Contingent
Deferred Sales Charges--Class C Shares" herein.
33
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Directors, the Manager is
primarily responsible for the execution of the Fund's portfolio transactions and
the allocation of brokerage. The Fund has no obligation to deal with any dealer
or group of dealers in the execution of transactions in portfolio securities of
the Fund. Where possible, the Fund deals directly with the dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. It is the policy of the Fund to
obtain the best results in conducting portfolio transactions for the Fund,
taking into account such factors as price (including the applicable dealer
spread or commission), the size, type and difficulty of the transaction
involved, the firm's general execution and operations facilities and the firm's
risk in positioning the securities involved. The portfolio securities of the
Fund generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging growth
companies in which the Fund may invest may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely traded
securities.
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as information concerning tax-exempt securities,
economic data and market forecasts) to the Manager 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 its
Management Agreement and the expense of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
Supplemental investment research obtained from such dealers might be used by the
Manager in servicing all of its accounts and all such research might not be used
by the Manager in connection with the Fund. Consistent with the Conduct Rules of
the NASD and policies established by the 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. The Fund may incur settlement delays on certain of such exchanges.
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."
34
<PAGE>
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategies.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE COMMISSIONS PAID
FISCAL YEAR ENDED NOVEMBER 30, COMMISSIONS PAID TO MERRIL LYNCH
- ------------------------------------------------------ ------------------- ----------------
<S> <C> <C>
1998.................................................. $ 13,683 $ 91
1997.................................................. $ 43,195 $ 2,930
1996.................................................. $ 45,424 $ 205
</TABLE>
For the fiscal year ended November 30, 1998, the brokerage commissions paid to
Merrill Lynch represented 0.67% of the aggregate brokerage commissions paid and
involved 1.21% of the Fund's dollar amount of transactions involving payment of
commissions during the year.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such 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 over-the-counter market usually involve transactions with
dealers acting as principal for their own accounts, affiliated persons of the
Fund, including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or over-the-counter transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. 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 adopted by the Board of Directors
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act 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 a statement
setting forth 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. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or FAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the Manager
or an affiliate act as manager, 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 an affiliate 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.
35
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans 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, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gain distributions. The statements will also show any other activity
in the account since the preceding statement. Shareholders will also receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. 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 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 CDSC) so that the cash
proceeds can be transferred to the account at the new firm or 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 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 his or her
shares and then must turn the certificates over to the new firm for
re-registration in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of the
second fund in the account in which the exchange is made
36
<PAGE>
or is otherwise eligible to purchase Class A shares of the second fund. Class D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("new Class A or Class D shares"), are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B or Class C shares of the fund from which the
exchange has been made. For purposes of computing the CDSC that may be payable
on a disposition of the new Class B or Class C shares, the holding period for
the outstanding Class B or Class C shares is "tacked" to the holding period of
the new Class B shares. For example, an investor may exchange Class B or
Class C shares of the Fund for those of Merrill Lynch Special Value Fund, Inc.
("Special Value Fund") after having held the Fund's Class B shares for two and a
half years. The 2% CDSC that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive cash. There will be no CDSC due
on this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three-year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the Special Value Fund
Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or
Class C shares of Select Pricing Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC
and toward satisfaction of any Conversion Period with respect to Class B shares.
Class B shares of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for the money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
Conversion Period. However, the holding period
37
<PAGE>
for Class B or Class C shares received in exchange for such money market fund
shares will be aggregated with the holding period for the original shares for
purposes of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other MLAM-advised mutual funds with shares for which certificates have
not been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific 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
(1-800-MER-FUND) or 1-(800)-637-3863.
RETIREMENT PLANS
Individual retirement accounts and other retirement plans are available
from Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each
38
<PAGE>
account. Information with respect to these plans is available on request from
Merrill Lynch. The minimum initial purchase to establish any such plan is $100,
and the minimum subsequent purchase is $1.
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) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(Registered) or
CBA(Registered) account may arrange to have periodic investments made in the
Fund of amounts of $100 or more ($1 or more for retirement accounts) or more
through the CMA(Registered) or CBA(Registered) Automated Investment Program.
AUTOMATIC DIVIDEND PROGRAM
Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the NYSE on the monthly payment date for such dividends and
distributions. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends or both dividends and
capital gains distributions, paid in cash, rather than reinvested in shares of
the Fund or vice versa (provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10.00 or less, a shareholder
will not receive such payment in cash and such payment will automatically be
reinvested in additional shares). Commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected. 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 checks. Cash payments can also be directly deposited to the
shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A, Class B,
Class C or Class D shares are redeemed from those on deposit in the
shareholder's account to provide the withdrawal payment specified by the
shareholder. The shareholder may specify the dollar amount and the class of
shares to be redeemed. Redemptions will be made at net asset value as determined
15 minutes after the close of business on the NYSE (generally, the NYSE closes
at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined 15 minutes after the close of business on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
39
<PAGE>
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares." Where
the systematic withdrawal plan is applied to Class B shares, upon conversion of
the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will be applied thereafter to Class D shares if the shareholder
so elects. If an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her Financial
Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA(Registered), CBA(Registered) Account or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA(Registered) or CBA(Registered)Systematic Redemption Program. The
minimum fixed dollar amount redeemable is $50. The proceeds of systematic
redemptions will be posted to the shareholder's account three business days
after the date the shares are redeemed. All redemptions are made at net asset
value. A shareholder may elect to have his or her shares redeemed on the first,
second, third or fourth Monday of each month, in the case of monthly
redemptions, or of every other month, in the case of bimonthly redemptions. For
quarterly, semiannual or annual redemptions, the shareholder may select the
month in which the shares are to be redeemed and may designate whether the
redemption is to be made on the first, second, third or fourth Monday of the
month. If the Monday selected is not a business day, the redemption will be
processed at net asset value on the next business day. The CMA(Registered) or
CBA(Registered) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(Registered) or
CBA(Registered) Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
Capital gains and ordinary income received in each of the retirement plans
referred to above are exempt from Federal taxation until distributed from the
plan. Investors considering participation in any such plan should review
specific tax laws relating thereto and should consult their attorneys or tax
advisers with respect to the establishment and maintenance of any such plan.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid at least annually. All
net realized capital gains, if any, are distributed to the Fund's shareholders
at least annually. Premiums from expired call options written by the Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for Federal income tax purposes. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. See "Shareholder
Services--Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. Dividends and distributions are taxable to
shareholders, as described below, whether they are invested in shares of the
Fund or received in cash. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class A and Class D shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares; similarly, the per share dividends and distributions
on Class D shares will be lower than the per share dividends and
40
<PAGE>
distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Pricing of
Shares--Determination of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as the
Fund 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 that 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.
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 a 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.
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 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). Certain categories of
capital gains are 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 gains dividends, as well as any amount of capital gains 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.
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 of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange 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 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"). Some of these
41
<PAGE>
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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States 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 applicability of the United States 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 United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States 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 paid by the Fund only if the shareholder meets
certain holding period requirements. The Fund also must meet these holding
period requirements, and if the Fund fails to do so, it will not be able to
"pass through" to shareholders the ability to claim a credit or deduction for
the related foreign taxes paid by the Fund. If the Fund satisfies the holding
period requirements and more than 50% in value of its 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 United States
income tax returns as gross income, treat such proportionate shares as taxes
paid by them, and deduct such proportionate shares computing in their taxable
incomes or, alternatively, use them as foreign tax credits against their United
States income taxes. No deductions for foreign taxes, moreover, 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
United States withholding taxes 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 United States 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 the 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
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<PAGE>
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.
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.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
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 options, futures 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 future 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
43
<PAGE>
greater than such shareholder's basis in Fund shares (assuming 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.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
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 investment in the Fund.
44
<PAGE>
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. 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 formulas 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 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 for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In order to reflect the
reduced sales charges in the case of Class A or Class D shares or the waiver of
the CDSC in the case of Class B or Class C shares applicable to certain
investors, as described under "Purchase of Shares" 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 take into account the
waiver of the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
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<PAGE>
Set forth in the tables 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 OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ------------------------------ --------------------- ------------------- --------------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended
November 30, 1998........... (28.06)% $ 719.40 (27.78)% $ 722.20
Inception (December 30, 1994)
to November 30, 1998........ (2.18)% $ 917.30 (2.08)% $ 920.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.......................... (22.59)% $ 774.10 (23.40)% $ 766.00
1997.......................... 22.43% $1,224.30 21.02% $1,210.20
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 CHARGES)
<S> <C> <C> <C> <C>
Inception (December 30, 1994)
to November 30, 1998........ (8.27)% $ 917.30 (7.92)% $ 920.80
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------------- -------------------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ------------------------------ --------------------- ------------------- --------------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended
November 30, 1998........... (25.59)% $ 744.10 (28.29)% $ 717.10
Inception (December 30, 1994)
to November 30, 1998........ (1.79)% $ 931.70 (2.46)% $ 906.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.......................... (23.38)% $ 766.20 (22.84)% $ 771.60
1997.......................... 21.42% $1,214.20 21.95% $1,219.50
1996.......................... (5.16)% $ 948.40 (4.31)% $ 956.90
Inception (December 30, 1994)
to November 30, 1995........ 5.60% $1,056.00 6.30% $1,063.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (December 30, 1994)
to November 30, 1998........ (6.83)% $ 931.70 (9.31)% $ 906.90
</TABLE>
46
<PAGE>
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"
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 greater total
return since, due to the reduced sales charges or the waiver of CDSCs, a lower
amount of expenses may be deducted. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future 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 various indices,
including the Morgan Stanley Capital International (MSCI) indices for Israel,
Turkey and South Africa, the Standard & Poor's 500 Index, the Dow Jones
Industrial Average, or to performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA Investment
Technology, Inc., Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine, Fortune Magazine or other industry publications. In addition,
from time to time the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements 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.
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 accountant 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.
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.
47
<PAGE>
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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested 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
(the "Custodian"), acts as custodian of the Fund's assets. Under its contract
with the Fund, the Custodian is authorized to establish separate accounts in
foreign currencies and to cause foreign securities owned by the Fund to be held
in its offices outside the U.S. 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
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's 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 "How to Buy, Sell,
Transfer and Exchange Shares--Through the Transfer Agent" 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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
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.
48
<PAGE>
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of any class of the Fund's shares as of January 4, 1999.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- -------------------------------------------- -------------------------------------------- ------------------
<S> <C> <C>
Arthur Zeikel and Terrie Zeikel 300 Woodland Avenue 24.6% of Class A
Westfield, NJ 07090
Althea Grace Pineda 54 Governors Lane 17.7% of Class A
Princeton, NJ 08540
Edward D. Zinbarg 5 Hardwell Road 16.6% of Class A
Short Hills, NJ 07078
James Leitner and Sandra Leitner 737 Charnwood Drive 7.4% of Class B
Wyckoff, NJ 07481
Merrill Lynch Asset Management P.O. Box 9011 8.5% of Class C
Princeton, NJ 08543 5.2% of Class D
Donald C. Brandt 5373 W. Alabama Street #502 7.4% of Class C
Houston, TX 77056
Sameh K. Toma and Bettie W. Toma 664 Lewter Shop Road 5.9% of Class C
Apex, NC 27502
Dave Jones c/o HR Strategies, Inc. 15.9% of Class D
400 Renaissance Ctr. #1500
Detroit, MI 48243
Sand Springs Home Attn.: Joe E. Williams 8.7% of Class D
P.O. Box 278
Sand Springs, OK 74063
PACO Attn.: Mutual Funds Unit 38615 7.5% of Class D
P.O. Box 513577
Los Angeles, CA 90051
Davis F. Gates 1255 Osceola Drive 5.3% of Class D
Fort Myers, FL 33901
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
49
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the "Aaa"
group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present which make the long-term risks
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 sometime 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.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. 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.
DESCRIPTION OF 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 makes no
representation that rated bank or insurance company obligations are exempt from
registration under the Securities Act of 1933 or issued in conformity with any
other applicable law or regulation. Nor does Moody's represent that any specific
bank or insurance company obligation is legally enforceable or a valid senior
obligation of a rated issuer. Moody's employs the following three designations,
all judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
A-1
<PAGE>
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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o 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 senior short-term 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 the parenthesis 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 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 our familiar 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.
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 to be a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
A-2
<PAGE>
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 dividends
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 thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issuer ranks in the lower end of its
generic rating category.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt 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.
The ratings are based on current information furnished by the obligor or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform any audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
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.
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA Debt 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 Debt rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt 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.
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
Debt 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 debt will likely have some
quality and protective characteristics, these may be outweighed by large uncertainties or major exposures
to adverse conditions.
BB Debt 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 Debt 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
commitments on the obligation.
CCC Debt 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 obligator is not likely to have the
capacity to meet its financial commitment on the obligation.
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 The "D" rating, unlike other ratings, is not prospective; rather, it is used only where a default has
actually occurred--and not where a default is only expected. Standard & Poor's changes ratings to "D"
either:
o On the day an interest and/or principal payment is due and is not paid. An exception is made if there
is a grace period and Standard & Poor's believes that a payment will be made, in which case the rating
can be maintained; or
o Upon voluntary bankruptcy filing or similar action. An exception is made if Standard & Poor's expects
that debt service payments will continue to be made on a specific issue. In the absence of a payment
default or bankruptcy filing, a technical default (i.e., covenant violation) is not sufficient for
assigning a "D" rating.
An issuer credit rating (also known as a corporate credit rating, counterparty credit rating, natural
rating, senior implied rating, or default risk rating) is changed to "N.M." (for "not meaningful") upon;
o The first occurrence of a payment default on any financial obligation, rated or unrated, other than a
financial obligation subject to a bona fide commercial dispute. (In this context, preferred stock is
not considered to be a financial obligation. Thus, a missed preferred stock dividend does not
necessarily mean that the issuer credit rating is changed to "N.M.");
o A voluntary bankruptcy filing by the issuer, or similar action--even if the issuer continues debt
service payments on some financial obligations; or
o Seizure of a rated bank by a regulator or placement of an insurer under regulatory supervision owing to
its financial condition. Such regulatory actions imply substantial uncertainty about the issuer's
ability to continue meeting financial obligations. (An insurer's claims-paying ability rating would go
to "R" if the insurer were placed under regulatory supervision because of its financial condition.)
</TABLE>
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
N.R. indicates not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly
A-4
<PAGE>
known as "investment grade" ratings) are generally regarded as eligible for
bank investment. Also, the laws of various states governing legal investment
impose certain rating or other standards for obligations eligible for
investment by savings banks, trust companies, insurance companies and
fiduciaries in general.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
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.
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 obligation.
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 Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information or based on other
circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which 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.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
A-5
<PAGE>
The 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.
<TABLE>
<S> <C>
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 prefered stock obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality, fixed-income security. The capacity
to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred stock obligations, although it is
somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred stock obligations.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
BB Preferred stock rated BB, B and CCC are regarded, on balance, as predominantly speculative with respect
B to the issuer's capacity to pay preferred stock obligations. BB indicates the lowest degree of
CCC 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 that is in arrears on dividends or sinking fund
payments, but that is currently paying.
C A referred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in default on debt instruments.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to
base a rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of
policy.
</TABLE>
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, ratings from AA to CCC may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
A-6
<PAGE>
[This page intentionally left blank]
<PAGE>
CODE # 18412-03-99
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C> <C>
1 -- Amended and Restated Articles of Incorporation of the Registrant, dated October 5, 1994.(a)
2 -- By-Laws of the Registrant.(a)
3 -- Portions of the Amended and Restated Articles of Incorporation and the By-Laws of the Registrant
defining the rights of shareholders.(b)
4(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)
5(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)
6 -- None.
7 -- Custody Agreement between the Registrant and Brown Brothers Harriman & Co.(c)
8(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)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(d)
13(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)
14(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.
15 -- Merrill Lynch Select Pricing(Service Mark) 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.
(Footnotes continued on next page)
C-1
<PAGE>
(Footnotes continued from previous page)
(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).
(g) Previously filed as an Exhibit to the Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. 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 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, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
C-2
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
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
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, 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 Technology 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 Advisor 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 Governmental 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 Corporate High
Yield 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 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.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAsset Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, 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 registered 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
C-3
<PAGE>
Intermediate Government Bond Fund is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665. The address of FAM, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Princeton Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds
Distributer ("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 10281-1201. The address of the
Fund's transfer agent, Financial Data Services, Inc. ("FDS"), 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, 1996 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 26,
and Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one or more
of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME 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; President of FAM and MLAM from 1977 to
1997; Chairman and Director of Princeton Services;
President of Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.
Jeffrey M. Peek President President of FAM; President and Director of Princeton
Services; Executive Vice President of ML & Co.; Managing
Director and Co-Head of the Investment Banking Division of
Merrill Lynch in 1997; Senior Vice President and Director
of the Global Securities and Economics Division of Merrill
Lynch from 1995 to 1997
Terry K. Glenn Executive Vice Executive Vice President of FAM; Executive Vice President
President and Director of Princeton Services; President and Director
of PFD; Director of FDS; President of Princeton
Administrators
Mark A. DeSario Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Linda L. Federici Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Elizabeth 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 Senior Vice President, Secretary and General Counsel of
President, Secretary FAM; Senior Vice Vice President of Princeton Services
and General Counsel
Philip L. Kirstein Senior Vice President Senior Vice President of FAM; Senior Vice President;
Director and Secretary of Princeton Services
Ronald M. Kloss Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C>
Debra W. Landsman-Yaros Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Vice President of PFD
Stephen M. M. Miller Senior Vice President Executive Vice President of Princeton Administrators;
Senior Vice President of Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Brian A. Murdock Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of FAM; Senior Vice
and Treasurer President of Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah Senior Vice President Senior Vice President of FAM; Senior Vice President and
Treasurer of Princeton Services
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies 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 Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, 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 Technology 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 Senior Floating Rate 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 Fund,
Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
registered 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.
C-5
<PAGE>
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,
1996, 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 26:
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C>
Arthur Zeikel Director and Chairman Chairman of MLAM and FAM; President of MLAM and FAM
from 1977 to 1997; Chairman and Director of Princeton
Services; President of Princeton Services from 1993 to
1997; Executive Vice President of ML & Co.
Alan J. Albert Senior Managing Vice President of MLAM
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 MLAM and FAM;
Senior Vice President and Treasurer of Princeton Services;
Vice President and Treasurer of PFD
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company None
Secretary
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, 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 26 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.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081, except
that the address of Messrs. 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 PFD WITH REGISTRANT
- ---------------------------------------------------- ---------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn...................................... President and Director Executive Vice President
Michael G. Clark.................................... Director None
Thomas J. Verage.................................... Director None
Robert W. Crook..................................... Senior Vice President None
Michael J. Brady.................................... Vice President None
William M. Breen.................................... Vice President None
James T. Fatseas.................................... Vice President None
Debra W. Landsman-Yaros............................. Vice President None
Michelle T. Lau..................................... Vice President None
Gerald M. Richard................................... Vice President and Treasurer None
Salvatore Venezia................................... Vice President None
William Wasel....................................... Vice President None
Robert Harris....................................... Secretary None
</TABLE>
C-6
<PAGE>
(c) Not applicable.
ITEM 28. 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, Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Merrill
Lynch Asset Management" 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 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT AND THE INVESTMENT
COMPANY ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, DULY AUTHORIZED, IN THE TOWNSHIP OF
PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 29TH DAY OF JANUARY, 1999.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND,
INC.
(Registrant)
By: /s/ ARTHUR ZEIKEL
----------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director (Principal Executive January 29, 1999
- ------------------------------------------ Officer)
(Arthur Zeikel)
DONALD C. BURKE* Vice President and Treasurer (Principal
- ------------------------------------------ Financial and Accounting Officer)
(Donald C. Burke)
DONALD CECIL* Director
- ------------------------------------------
(Donald Cecil)
ROLAND M. MACHOLD* Director
- ------------------------------------------
(Roland M. Machold)
EDWARD H. MEYER* Director
- ------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- ------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- ------------------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- ------------------------------------------
(Edward D. Zinbarg)
*By: /s/ ARTHUR ZEIKEL January 29, 1999
-------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of each of the Maryland corporations listed
below and a trustee of each of the Massachusetts business trusts listed below,
hereby authorizes Arthur Zeikel, Terry K. Glenn, Donald C. Burke, Barbara G.
Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel, Ira P. Shapiro or
Michael J. Hennewinkel, or any of them, as attorney-in-fact, to sign on his
behalf any amendments to the Registration Statement for each of the following
registered investment companies and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission: Merrill Lynch Americas Income Fund,
Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill Lynch Dragon
Fund, Inc.; Merrill Lynch Emerging Tigers Fund, Inc.; Merrill Lynch EuroFund;
Merrill Lynch Global Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for
Investment and Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch
Global SmallCap Fund, Inc.; Merrill Lynch Global Technology Fund, Inc.; Merrill
Lynch Global Value Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill
Lynch International Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill
Lynch Middle East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill
Lynch Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.;
and Worldwide DollarVest Fund, Inc.
Dated: January 21, 1999
/s/ DONALD CECIL
----------------------------------
(Donald Cecil)
/s/ ROLAND M. MACHOLD
----------------------------------
(Roland M. Machold)
/s/ EDWARD H. MEYER
----------------------------------
(Edward H. Meyer)
/s/ CHARLES C. REILLY
----------------------------------
(Charles C. Reilly)
/s/ RICHARD B. WEST
----------------------------------
(Richard B. West)
/s/ ARTHUR ZEIKEL
----------------------------------
(Arthur Zeikel)
/s/ EDWARD D. ZINBARG
----------------------------------
(Edward D. Zinbarg)
C-9
<PAGE>
POWER OF ATTORNEY
The undersigned, the Vice President and Treasurer of each of the registered
investment companies listed below, hereby authorizes Arthur Zeikel, Terry K.
Glenn, Barbara G. Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel,
Ira P. Shapiro or Michael J. Hennewinkel, or any of them, as attorney-in-fact,
to sign on his behalf any amendments to the Registration Statement for each of
the following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: Merrill Lynch
Americas Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.;
Merrill Lynch Dragon Fund, Inc.; Merrill Lynch Emerging Tigers Fund, Inc.;
Merrill Lynch EuroFund; Merrill Lynch Global Allocation Fund, Inc.; Merrill
Lynch Global Bond Fund for Investment and Retirement; Merrill Lynch Global
Holdings, Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill Lynch Global
Technology Fund, Inc.; Merrill Lynch Global Value Fund, Inc.; Merrill Lynch
Healthcare Fund, Inc.; Merrill Lynch International Equity Fund; Merrill Lynch
Latin America Fund, Inc.; Merrill Lynch Middle East/Africa Fund, Inc.; Merrill
Lynch Pacific Fund, Inc.; Merrill Lynch Short-Term Global Income Fund, Inc.;
Merrill Lynch Technology Fund, Inc.; and Worldwide DollarVest Fund, Inc.
Dated: January 22, 1999
/s/ DONALD C. BURKE
----------------------------------
(Donald C. Burke)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C> <C>
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
14(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>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Middle East/Africa Fund, Inc.
We consent to the incorporation by reference in this Post-Effective Amendment
No. 6 to Registration Statement No 33-55843 of our report dated January 19,
1999, appearing in the annual report to shareholders of Merrill Lynch Middle
East/Africa Fund, Inc. for the year ended November 30, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 28, 1999
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