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[LOGO] Merrill Lynch
Prospectus
Merrill Lynch Middle East/Africa Fund, Inc.
[Merrill Lynch Artwork]
April 1, 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.
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<TABLE>
<CAPTION>
Table of Contents PAGE
[LOGO] KEY FACTS
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<S> <C>
The Merrill Lynch Middle East/Africa Fund at a Glance 3
Risk/Return Bar Chart 5
Fees and Expenses 6
[LOGO] DETAILS ABOUT THE FUND
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How the Fund Invests 8
Investment Risks 9
[LOGO] YOUR ACCOUNT
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Merrill Lynch Select PricingSM System 22
How to Buy, Sell and Transfer Shares 27
[LOGO] MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management 32
Financial Highlights 33
[LOGO] FOR MORE INFORMATION
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Shareholder Reports Back Cover
Statement of Additional Information Back Cover
</TABLE>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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THE MERRILL LYNCH MIDDLE EAST/AFRICA FUND AT A GLANCE
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[GRAPHIC] Key Facts
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 is the Fund's investment objective?
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. Certain of the
risks associated with international investments are heightened for investments
in emerging markets such as Middle Eastern/African countries.
Fund management chooses securities using a combination of "top down" and "bottom
up" investment styles. "Top down" means that the Fund seeks to allocate its
investments to markets that Fund management believes have the potential to
outperform other 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 choosing debt
securities, Fund management considers various factors including the credit
quality of issuers and yield analysis.
When assessing individual companies, Fund management seeks to identify companies
engaged in businesses with attractive earnings prospects, sound management and a
record of maximizing returns on shareholder equity. 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. However,
because of the difficulty of investing substantial sums in many Middle Eastern
and African markets, 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. The Fund has
not established any rating criteria for the debt securities in which it may
invest. The Fund
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
3
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[LOGO] Key Facts
may invest in high yield or "junk" bonds and in certain types of "derivative"
securities. We cannot guarantee that the Fund will achieve its investment
objective.
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. Generally, when interest rates go up, the value of debt
securities goes down. 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 non-diversified fund, which means that it may invest 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.
Derivatives and high yield or "junk" bonds may be volatile and subject to
liquidity, leverage, credit and other types of risk.
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 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
long term capital appreciation.
o Are not looking for a significant amount of current income.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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RISK/RETURN BAR CHART
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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.
<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+
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<S> <C> <C>
Merrill Lynch Middle East/
Africa Fund* Class A -27.19% -2.04%
Class B -27.02% -1.77%
Class C -24.71% -1.69%
Class 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 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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[LOGO] Key Facts
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
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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
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<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 percentage of net asset
value of shares redeemed within 12 months
of purchase) 2.00% 2.00% 2.00% 2.00%
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(f) 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 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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(Footnotes continued from previous page)
(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.
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
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<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
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
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<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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Details About the Fund
[GRAPHIC]
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 from 1989 to 1997.
ABOUT THE
MANAGER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
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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. 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 South Africa
o Ghana o Turkey
o Morocco o Israel
o Jordan o Zimbabwe
The Fund is non-diversified, 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.
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
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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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 -- Derivatives are financial instruments
whose value is derived from another security, a commodity (such as oil or gold),
or an index such as the Standard & Poor's 500 Index. The Fund may use
derivatives including 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.
INVESTMENT RISKS
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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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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[LOGO] Details About the Fund
Market and Selection Risk -- Market risk is the risk that the stock or bond
markets in certain of the countries in which the Fund invests 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 securities traded on foreign markets have often
(though not always) performed differently than securities 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 in certain foreign markets and a smaller trading volume each
day, it may make it difficult for the Fund to buy and sell securities in those
markets. 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
companies 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.
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
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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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 strong 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. Other 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 Fund 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 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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[LOGO] Details About the Fund
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.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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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.
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
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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[LOGO] Details About the Fund
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 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,
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
14
<PAGE>
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.
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
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
[LOGO] Details About the Fund
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.
Concentration Risk -- The Fund is a non-diversified fund, which means that it
may invest 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.
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.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
Risks associated with certain types of securities in which the Fund may invest
include:
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.
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.
Standby Commitment Agreements -- Standby commitment agreements involve the
risk that the security the Fund buys will lose value prior to its delivery.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
[LOGO] Details About the Fund
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. 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.
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.
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.
Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt are subject 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
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.
Derivatives -- 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:
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.
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.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
[LOGO] Details About the Fund
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.
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.
Illiquid Securities -- The Fund may invest up to 15% of its net 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
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.
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 Securities -- 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.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
[LOGO] Your Account
[GRAPHIC]
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<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 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>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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[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.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than
$50,000 4.75% 4.99% 4.50%
$50,000 but less than
$100,000 4.00% 4.17% 3.75%
$100,000 but less
than $250,000 3.00% 3.09% 2.75%
$250,000 but less than
$1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over** 0.00% 0.00% 0.00%
</TABLE>
* Rounded to the nearest one-hundredth percent.
** 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.
o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
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:
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<PAGE>
[LOGO] 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 are not subject to a deferred sales charge.
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 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.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends 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. The conversion schedule may be modified in certain cases.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
26
<PAGE>
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. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL AND TRANSFER SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell and transfer 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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<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 22. 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 that retirement plans have a $100 initial minimum
investment.
(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 order 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 application. Mail the completed purchase
application 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 are automatically reinvested without a sales charge.
through the automatic
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>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
28
<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 certificates, 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>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
29
<PAGE>
[LOGO] Your Account
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.
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
DIVIDENDS 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 in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares, 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 gain dividends are generally taxed
at different rates than ordinary income dividends.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
30
<PAGE>
"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. 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 dividend. Before investing you may want to
consult your tax adviser.
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 dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
31
<PAGE>
Management of the Fund [Logo]
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 $507 billion in investment company and other portfolio
assets under management as of February 1999. 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.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
32
<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). 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 For the
Period Period
Dec. 30, Dec. 30,
1994(+) 1994(+)
For the Year Ended Nov. 30, to Nov. For the Year Ended Nov. 30, to Nov.
------------------------------ 30, ------------------------------ 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% 78.12% 46.36% 40.97%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Total investment returns exclude the effects of sales loads; results would
be lower if sales charges were included.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
33
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------ -------------------------------------------
For the For the
Period Period
Dec. 30, Dec. 30,
1994(+) 1994(+)
For the Year Ended Nov. 30, to Nov. For the Year Ended Nov. 30, to Nov.
------------------------------ 30, ------------------------------ 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; results would
be lower if sales charges were included.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
34
<PAGE>
<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 |_______ _________| MANAGER |____________
| |______________________| | | |____________________| |
| | | |
| 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>
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
<PAGE>
For More Information[Logo]
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 calling1-800-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 #18415-04-99
(C)Merrill Lynch Asset Management, L.P.
PROSPECTUS
[Logo]Merrill Lynch
Merrill Lynch
Middle East Africa
Fund, Inc.
[Merrill Lynch Artwork]
April 1, 1999
<PAGE>
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 April
1, 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 April 1, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................................................... 2
Foreign Investment Risks................................................................................. 3
Debt Securities.......................................................................................... 4
Convertible Securities................................................................................... 6
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
Reduced Initial Sales Charges............................................................................ 23
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
Shareholder Services....................................................................................... 36
Investment Account....................................................................................... 36
Retirement Plans......................................................................................... 36
Automatic Investment Plans............................................................................... 36
Automatic Dividend Reinvestment Plan..................................................................... 37
Dividends and Taxes........................................................................................ 37
Dividends................................................................................................ 37
Taxes.................................................................................................... 37
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions.............................. 39
Special Rules for Certain Foreign Currency Transactions.................................................. 40
Performance Data........................................................................................... 40
General Information........................................................................................ 43
Description of Shares.................................................................................... 43
Independent Auditors..................................................................................... 44
Custodian................................................................................................ 44
Transfer Agent........................................................................................... 44
Legal Counsel............................................................................................ 44
Reports to Shareholders.................................................................................. 44
Shareholder Inquiries.................................................................................... 44
Additional Information................................................................................... 44
Financial Statements....................................................................................... 45
Appendix A--Ratings of Debt Securities..................................................................... A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity and debt securities of corporate
and governmental issuers in Middle Eastern/African countries. For purposes of
its investment objective, the Fund may invest in the securities of issuers in
all countries in the Middle East and Africa. 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
2
<PAGE>
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 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.
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:
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.
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.
Junk bonds are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
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.
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 the prices
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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
in the case of securities trading in a more liquid market.
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.
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 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
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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 Standard & Poor's Composite 500 Index 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.
Hedging. 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 Put 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
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prior to the option's expiration date. If the market value of the portfolio
holdings associated with the put option increases rather than decreases,
however, the Fund will lose the option premium and will consequently realize a
lower return on the portfolio holdings than would have been realized without the
purchase of the put. Purchasing a put option may involve correlation risk, and
may also involve liquidity and credit risk.
Purchasing Call Options. 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 Call 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.
Writing Put Options. 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; Limitations on the Use of OTC
Derivatives" 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. 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
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
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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.
Currency Futures. 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.
Currency Options. 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; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency 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. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Manager believes that (i) there is a
demonstrable high correlation between the currency in which the cross-hedge is
denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
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.
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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.
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; Limitations on the Use of OTC Derivatives." 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.
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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.
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 has determined to treat as liquid Rule 144A securities
that are either freely tradable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and procedures adopted
by the Fund's Board. The Board has adopted guidelines and delegated to the
Manager the daily function of determining and monitoring liquidity of restricted
securities. The Board, 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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
14
<PAGE>
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 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
15
<PAGE>
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.
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 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.
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
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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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of eight 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.
TERRY K. GLENN (58)--President and Director(1)(2)--Executive Vice President
of the Manager and Fund Asset Management ("FAM") (which terms included their
corporate predecessors) since 1983; Executive Vice President and Director of
Princeton Services, Inc. ("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.
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).
ARTHUR ZEIKEL (66)--Director(1)(2)--Chairman of the Manager and FAM from
1997 to 1999 and President thereof from 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999, Director thereof from 1993 to 1999 and President
thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.") from 1990 to 1999.
EDWARD D. ZINBARG (64)--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.
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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)--Senior Vice
President and Treasurer of the Manager and FAM since 1999; Senior Vice President
and Treasurer of Princeton Services since 1999; Vice President of PFD since
1999; First Vice President of the Manager from 1997 to 1999; 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 1, 1999, the Directors and officers of the Fund as a group (11
persons) owned an aggregate of approximately 8% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, an officer
and a Director 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 consisting 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 (57 registered investment companies consisting of 70
portfolios); Mr. West (58 registered investment companies consisting of 79
portfolios); and Mr. Zinbarg (19 registered investment companies consisting
of 19 portfolios).
(2) Mr. Machold was elected a Director of the Fund and director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998.
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares--Reduced Initial Sales Charges--Purchase Privilege of Certain
Persons."
18
<PAGE>
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, MANAGEMENT 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."
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.
19
<PAGE>
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 and Transfer 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.
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 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 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 PricingSM 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
21
<PAGE>
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.
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 SM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services and
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee. 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 $ 1,477 $ 129 $ 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
22
<PAGE>
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.
REDUCED INITIAL SALES CHARGES
Reinvested Dividends. No initial sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of
dividends.
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.
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 investment companies, 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. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
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 PricingSM 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
24
<PAGE>
exercise of this investment option, shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing
Class A shares and the other requirements pertaining to the reinvestment
privilege are met. In order to exercise this investment option, a shareholder of
one of the above-referenced continuously offered closed-end funds (an "eligible
fund") must sell his or her shares of common stock of the eligible fund (the
"eligible shares") back to the eligible fund in connection with a tender offer
conducted by the eligible fund and reinvest the proceeds immediately in the
designated class of shares of the Fund. This investment option is available only
with respect to eligible shares as to which no Early Withdrawal Charge or 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
25
<PAGE>
the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
CDSC will be assessed on shares derived from reinvestment of dividends. It will
be assumed that the redemption is first of shares held for over four years or
shares acquired pursuant to reinvestment of dividends 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 may be waived for any Class B shares that were acquired and held at
the time of the redemption in an Employee AccessSM 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 also be waived in connection with involuntary termination of an
account in which Fund shares are held.
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
26
<PAGE>
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 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.
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. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends 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 involuntary termination of an account in which Fund shares are held.
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>
<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
27
<PAGE>
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 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
28
<PAGE>
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 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.
29
<PAGE>
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 $ 29 $ 133 $ 27 $ 106 $ 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.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum (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 and Sell 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, 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 may not be reflected in the computation of the Fund's net asset value.
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
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."
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
34
<PAGE>
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. Certain of these services are available only to U.S.
investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive 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. 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 dividends. 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 may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. All shareholder services will be available for the transferred shares.
After the transfer, the shareholder may purchase additional shares of funds
owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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 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
36
<PAGE>
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 REINVESTMENT PLAN
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. No
CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends.
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 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.
DIVIDENDS AND TAXES
DIVIDENDS
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 in cash. See "Shareholder Services--Automatic
Dividend Reinvestment Plan" for information concerning the manner in which
dividends may be reinvested automatically in shares of the Fund. Dividends are
taxable to shareholders, as described below, whether they are invested in shares
of the Fund or received in cash. The per share dividends on Class B and Class C
shares will be lower than the per share dividends 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 on Class D shares will be lower than the per share dividends
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.
37
<PAGE>
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 capital gain dividends, as well
as any amount of capital gain dividends in the different categories of capital
gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
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.
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
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
38
<PAGE>
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 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
39
<PAGE>
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 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.
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
40
<PAGE>
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.
41
<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>
42
<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 Composite 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. When comparing
its performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. 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
43
<PAGE>
distribution of the Class B, Class C and Class D shares are borne solely by such
class. Stock certificates are issued by the transfer agent only on specific
request. Certificates for fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund were paid by the Fund and are being amortized over a period
not exceeding five years. The proceeds realized by the Manager upon the
redemption of any of the shares initially purchased by it will be reduced by the
proportional amount of the unamortized organizational expenses which the number
of such initial shares being redeemed bears to the number of shares initially
purchased.
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
44
<PAGE>
of such name to any other company, and the Fund has granted ML & Co., under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by ML & Co.
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of any class of the Fund's shares as of March 1, 1999.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- --------------------------------------------- --------------------------------------------- -----------------
<S> <C> <C>
Arthur Zeikel and Terrie Zeikel 300 Woodland Avenue 25.6% of Class A
Westfield, NJ 07090
Althea Grace Pineda 54 Governors Lane 18.4% of Class A
Princeton, NJ 08540
Edward D. Zinbarg 5 Hardwell Road 17.2% of Class A
Short Hills, NJ 07078
James Leitner and Sandra Leitner 737 Charnwood Drive 8.3% of Class B
Wyckoff, NJ 07481
Merrill Lynch Asset Management Attn.: Donald C. Burke 5.0% of Class A
P.O. Box 9011 9.1% of Class C
Princeton, NJ 08543 6.6% of Class D
Donald C. Brandt 5373 W. Alabama Street #502 7.9% of Class C
Houston, TX 77056
Sameh K. Toma and Bettie W. Toma 664 Lewter Shop Road 6.4% of Class C
Apex, NC 27502
Sand Springs Home Attn.: Joe E. Williams 11.0% of Class D
P.O. Box 278
Sand Springs, OK 74063
PACO Attn.: Mutual Funds Unit 38615 9.5% of Class D
P.O. Box 513577
Los Angeles, CA 90051
Davis F. Gates 1255 Osceola Drive 6.7% of Class D
Fort Myers, FL 33901
Dr. Zielinski & Assoc. PC 25800 Northwestern Hwy #1100 6.3% of Class D
Southfield, MI 48075
</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.
45
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
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 MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's 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 and takes into
account the currency in which the obligation is denominated.
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 SHORT-TERM ISSUE CREDIT 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
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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.
NR 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
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Code # 18412-04-99
