<PAGE>
As filed with the Securities and Exchange Commission on November 23, 1994
Securities Act File No. 33-
Investment Company Act File No. 811-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. / /
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. / /
(Check appropriate box or boxes)
________________________________
MERRILL LYNCH GLOBAL INSTITUTIONAL SERIES, INC.
(exact name of Registrant as specified in Charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Global Institutional Series, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
____________________________
Copies to:
Counsel for the Fund: Philip L. Kirstein, Esq.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Frank P. Bruno, Esq.
____________________________
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration
Statement.
_____________________________
An indefinite number of shares of Common Stock of the Registrant is
being registered by this Registration Statement under the Securities Act of
1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=============================================================================
<PAGE>
MERRILL LYNCH GLOBAL INSTITUTIONAL SERIES, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<S>
PART A <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . . . . . . Fee Table
Item 3. Condensed Financial Information . . . . . . . . . . Not Applicable
Item 4. General Description of Registrant . . . . . . . . . Investment Objectives and Policies;
Additional Information
Item 5. Management of the Fund . . . . . . . . . . . . . . Fee Table; Management of the Fund;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund Performance . . . . Not Applicable
Item 6. Capital Stock and Other Securities . . . . . . . . Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered . . . . . . . Cover Page; Fee Table; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase . . . . . . . . . . . . . Fee Table; Purchase of Shares;
Shareholder Services; Redemption of
Shares
Item 9. Pending Legal Proceedings . . . . . . . . . . . . . Not Applicable
PART B
Item 10. Cover Page . . . . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . . . . . Back Cover Page
Item 12. General Information and History . . . . . . . . . . Not Applicable
Item 13. Investment Objectives and Policies . . . . . . . . Investment Objectives and Policies
Item 14. Management of the Fund . . . . . . . . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . Management of the Fund
Item 16. Investment Advisory and Other Services . . . . . . Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other Practices . . . . . Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities . . . . . . . . General Information
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered . . . . . . . . . . . . . . . . . . . Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status . . . . . . . . . . . . . . . . . . . . Dividends and Distributions; Taxes
Item 21. Underwriters . . . . . . . . . . . . . . . . . . . Purchase of Shares
Item 22. Calculation of Performance Data . . . . . . . . . . Performance Data
Item 23. Financial Statements . . . . . . . . . . . . . . . Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 23, 1994
PROSPECTUS
- ----------
, 1994
MERRILL LYNCH GLOBAL INSTITUTIONAL SERIES, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800
_____________________
Merrill Lynch Global Institutional Series, Inc. (the "Fund") is a
professionally managed open-end investment company. The Fund consists of
four separate portfolios: the International Equity Portfolio, the Far East
Portfolio, the Developing Capital Markets Portfolio and the Latin America
Portfolio (each a "Portfolio"). Each Portfolio has its own separate
investment objective and may employ a variety of instruments and techniques
to enhance income and to hedge against market and currency risk. Investments
on an international basis involve risks and special considerations not
typically associated with investments in securities of United States issuers.
See "Risk Factors and Special Considerations." There can be no assurance
that the investment objective of any Portfolio will be achieved. Each
Portfolio pursues its investment objective through the separate investment
policies described below:
International Equity Portfolio is a non-diversified open-end portfolio
seeking long-term capital appreciation and, secondarily, income by investing
in equity securities of issuers located in countries other than the United
States. The Portfolio is designed for investors seeking to complement their
U.S. holdings through foreign equity investments. Investments may be shifted
among the various equity markets of the world outside of the U.S. depending
upon management's outlook with respect to prevailing trends and developments.
It is anticipated that a substantial portion of the Portfolio's assets will
be invested in the developed countries of Europe and the Far East and that a
significant portion of its assets also may be invested in developing
countries.
Far East Portfolio is a non-diversified open-end portfolio seeking long-
term capital appreciation by investing primarily in equity and debt
securities of issuers in developing countries located in Asia and the Pacific
Basin. For purposes of its investment objective, the portfolio considers
developing Asian-Pacific countries to be all countries in Asia and the
Pacific Basin other than Japan, Australia and New Zealand. The objective of
the portfolio reflects the belief that the emerging economies and securities
markets of the developing Asian-Pacific countries present attractive
investment opportunities. It is expected that under normal conditions at
least 65% of the Portfolio's total assets will be invested in developing
Asian-Pacific securities.
(Continued on next page)
_____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_____________________
This Prospectus is a concise statement of information about the Fund
that is relevant to making an investment in the Fund. This Prospectus should
be retained for future reference. A statement containing additional
information about the Fund, dated _______, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
_____________________
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
<PAGE>
(Continued from Cover Page)
Developing Capital Markets Portfolio is a non-diversified open-end
portfolio seeking long-term capital appreciation by investing in securities,
principally equities, of issuers in countries having smaller capital markets.
This objective of the Portfolio reflects the belief that investment
opportunities may result from an evolving long-term international trend
favoring more market-oriented economies, a trend that may especially benefit
certain countries having smaller capital markets.
Latin America Portfolio is a non-diversified open-end portfolio seeking
long-term capital appreciation by investing primarily in equity and debt
securities of issuers in Latin America. This objective of the Portfolio
reflects the belief that investment opportunities may result in Latin America
from an evolving long-term international trend encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
It is expected that under normal conditions at least 65% of the Portfolio's
total assets will be invested in Latin American securities.
_____________________
Shares of each Portfolio are available for purchase solely by
institutional "accredited investors", as defined in Regulation D of the
Securities Act of 1933 (the "Securities Act"). Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), Box 9011, Princeton, New Jersey 08543-
9011 ((609) 282-2800), and other securities dealers which have entered into
selected dealer agreements with the Distributor, including Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), will engage in a
continuous offering of Portfolio shares at a price equal to the next
determined net asset value per share. Shareholders may redeem their shares
at any time at the next determined net asset value, minus a redemption fee to
be retained by the Portfolio being redeemed of 2.0% of the net asset value of
the shares being redeemed. However, if at least 21 calendar days prior to
the intended date of redemption the Fund receives written notice of the
investor's intention to redeem shares, the 2.0% redemption fee will be
waived. If such written notice is given, the redemption price shall be the
net asset value per share determined on the date specified in such notice as
the intended redemption date. See "Redemption of Shares." The minimum
initial purchase is $5 million per Portfolio. There is no minimum for
subsequent investments. See "Purchase of Shares."
To permit each Portfolio to invest the net proceeds from the sale of its
shares in an orderly manner, the Fund may, from time to time, suspend the
sale of Portfolio shares, except for dividend reinvestments.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Portfolios follows:
<TABLE>
<CAPTION>
INTERNATIONAL DEVELOPING LATIN
EQUITY FAR EAST CAPITAL MARKETS AMERICAN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) . . . . . . . . None None None None
Sales Charge Imposed on Dividend
Reinvestments . . . . . . . . . None None None None
Deferred Sales Charge (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) . . . . . . None None None None
Redemption Fee Payable to the
Portfolio (a) . . . . . . . . . . . 2.0% 2.0% 2.0% 2.0%
ANNUAL PROGRAM OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(b):
Management Fees(c) . . . . . . . . . __% __% __% __%
12b-1 Fees . . . . . . . . . . . . . None None None None
Other Expenses:
Custodial Fees . . . . . . . . -- -- -- --
Shareholder Servicing Costs(d) -- -- -- --
Other . . . . . . . . . . . . . -- -- -- --
Total Other Expenses . . . . . -- -- -- --
Total Fund Operating Expenses . . . -- -- -- --
_________________
(a) The redemption fee will be waived if at least 21 calendar days prior to
the intended date of redemption the Fund receives written notice of the
investor's intention to redeem shares.
(b) Information under "Other Expenses" is estimated for the fiscal year
ending ________________, 1995.
(c) See "Management of the Fund - Management and Advisory Arrangements" --
p. 24.
(d) See "Management of the Fund -- Transfer Agency Services" -- p. 25.
</TABLE>
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION> CUMULATIVE
EXPENSES PAID
FOR THE PERIOD OF:
OPERATING ------------------
EXPENSE
RATIO 1 YEAR 3 YEARS
--------- ------ -------
<S> <C> <C> <C>
An investor in the Portfolios listed below would pay the
following expenses on a $1,000 investment assuming (1)
an operating expense ratio as indicated below; (2) a 5%
annual return throughout the periods and (3) redemption
at the end of the period, including a 2.0% redemption
fee payable to the Portfolio.
International Equity Portfolio . . . . . . . . . . $ $
Far East Portfolio . . . . . . . . . . . . . . . . $ $
Developing Capital Markets Portfolio . . . . . . . $ $
Latin America Portfolio . . . . . . . . . . . . . $ $
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
International Equity Portfolio . . . . . . . . . . $ $
Far East Portfolio . . . . . . . . . . . . . . . . $ $
Developing Capital Markets Portfolio . . . . . . . $ $
Latin America Portfolio . . . . . . . . . . . . . $ $
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in a Portfolio will bear. The Example
set forth above assumes reinvestment of all dividends and distributions and
utilizes a 5% annual rate of return as mandated by Securities and Exchange
Commission ("Commission") regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE.
4
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
GENERAL
Because each Portfolio intends to invest in securities of non-U.S.
issuers, an investor in the Fund should be aware of certain risk factors and
special considerations relating 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, each Portfolio should be considered as a means
of diversifying an investment portfolio and not in itself a balanced
investment program.
INVESTING ON AN INTERNATIONAL BASIS
Specific Risks. Investing on an international basis and in countries
with smaller or emerging capital markets involves certain risks not involved
in domestic investments, including fluctuations in foreign exchange rates,
future political and economic developments, different legal systems 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 each
Portfolio 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 each Portfolio and the unrealized
appreciation or depreciation of investments. Currencies of certain 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.
As a result, the Manager may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or appropriate to
invest in a particular country. Each Portfolio may invest in countries in
which foreign investors, including the Manager, have had no or limited prior
experience. Due to the emphasis on securities of issuers located in smaller
or emerging capital markets in certain Portfolios and the potential for
substantial volatility in many foreign securities markets, each Portfolio
should be considered as a vehicle for diversification and not as a balanced
investment program.
Public Information. Most of the securities held by a Portfolio will not
be registered with the Securities and Exchange Commission, nor will the
issuers thereof be subject to the reporting requirements of such agency.
Accordingly, there may be less publicly available information about a foreign
issuer than about a U.S. issuer and such foreign issuers may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those of U.S. issuers. As a result, traditional investment
measurements, such as price/earnings ratios, as used in the United States,
may not be applicable to certain smaller, emerging foreign capital markets.
Foreign issuers, and issuers in smaller, emerging capital markets in
particular, generally are not subject to uniform accounting, auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to domestic issuers.
Trading Volume, Clearance and Settlement. Foreign financial markets,
while often growing in trading volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices may be more volatile than securities of
comparable domestic companies.
5
<PAGE>
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to
conduct such transactions. Further, satisfactory custodial services for
investment securities may not be available in some countries having smaller,
emerging capital markets, which may result in a Portfolio incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement could result in periods when
assets of a Portfolio are uninvested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to
settlement problems or the risk of intermediary counter party failures could
cause a Portfolio to miss attractive investment opportunities. The inability
to dispose of a portfolio security due to settlement problems could result
either in losses to a Portfolio due to subsequent declines in the value of
such portfolio security or, if the Portfolio has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Government Supervision and Regulation. There generally is less
governmental supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States. Further, brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
Depositary Receipts. Each Portfolio 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 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.
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as the
Portfolios. As illustrations, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the
investment by foreign persons in a company to only a specific class of
securities which may have less advantageous terms than securities of the
company available for purchase by nationals. Certain countries may restrict
investment opportunities in issuers or industries deemed important to
national interests.
A number of countries, such as Chile, Brazil, South Korea, Taiwan and
Thailand, have authorized the formation of closed-end investment companies to
facilitate indirect foreign investment in their capital markets. In
accordance with the Investment Company Act of 1940 (the "Investment Company
Act"), each Portfolio may invest up to 10% of its total assets in securities
of closed-end investment companies, not more than 5% of which may be invested
in any one such company. This restriction on investments in securities of
closed-end investment companies may limit opportunities for each Portfolio to
invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market
prices representing premiums to their net asset values. If a Portfolio
acquires shares in closed-end investment companies, shareholders would bear
both their proportionate share of expenses in the Fund (including investment
advisory fees) and, indirectly, the expenses of such closed-end investment
companies. Each Portfolio also may seek, at its own cost, to create its own
investment entities under the laws of certain countries.
6
<PAGE>
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 each
Portfolio's ability to invest in any equity security of an issuer which, in
its most recent fiscal year, derived more than 15% of its revenues from
"securities related activities", as defined by the rules thereunder. These
provisions may also restrict each Portfolio's investments in certain foreign
banks and other financial institutions.
Hedging Strategies. Each Portfolio may engage in various strategies to
seek to hedge against movements in the equity and debt markets and exchange
rates between currencies by the use of options, futures, options on futures
and forward currency transactions. However, suitable hedging instruments may
not be available on a timely basis and on acceptable terms. Furthermore,
even if hedging techniques are available, each Portfolio will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when market or currency movements occur. Utilization of
options and futures transactions involves the risk of imperfect correlation
in movements in the price of options and futures and movements in the price
of the securities or currencies which are the subject of the hedge. Options
and futures transactions in foreign markets are also subject to the risk
factors associated with foreign investments generally, as discussed above.
There can be no assurance that a liquid secondary market for options and
futures contracts will exist at any specific time. Investors should be aware
that U.S. dollar denominated securities may not be available in some or all
countries in which the Portfolios invest; that the forward currency market
for the purchase of U.S. dollars in some countries is not highly developed;
and that, in certain countries, no forward market for foreign currencies
currently exists or such market may be closed to investment by the
Portfolios.
Borrowing. Each Portfolio may borrow up to 331/3% of its total assets,
taken at market value, but only from banks as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions or to
settle securities transactions. No Portfolio will purchase securities while
borrowings exceed 5% of its total assets, except (a) to honor prior
commitments or (b) to exercise subscription rights when outstanding
borrowings have been obtained exclusively for settlements of other securities
transactions. The purchase of securities while borrowings are outstanding
will have the effect of leveraging a Portfolio. Such leveraging increases a
Portfolio's exposure to capital risk, and borrowed funds are subject to
interest costs which will reduce net income.
No Rating Criteria for Debt Securities. The Portfolios have established
no rating criteria for the debt securities in which they may invest, and such
securities may not be rated at all for creditworthiness. Securities rated in
the medium to lower rating categories of nationally recognized statistical
rating organizations and unrated securities of comparable quality ("high
yield/high risk securities") are predominately speculative with respect to
the capacity to pay interest and repay principal in accordance with the terms
of the security and generally involve a greater volatility of price than
securities in higher rating categories. The sovereign debt instruments in
which the Portfolios may invest involve great risk and are deemed to be the
equivalent in terms of quality to high yield/high risk securities. The
Portfolios may have difficulty disposing of certain sovereign debt
obligations because there may be no liquid secondary trading market for such
securities. Each Portfolio may invest up to 5% of their total assets in
sovereign debt that is in default. See "Investment Objective and Policies--
Certain Risks of Debt Securities".
Non-Diversified Status. As non-diversified portfolios, each Portfolio
may invest a larger percentage of its assets in individual issuers than a
diversified portfolio. In this regard, the Portfolios are not subject to the
general limitation under the Investment Company Act that they may not invest
more than 5% of their total assets in the securities of any one issuer. To
the extent the Portfolios make investments in excess of 5% of their assets in
a particular issuer, its exposure to credit and market risks associated with
that issuer is increased. Also, as non-diversified portfolios, since a
relatively high percentage of each Portfolio's assets may be invested in the
securities of a limited number of issuers, each Portfolio may be more
susceptible to any single economic, political or regulatory occurrence than a
diversified investment company.
7
<PAGE>
(Fees and Expenses. The investment advisory fee (at the annual rate of
____% of the International Equity Portfolio's average daily net assets and at
the annual rate of ____% of the Far East, Developing Capital Markets and
Latin America Portfolios' average daily net assets) and other operating
expenses of each Portfolio may be higher than the investment advisory fees
and operating expenses of other mutual funds managed by the Manager and other
investment advisers.)
Foreign Sub-custodians and Securities Depositories. Rules adopted under
the Investment Company Act permit each Portfolio to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be
eligible sub-custodians for a Portfolio, in which event the Portfolio may be
precluded from purchasing securities in certain foreign countries in which it
otherwise would invest or which may result in the Portfolio's incurring
additional costs and delays in providing transportation and custody services
for such securities outside of such countries. A Portfolio may encounter
difficulties in effecting on a timely basis portfolio transactions with
respect to any securities of issuers held outside their countries. Other
banks that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain
countries there may be legal restrictions or limitations on the ability of a
Portfolio to recover assets held in custody by foreign sub-custodians in the
event of the bankruptcy of the sub-custodian.
In addition to the general risk factors and special considerations noted
above which are applicable to each of the Portfolios, described below are
risk factors and special considerations particular to each Portfolio which
the investor should consider before investing in the Fund:
INTERNATIONAL EQUITY PORTFOLIO
It is anticipated that a significant portion of the International Equity
Portfolio's assets may be invested in the developing countries of the world,
including, but not limited to, countries located in Eastern Europe, Latin
America and the Far East. To the extent that the International Equity
Portfolio invests in developing countries, it also will be subject to the
risks discussed below under "Far East, Developing Capital Markets, and Latin
America Portfolios."
The Portfolio may invest up to 15% of its total assets in illiquid or
otherwise not readily marketable securities.
FAR EAST, DEVELOPING CAPITAL MARKETS AND LATIN AMERICA PORTFOLIOS
The securities markets of developing countries are not as large as the
U.S. securities markets and have substantially less trading volume, resulting
in a lack of liquidity and high price volatility. Certain markets, such as
those of China, are in only the earliest stages of development. There is
also 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. Many of
such markets also may be affected by developments with respect to more
established markets in the region, such as in Japan. Brokers in developing
countries typically are fewer in number and less capitalized than brokers in
the United States. These factors, combined with the U.S. regulatory
requirements for open-end investment companies and the restrictions on
foreign investment discussed below, result in potentially fewer investment
opportunities for these Portfolios and may have an adverse impact on the
investment performance of each Portfolio. The Far East, Developing Capital
Markets and Latin America Portfolios' investment restrictions permit them to
invest up to 15% of their total assets in securities which are determined by
the Manager to be illiquid or otherwise not readily marketable securities.
8
<PAGE>
The investment objective of the Far East Portfolio reflects the belief
that the economies of the developing Asian-Pacific countries will continue to
grow in such a fashion as to provide attractive investment opportunities. At
the same time, emerging economies present certain risks that do not exist in
more established economies. Especially significant is that political and
social uncertainties exist for many of the developing Asian-Pacific
countries. In addition, the governments of many of such countries, such as
China and Indonesia, have a heavy role in regulating and supervising the
economy. Another risk common to most such countries is that the economy is
heavily export oriented and, accordingly, is dependent upon international
trade. The existence of overburdened infrastructure and obsolete financial
systems also presents risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports
of primary commodities and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors.
The investment objective of the Latin America Portfolio reflects the
belief that investment opportunities may result in Latin America from an
evolving long-term international trend encouraging greater market orientation
and diminishing governmental intervention in economic affairs. The Latin
American economies have experienced considerable difficulties in the past
decade. Although there have been significant improvements in recent years,
the Latin American economies continue to experience significant problems,
including high inflation rates and high interest rates. The emergence of the
Latin American economies and securities markets will require continued
economic and fiscal discipline which has been lacking at times in the past,
as well as stable political and social conditions. Recovery may also be
influenced by international economic conditions, particularly those in the
United States, and by world prices for oil and other commodities. There is
no assurance that the economic initiatives will be successful.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in
developing countries. For example, some of the currencies of Latin American
and developing Asian-Pacific countries have experienced devaluations relative
to the U.S. dollar, and major adjustments have been made periodically in
certain of such currencies. Certain countries, such as India, face serious
exchange constraints. In addition, as mentioned above, governments of many
developing countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. In certain cases, the
government owns or controls many companies, including the largest in the
country. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and the Far East, Developing Capital Markets
and Latin America Portfolios, as well as the value of securities in these
Portfolios.
In addition to the relative lack of publicly available information about
developing market issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
are applicable to U.S. companies, inflation accounting rules in some
developing countries require, for companies that keep accounting records in
the local currency, for both tax and accounting purposes, that certain assets
and liabilities be restated on the company's balance sheet in order to
express items in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits for certain developing
market companies.
Certain Latin American countries such as Argentina, Brazil and Mexico,
developing Asian-Pacific countries such as the Philippines and India and
other developing market countries such as Turkey, are especially large
debtors to commercial banks and foreign governments. Trading in debt
obligations issued or guaranteed by developing market governments ("sovereign
debt") or their agencies and instrumentalities ("governmental entities")
involves a high degree of risk. The governmental entity that controls the
repayment of sovereign debt may not be willing or able to repay the principal
and/or interest when due in accordance with the terms of such obligations. A
governmental entity's willingness or ability to repay principal and interest
due in a timely manner may be affected
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by, among other factors, its cash flow situation, the relative size of the
debt service burden to the economy as a whole, the governmental entity's
dependence on expected disbursements from third parties, the governmental
entity's policy towards the International Monetary Fund and the political
constraints to which a governmental entity may be subject. As a result,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including the Far East, Developing Capital Markets and Latin
America Portfolios) 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 governmental entities
have defaulted may be collected in whole or in part.
Substantial limitations may exist in certain countries with respect to
the Portfolios' ability to repatriate investment income, capital or the
proceeds of sales of securities by foreign investors. For example, in Chile,
with limited exceptions, invested capital cannot be repatriated for three
years. The Portfolios 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 Portfolios of any restrictions on
investments. No more than 15% of each Portfolio's total assets may be
comprised, in the aggregate, of assets which are (i) subject to material
legal restrictions on repatriation or (ii) invested in illiquid securities.
Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operations of the
Portfolio. For example, funds in the Far East may be withdrawn from the
People's Republic of China only in U.S. or Hong Kong dollars and only at an
exchange rate established by the government once each week.
With respect to the Far East Portfolio in particular, archaic legal
systems in certain developing Asian-Pacific countries may have an adverse
impact on the Far East Portfolio. For example, while the potential liability
of a shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain
developing Asian-Pacific countries. Similarly, the rights of investors in
developing Asian-Pacific companies may be more limited than those of
shareholders of U.S. corporations.
The manner in which foreign investors may invest in companies in certain
developing countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Portfolio. For example, the
Portfolio may be required in certain of such countries to invest initially
through a local broker or other entity and then have the shares purchased re-
registered in the name of the Portfolio. Re-registration may in some
instances not be able to occur on a timely basis, resulting in a delay during
which the Portfolio 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 Portfolio places a purchase
order but is subsequently informed, at the time of re-registration, that the
permissible allocation of the investment to foreign investors has been
filled, depriving the Portfolio of the ability to make its desired investment
at that time.
Certain foreign countries, especially those in Latin America, have
experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in interest rates
have had and may continue to have very negative effects on the economies and
securities markets of certain foreign countries.
10
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INVESTMENT OBJECTIVE AND POLICIES
The Fund consists of four separate Portfolios: the International Equity
Portfolio, the Far East Portfolio, the Developing Capital Markets Portfolio
and the Latin America Portfolio, each with its own separate investment
objective. Each of the Portfolios pursues its investment objective through
separate investment policies. These investment objectives are fundamental
policies of the Portfolios and may not be changed without the approval of the
holders of a majority of each Portfolio's respective outstanding voting
securities, as defined in the Investment Company Act. The Portfolios are
authorized to employ a variety of investment techniques to hedge against
market and currency risk, although suitable hedging instruments may not be
available on a timely basis and on acceptable terms. There can be no
assurance that a Portfolio's investment objective will be achieved. Set
forth below are the specific investment objective and policies of each
Portfolio, followed by a description of general investment policies
applicable to some or all of the Portfolios.
INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to
seek capital appreciation and, secondarily, income by investing in a
diversified portfolio of equity securities of issuers located in countries
other than the United States. Under normal conditions, at least 65% of the
Portfolio's total assets will be invested in such equity securities. There
can be no assurance that the Portfolio's investment objective will be
achieved. The Portfolio is designed for investors seeking to complement
their U.S. holdings through foreign equity investments.
The Portfolio, utilizing the combined purchasing power of its
shareholders' funds, provides the investor with the opportunity to
participate in a portfolio of equity securities in a number of different
foreign markets which typically would require substantially larger
commitments. Other advantages include worldwide professional management and
administrative convenience. Unlike many intermediary investment vehicles,
such as closed-end investment companies that invest in a single country, the
Portfolio intends to diversify investment risk among the capital markets of a
number of countries.
The Portfolio will invest in an international portfolio of securities of
foreign companies located throughout the world. While there are no
prescribed limits on the geographic allocation of the Portfolio's
investments, management of the Portfolio anticipates that a substantial
portion of its assets will be invested in the developed countries of Europe
and the Far East. However, for the reasons stated below, management of the
Portfolio will give special attention to investment opportunities in the
developing countries of the world, including, but not limited to, Eastern
Europe, Latin America and the Far East. It is anticipated that a significant
portion of the Portfolio's assets may be invested in such developing
countries, and the Portfolio may invest without limit in such securities.
The allocation of the Portfolio's assets among the various foreign
securities markets will be determined by the Portfolio's manager, Merrill
Lynch Asset Management (the "Manager" or "MLAM") and the Portfolio's sub-
manager, Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), based
primarily on an assessment of the relative condition and growth potential of
the various economies and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. Within such allocations, the Manager and MLAM U.K. will seek to
identify equity investments in each market which are expected to provide a
total return which equals or exceeds the return of such market as a whole.
A significant portion of the Portfolio's assets may be invested in
developing countries. This allocation of the Portfolio's assets reflects the
belief that attractive investment opportunities may result from an evolving
long-term international trend favoring more market-oriented economies, a
trend that may especially benefit certain developing countries with smaller
capital markets. This trend may be facilitated by local or international
political, economic or financial developments that could benefit the capital
markets of such countries. Certain such countries,
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particularly so-called "emerging" countries (such as Malaysia, Mexico and
Thailand), which may be in the process of developing more market-oriented
economies, may experience relatively high rates of economic growth. Because
of the general illiquidity of the capital markets in certain developing
countries, the Portfolio may invest in a relatively small number of leading
or relatively actively traded companies in such countries' capital markets in
the expectation that the investment experience of the securities of such
companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Portfolio will primarily emphasize investments in common
stock, the Portfolio may also invest in preferred stocks, convertible debt
securities and other equity or equity-linked instruments. The Portfolio
reserves the right, as a temporary defensive measure and to provide for
redemptions, 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").
Under certain adverse investment conditions, the Portfolio may restrict the
markets in which its assets will be invested and may increase the proportion
of assets invested in Temporary Investments of U.S. issuers. Under normal
conditions, at least 65% of the Portfolio's total assets will be invested in
the securities of issuers from at least three different foreign countries.
Investments made for defensive purposes will be maintained only during
periods in which the Manager or MLAM U.K. determines that economic or
financial conditions are adverse for holding or being fully invested in
equity securities of foreign issuers. A portion of the Portfolio normally
would be held in U.S. dollars or short-term interest bearing U.S. dollar-
denominated securities to provide for possible redemptions.
For purposes of the Portfolio's investment objective, an issuer
ordinarily would be considered to be located in the country under the laws of
which it is organized or where the primary trading market of its securities
is located. The Portfolio, however, may consider an issuer to be located in
a country, without reference to its domicile or to the primary trading market
of its securities, when at least 50% of its non-current assets,
capitalization, gross revenues or profits in any one of the two most recent
fiscal years represents (directly or indirectly through subsidiaries) assets
or activities located in such country. The Portfolio also may consider a
debt security that is denominated in a particular country's currency to be a
security of an issuer in such country without reference to the principal
trading market of the security or to the location of its issuer.
Additionally, the Portfolio may consider a derivative product tied to
securities or issuers located in a particular country to be the security of
an issuer in that country. The Portfolio also may consider investment
companies to be located in the country or countries in which they primarily
make their portfolio investments.
FAR EAST PORTFOLIO
The investment objective of the Portfolio is to seek long-term capital
appreciation by investing primarily in developing Asian-Pacific equity and
debt securities. Except for Temporary Investments, as discussed below, at
least 65% of the Portfolio's assets will consist of direct or indirect
investments in developing Asian-Pacific equity and debt securities, including
common stocks, preferred stocks, debt securities convertible into common
stocks and non-convertible debt securities.
For the purposes of the Portfolio's investment objective, developing
Asian-Pacific countries include, but are not limited to, Hong Kong, South
Korea, Singapore, Taiwan, Thailand, Malaysia, Indonesia, China, the
Philippines, India, Pakistan, Turkey, Brunei and Sri Lanka. Japan, Australia
and New Zealand, because they have more developed economies, are not
included. A security ordinarily will be considered to be a developing Asian-
Pacific security when its issue is organized in, or its primary trading
market is located in, a developing country in Asia or in the Pacific Basin.
The Portfolio may consider a security to be a developing Asian-Pacific
security, without reference to its issuer's domicile or to its primary
trading market, when at least 50% of the issuer's non-current assets,
capitalization, gross revenues or profits in any one of the two most recent
fiscal years represents (directly or indirectly through subsidiaries) assets
or activities located in such countries. The Portfolio may acquire
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<PAGE>
developing Asian-Pacific securities that are denominated in currencies other
than a developing Asian-Pacific currency. The Portfolio also may consider a
debt security that is denominated in a developing Asian-Pacific currency to
be a developing Asian-Pacific security without reference to its principal
trading market or to the location of its issuer. Additionally, the Portfolio
may consider a derivative product tied to a developing Asian-Pacific security
to be a developing Asian-Pacific security. The Portfolio also may consider
investment companies to be located in the country or countries in which they
primarily make their portfolio investments.
The economies of a number of the developing Asian-Pacific countries have
been among the most rapidly growing economies in the world in recent years.
In the 1980's, the four original newly industrialized economies were Hong
Kong, South Korea, Singapore and Taiwan, the so-called four "tigers." In the
late 1980's, the economies of Thailand, Malaysia and Indonesia, which,
together with Singapore, the Philippines and Brunei, are members of the
Association of Southeast Asian Nations, began to emerge, making significant
economic progress. More recently, southern China, particularly the province
of Guangdong, experienced rapid economic growth. This regional growth has
resulted from government policies directed towards market-oriented economic
reform and, in particular, seeking to encourage the development of labor-
intensive, export-oriented industries. There also has been growth resulting
from an increase in domestic demand. In addition, the governments have been
introducing deregulatory reforms to encourage development of their securities
markets and, in varying degrees, permit foreign investment. A number of
these securities markets have been undergoing rapid growth. While
investments in developing Asian-Pacific securities are subject to
considerable risks (see "Risk Factors and Special Considerations"), the
objective of the Portfolio reflects the belief that the emerging economies
and securities markets of developing Asian-Pacific countries present
attractive investment opportunities.
The Portfolio will generally seek to diversify investments on a
geographic basis within the developing Asian-Pacific countries. Under
certain adverse investment conditions, however, the Portfolio may restrict
the developing Asian-Pacific securities markets in which its assets are
invested. The allocation of the Portfolio's assets among the various
securities markets of the developing Asian-Pacific countries will be
determined by the Manager.
Many investors lack the information, capability or inclination to invest
in the developing Asian-Pacific countries. It also may not be permissible
for such investors to invest directly in certain developing Asian-Pacific
capital markets. Unlike many intermediary investment vehicles, such as
closed-end investment companies that invest in a single country, the
Portfolio intends to diversify investment risk among the capital markets of a
number of countries.
The Portfolio may also seek capital appreciation through investment in
developing Asian-Pacific debt securities. Capital appreciation in debt
securities may arise as a result of a favorable change in relative foreign
exchange rates, in relative interest rate levels or in the creditworthiness
of issuers. The receipt of income from such debt securities is incidental to
the Portfolio's objective of long-term capital appreciation. In accordance
with its investment objective, the Portfolio will not seek to benefit from
anticipated short-term fluctuations in currency exchange rates. The
Portfolio may, from time to time, invest in debt securities with relatively
high yields (as compared to other debt securities meeting the Portfolio's
investment criteria), notwithstanding that the Portfolio may not anticipate
that such securities will experience substantial capital appreciation. Such
income can be used, however, to offset the operating expenses of the
Portfolio. For a description of the risks involved in investing in high
yield debt see "No Rating Criteria for Debt Securities" below.
The Portfolio may invest in debt securities ("sovereign debt") issued or
guaranteed by developing Asian-Pacific governments (including developing
Asian-Pacific countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign
governments)
13
<PAGE>
to promote economic reconstruction or development ("supranational entities"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank") and the Asian Development Bank. 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.
The Portfolio reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in developing Asian-
Pacific countries, to hold Temporary Investments. The Portfolio may also
invest in venture capital investments and illiquid privately placed
securities, provided that such investments, together with other illiquid
securities held by the Portfolio, do not exceed 15% of the Portfolio's total
assets.
DEVELOPING CAPITAL MARKETS PORTFOLIO
The investment objective of the Portfolio is to seek long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. Except for Temporary Investments,
as discussed below, all of the Portfolio's assets will consist of direct or
indirect investments in issuers in countries having smaller capital markets.
It is currently expected that under normal conditions at least 65% of the
Portfolio's total assets will be invested in equity securities.
For purposes of its investment objective, the Portfolio considers
countries having smaller capital markets to be all countries other than the
four countries having the largest equity market capitalizations. Currently,
these four countries are Japan, the United Kingdom, the United States and
Germany. On September 30, 1994, those countries' equity market
capitalizations totalled approximately 77.5% of the world's equity market
capitalization according to data provided by Morgan Stanley Capital
International. The Portfolio will at all times, except during defensive
periods, maintain investments in at least three countries having smaller
capital markets.
The Portfolio seeks to benefit from economic and other developments in
smaller capital markets. The investment objective of the Portfolio reflects
the belief that investment opportunities may result from an evolving long-
term international trend favoring more market-oriented economies, a trend
that may especially benefit certain countries having smaller capital markets.
This trend may be facilitated by local or international political, economic
or financial developments that could benefit the capital markets of such
countries. Certain such countries, particularly so-called "emerging"
countries (such as Malaysia, Mexico and Thailand) which may be in the process
of developing more market-oriented economies, may experience relatively high
rates of economic growth. Other countries (such as France, the Netherlands
and Spain), although having relatively mature smaller capital markets, may
also be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental
intervention in economic affairs.
Many investors lack the information, capability or inclination to invest
in countries having smaller capital markets. It also may not be permissible
for such investors to invest directly in certain such markets. Unlike many
intermediary investment vehicles, such as closed-end investment companies
that invest in a single country, the Portfolio intends to diversify
investment risk among the capital markets of a number of countries. The
Portfolio will not necessarily seek to diversify investments on a
geographical basis or on the basis of the level of economic development of
any particular country.
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In its investment decision-making, the Manager will emphasize the
allocation of assets among certain countries' capital markets, rather than
the selection of particular industries or issuers. Because of the general
illiquidity of the capital markets in some countries, the Portfolio may
invest in a relatively small number of leading or actively traded companies
in a country's capital markets in the expectation that the investment
experience of the securities of such companies will substantially represent
the investment experience of the country's capital markets as a whole.
The Portfolio also may invest in debt securities of issuers in countries
having smaller capital markets. Capital appreciation in debt securities may
arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Portfolio will not seek to
benefit from anticipated short-term fluctuations in currency exchange rates.
The Portfolio may, from time to time, invest in debt securities with
relatively high yields (as compared to other debt securities meeting the
Portfolio's investment criteria), notwithstanding that the Portfolio may not
anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating
expenses of the Portfolio.
The Portfolio may invest in debt securities issued or guaranteed by
foreign governments (including foreign states, provinces and municipalities)
or their agencies and instrumentalities ("governmental entities"), issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign
governments) to promote economic reconstruction or development
("supranational entities"), or issued by foreign corporations or financial
institutions.
Supranational 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"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. 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.
The Portfolio reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in countries having
smaller capital markets, to hold Temporary Investments. The Portfolio may
also invest in venture capital investments and illiquid privately placed
securities, provided that such investments, together with other illiquid
securities held by the Portfolio, do not exceed 15% of the Portfolio's total
assets.
For purposes of the Portfolio's investment objective, an issuer
ordinarily will be considered to be located in the country under the laws of
which it is organized or where the primary trading market of its securities
is located. The Portfolio, however, may consider an issuer to be located in
countries having smaller capital markets, without reference to its domicile
or to the primary trading market of its securities, when at least 50% of its
non-current assets, capitalization, gross revenues or profits in any one of
the two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Portfolio
may acquire securities of issuers in countries having smaller capital markets
denominated in currencies other than the currency of smaller capital markets
countries. The Portfolio also may consider a debt security that is
denominated in a particular country's currency to be a security of an issuer
in such country without reference to the principal trading market of the
security or to the location of its issuer. Additionally, the Portfolio may
consider a derivative product tied to securities or issuers located in a
particular country to be the security of an issuer in that country. The
Portfolio also may consider investment companies to be located in the country
or countries in which they primarily make their portfolio investments.
15
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LATIN AMERICA PORTFOLIO
The investment objective of the Portfolio is to seek long-term capital
appreciation by investing primarily in Latin American equity and debt
securities. Except for Temporary Investments, as discussed below, at least
65% of the Portfolio's assets will consist of direct or indirect investments
in Latin American equity and debt securities, including common stocks,
preferred stocks, debt securities convertible into common stocks and
non-convertible debt securities.
For the purpose of the Portfolio's investment objective, Latin America
includes Mexico, Central America, South America and the Spanish speaking
islands of the Caribbean, including Puerto Rico. A security ordinarily will
be considered to be a Latin American security when its issuer is organized in
Latin America or its primary trading market is located in Latin America. The
Portfolio may consider a security to be Latin American without reference to
its issuer's domicile or to its primary trading market, when at least 50% of
the issuer's non-current assets, capitalization, gross revenues or profits in
any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such
countries. The Portfolio may acquire Latin American securities that are
denominated in currencies other than a Latin American currency. The
Portfolio also may consider a debt security that is denominated in a Latin
American currency to be a Latin American security without reference to its
principal trading market or to the location of its issuer. Additionally, the
Portfolio may consider a derivative product tied to a Latin American security
to be a Latin American security. The Portfolio may consider investment
companies to be located in the country or countries in which they primarily
make their portfolio investments.
The Portfolio seeks to benefit from economic and other developments in
Latin America. The investment objective of the Portfolio reflects the belief
that investment opportunities may result in Latin America from an evolving
long-term international trend encouraging greater market orientation and
diminishing governmental intervention in economic affairs. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of certain Latin American
countries.
In recent years, there has been a significant trend in Latin America
towards democracy and market-oriented economic reform. While there have been
distinct differences in the approaches taken by the various countries and the
degrees of success in accomplishing the economic objectives, the countries
have generally sought to reduce the government's role in economic affairs and
implement policy initiatives designed to control inflation, reduce financial
deficits and external debt, establish stable currency exchange rates,
liberalize trade restrictions, increase foreign investment, privatize
state-owned companies and develop and modernize the securities markets.
While considerable difficulties remain, the economies of certain Latin
American countries have improved, and these improvements have been reflected
in the performance of the securities markets and the reversal of the capital
flight which prevailed in the early 1980's.
The Portfolio will not necessarily seek to diversify investments on a
geographic basis within Latin America The allocation of the Portfolio's
assets among the various securities markets of Latin America will be
determined by the Manager. It is presently contemplated that the Portfolio
will emphasize investments in the equity and debt markets of Argentina,
Brazil, Chile, Mexico and Venezuela. Under certain adverse investment
conditions, the Portfolio may restrict the Latin American securities markets
in which its assets are invested.
Many investors lack the information, capability or inclination to invest
in Latin American countries. It also may not be permissible for such
investors to invest directly in certain Latin American capital markets.
Unlike many intermediary investment vehicles, such as closed-end investment
companies that invest in a single country, the Portfolio intends to diversify
investment risk among the capital markets of a number of countries.
16
<PAGE>
The Portfolio may also seek capital appreciation through investment in
Latin American debt securities. Capital appreciation in debt securities may
arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. The
receipt of income from such debt securities is incidental to the Portfolio's
objective of long-term capital appreciation. In accordance with its
investment objective, the Portfolio will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Portfolio may, from
time to time, invest in debt securities with relatively high yields (as
compared to other debt securities meeting the Portfolio's investment
criteria), notwithstanding that the Portfolio may not anticipate that such
securities will experience substantial capital appreciation. Such income can
be used, however, to offset the operating expenses of the Portfolio. For a
description of the risks involved in investing in high yield debt see "No
Rating Criteria for Debt Securities" below.
The Portfolio may invest in debt securities ("sovereign debt") issued or
guaranteed by Latin American governments (including Latin American countries,
provinces and municipalities) or their agencies and instrumentalities
("governmental entities"), debt securities issued or guaranteed by
international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related governmental
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank") and the Inter-American Development Bank. 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.
The Portfolio reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in Latin American
countries, to hold Temporary Investments. The Portfolio may also invest in
venture capital investments and illiquid privately placed securities,
provided that such investments, together with other illiquid securities held
by the Portfolio, do not exceed 15% of the Portfolio's total assets.
___________________________________
No Rating Criteria for Debt Securities. The Portfolios have established
no rating criteria for the debt securities in which they may invest, and such
securities may not be rated at all for creditworthiness. Securities rated in
the medium to lower rating categories of nationally recognized statistical
rating organizations such as Standard & Poor's Corporation ("S&P") and
Moody's Investors Service, Inc. ("Moody's") and unrated securities of
comparable quality (referred to herein as "high yield/high risk securities")
are predominantly speculative with respect to the capacity to pay interest
and repay principal in accordance with the terms of such securities and
generally involve a greater volatility of price than securities in higher
rating categories. These securities are commonly referred to as "junk"
bonds. In purchasing such securities, the Portfolios 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. No Portfolio is
authorized to purchase debt securities that are in default, except for
sovereign debt (discussed below) in which a Portfolio may invest no more than
5% of its total assets while such sovereign debt securities are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more
17
<PAGE>
traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the
case with higher rated securities. For example, during an economic downturn
or a sustained period of rising interest rates, issuers of high yield/high
risk securities may be more likely to experience financial stress, especially
if such issuers are highly leveraged. During such periods, such issuers may
not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments or the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield/high risk securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield/high risks securities may have call or redemption features
which would permit an issuer to repurchase the securities from the Portfolio.
If a call were exercised by the issuer during a period of declining interest
rates, the Portfolio likely would have to replace such called securities with
lower yielding securities, thus decreasing the net investment income to the
Portfolio and dividends to shareholders.
The Portfolio may have difficulty disposing of certain high yield/high
risk securities because there may be a thin trading market for such
securities. To the extent that a secondary trading market for high
yield/high risk securities does exist, it is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Portfolio's
ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such
as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for certain high yield/high risk securities also may make it
more difficult for the Portfolio to obtain accurate market quotations for
purposes of valuing the portfolio. Market quotations are generally available
on many high yield/high risk securities only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for
actual sales.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Portfolio's net asset value. In addition, the
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default on a portfolio holding or to participate in the
restructuring of the obligation.
Sovereign Debt. Certain Latin American countries such as Argentina,
Brazil and Mexico, Asian-Pacific countries such as the Philippines and India
and other developing market countries such as Turkey are among the largest
debtors to commercial banks and foreign governments. At times, certain of
such countries, especially those in Latin America, have declared moratoria on
the payment of principal and/or interest on outstanding debt.
Investment in sovereign debt 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 interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability
to repay principal and interest 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 may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others
abroad to reduce principal and interest arrearages 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 interest when due may result in
18
<PAGE>
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the Portfolios, 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.
The sovereign debt instruments in which the Portfolios 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. Similarly, the Portfolios may have
difficulty disposing of certain sovereign debt obligations because there may
be a thin trading market for such securities. Each Portfolio will not invest
more than 5% of its total assets in sovereign debt which is in default.
Depositary Receipts. Each Portfolio may invest in the securities of
foreign issuers in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities
into which they may be converted. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in
Europe which evidence a similar ownership arrangement. GDRs are receipts
issued throughout the world which evidence a similar ownership arrangement.
Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe
and are designed for use throughout the world. Each Portfolio may invest in
unsponsored ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and
GDRs are not obligated to disclose material information in the United States,
and therefore, there may not be a correlation between such information and
the market value of such securities.
Indexed Securities. Each Portfolio may invest in securities whose
potential return is based on the change in particular measurements of value
or rate (an "index"). As an illustration, a Portfolio may invest in a debt
security that pays interest and returns principal based on the change in an
equity index, an interest rate index or an index based on the values of one
or more precious or industrial metals. Interest and principal payable on a
security may also be based on relative changes among particular indices. In
addition, the Portfolio may invest in securities whose potential investment
return is inversely based on the change in particular indices. For example,
a Portfolio may invest in securities that pay a higher rate of interest and
principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that a
Portfolio invests in such types of securities, it will be subject to the
risks associated with changes in the particular indices, which may include
reduced or eliminated interest payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may
have the effect of providing a degree of investment leverage, because they
may increase or decrease in value at a rate that is a multiple of the changes
in applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
Each Portfolio believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may
allow a Portfolio to seek potential investment rewards, hedge other portfolio
positions, or vary the degree of portfolio leverage relatively efficiently
under different market conditions.
Rule 144A Securities. Each Portfolio may purchase securities that are
not registered ("restricted securities") under the Securities Act, as
amended, but can be offered and sold to "qualified institutional buyers"
under Rule 144A under that Act. However, a Portfolio will not invest more
than 15% of its assets in illiquid investments,
19
<PAGE>
which includes securities for which there is no readily available market,
securities subject to contractual restrictions on resale, and otherwise
restricted securities, unless the Fund's Board of Directors continuously
determines, based on the trading markets for the specific restricted
security, that it is liquid. The Board of Directors has determined to treat
as liquid Rule 144A securities which are freely tradeable in their primary
markets offshore. The Board of Directors may adopt guidelines and delegate
to the Manager and MLAM U.K. the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how this
market for restricted securities sold and offered under Rule 144A will
develop, the Board of Directors will carefully monitor each Portfolio's
investments in these securities, focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment
practice could have the effect of increasing the level of illiquidity in a
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Portfolios are classified as
non-diversified within the meaning of the Investment Company Act, which means
that the Portfolios are not limited by such Act in the proportion of the
assets that each may invest in securities of a single issuer. The
Portfolios' investments will be limited, however, in order to qualify for the
special tax treatment afforded "regulated investment companies" under the
Internal Revenue Code of 1986, as amended. See "Additional Information--
Taxes". To qualify, each Portfolio must comply with certain requirements,
including limiting investments so that at the close of each quarter of the
taxable year (i) not more than 25% of the market value of the Portfolio'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 Portfolio will not own more than 10% of the
outstanding voting securities of a single issuer. A Portfolio 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 a Portfolio invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Portfolio
may be more susceptible than a more widely diversified fund to any single
economic, political or regulatory occurrence or to changes in an issuer's
financial condition or in the market's assessment to the issuers.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, each Portfolio may incur settlement delays on
certain of such exchanges. See "Risk Factors and Special Considerations".
In executing a Portfolio's transactions, the Portfolio's Manager seeks to
obtain the best net results for the Portfolio, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
Each Portfolio may invest in certain securities traded in the
over-the-counter market and, where possible, will deal directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere.
Such dealers usually are acting as principal for their own account. On
occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and
sale of underlying securities upon exercise of options.
No Portfolio has any obligation to deal with any broker or dealer in the
execution of its portfolio transactions. Under the Investment Company Act,
persons affiliated with the Fund and persons who are affiliated with such
affiliated persons, including Merrill Lynch, are prohibited from dealing with
any Portfolio as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Securities
and Exchange Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated
20
<PAGE>
persons, may serve as its broker in transactions conducted on an exchange and
in over-the-counter transactions conducted on an agency basis and may receive
brokerage commissions from a Portfolio. In addition, consistent with the
Rules of Fair Practice of the NASD, the Fund may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute
transactions for a Portfolio. It is expected that the majority of the shares
of the Portfolios will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than those associated
with transactions in U.S. securities, although the Fund will endeavor to
achieve the best net results in effecting such transactions.
Portfolio Turnover. Each Portfolio Manager will effect portfolio
transactions without regard to holding period if in his or her judgment such
transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, each Portfolio may engage in a substantial number of portfolio
transactions. Accordingly, while each Portfolio anticipates that its annual
portfolio turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate
is calculated by dividing the lesser of each Portfolio's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of
securities whose maturities at the time of acquisition were one year or less)
by the monthly average value of the securities in the portfolio during the
year. A high portfolio turnover rate involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by each Portfolio.
When-Issued Securities and Delayed Delivery Transactions. The
Portfolios may purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. These transactions occur
when securities are purchased or sold by a Portfolio with payment and
delivery taking place in the future to secure what is considered an
advantageous yield and price to the Portfolio at the time of entering into
the transaction. Although the Portfolios have not established any limit on
the percentage of their respective assets that may be committed in connection
with such transactions, each Portfolio will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Portfolios may from time to time
enter into standby commitment agreements. Such agreements commit these
Portfolios, for a stated period of time, to purchase a stated amount of a
fixed income security which may be issued and sold to the Portfolios at the
option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement, a
Portfolio is paid a commitment fee, regardless of whether or not the security
is ultimately issued, which is typically approximately 0.5% of the aggregate
purchase price of the security which the Portfolio has committed to purchase.
These Portfolios will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price
which is considered advantageous to the Portfolio. The Portfolios will not
enter into a standby commitment with a remaining term in excess of 45 days
and will limit their investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions on resale,
will not exceed 15% of their respective total assets taken at the time of
acquisition of such commitment or security. The Portfolios will at all times
maintain a segregated account with their custodian of cash, cash equivalents,
U.S. Government securities or other high grade liquid debt securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount
equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the
issuance of the security underlying the commitment is at the option of the
issuer, the Portfolios may bear the risk of a decline
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<PAGE>
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 will
thereafter be reflected in the calculation of the Portfolio's net asset
value. The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. Each of the
Portfolios may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Under a repurchase agreement, the seller
agrees, upon entering into the contract with a Portfolio, to repurchase a
security (typically a security issued or guaranteed by the U.S. government)
at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed yield for the
Portfolio insulated from fluctuations in the market value of the underlying
security during such period, although, to the extent the repurchase agreement
is not denominated in U.S. dollars, the Portfolio's return may be affected by
currency fluctuations. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract
is similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement. In all instances, the Portfolio
takes possession of the underlying securities when investing in repurchase
agreements or purchase and sale contracts. Nevertheless, if the seller were
to default on its obligation to repurchase a security under a repurchase
agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Portfolio had paid to the
seller, the Portfolio would realize a loss. The Portfolios may not invest
more than 15% of their respective total assets in repurchase agreements or
purchase and sale contracts maturing in more than seven days, together with
all other illiquid securities.
Lending of Portfolio Securities. Each Portfolio may from time to time
lend securities from its portfolio with a value not exceeding 331/3% of its
total assets to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. This
limitation is a fundamental policy, and it may not be changed without the
approval of the holders of a majority of each Portfolio's outstanding voting
securities, respectively, as defined in the Investment Company Act. During
the period of such a loan, a Portfolio receives the income on the loaned
securities and receives either the income on the collateral or other
compensation, i.e., negotiated loan premium or fee, for entering into the
loan and thereby increases its yield. Such loans are terminable at any time,
and the borrower, after notice, will be required to return borrowed
securities within five business days. In the event that the borrower
defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, a Portfolio could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that
the value of the collateral falls below the market value of the borrowed
securities.
INVESTMENT RESTRICTIONS
Each Portfolio's investment activities are subject to further
restrictions that are described in the Statement of Additional Information.
Investment restrictions and policies which are fundamental policies may not
be changed without the approval of the holders of a majority of each
Portfolio's outstanding voting securities, respectively (which for this
purpose and under the Investment Company Act means the lesser of (a) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (b) more than 50% of the outstanding shares).
Among their fundamental policies, no Portfolio may invest more than 25% of
its total assets, taken at market value at the time of each investment, in
the securities of issuers of any particular industry
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<PAGE>
(including the securities issued or guaranteed by the government of any one
foreign country, but excluding the U.S. Government and its agencies or
instrumentalities). Investment restrictions and policies that are non-
fundamental policies may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, a Portfolio may not
borrow money or pledge its assets, except that each Portfolio (a) may borrow
from a bank as a temporary measure for extraordinary or emergency purposes or
to meet redemptions in amounts not exceeding 331/3% (taken at market value)
of its total assets and pledge its assets to secure such borrowings, (b) may
obtain 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 a Portfolio 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 a Portfolio's
exposure to capital risk, and borrowed funds are subject to interest costs
which will reduce net income.
As a non-fundamental policy, the Portfolios will not invest in
securities which cannot readily be resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including
repurchase agreements and purchase and sale contracts maturing in more than
seven days, if, regarding all such securities, more than 15% of its total
assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, a Portfolio may purchase without regard to
this limitation securities that are not registered under the Securities Act,
but that can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act, provided that the Fund's Board of
Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies--Uniform Investment Restrictions" in the
Statement of Additional Information.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the
overall supervision of the operations of the Fund and performs the various
duties imposed on the directors of investment companies by the Investment
Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President and Chief Investment Officer of the Manager
and FAM: President and Director of Princeton Services, Inc. ("Princeton
Services"); Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co."); Executive Vice President of Merrill Lynch; Director of the
Distributor.
(to be provided by amendment)
____________________
* Interested person, as defined in the Investment Company Act, of the
Fund.
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<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business
as Merrill Lynch Asset Management, is owned and controlled by ML & Co., Inc.,
a financial services holding company and the parent of Merrill Lynch. The
Manager provides each Portfolio with management and investment advisory
services. The Manager or an affiliate, Fund Asset Management, L.P. ("FAM"),
acts as the investment adviser for more than 100 other registered investment
companies. The Manager or FAM also offers portfolio management and portfolio
analysis services to individuals and institutions. As of August 31, 1994,
the Manager and FAM had a total of approximately $165.7 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Manager.
The management agreement with the Manager relating to each Portfolio
(each a "Management Agreement") provides that, subject to the direction of
the Board of Directors of the Fund, the Manager is responsible for the actual
management of that Portfolio and constantly reviews that Portfolio's holdings
in light of its own research analysis and that from other relevant sources.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
The Manager provides the portfolio managers for each Portfolio, each of
whom considers analyses from various sources (including brokerage firms with
which the Fund does business), makes the necessary decisions, and places
transactions accordingly. The Manager is also obligated to perform certain
administrative and management services for the Fund and is obligated to
provide all of the office space, facilities, equipment and personnel
necessary to perform its duties under the Management Agreement.
Each Portfolio pays the Manager a monthly fee based on the average daily
value of that Portfolio's net assets at the following annual rates:
<TABLE>
<CAPTION>
International Developing Latin
Equity Far East Capital Markets American
Portfolio Portfolio Portfolio Portfolio
------------- ---------- ---------------- ---------
<S> <C> <C> <C>
___% ___% ___% ___%
</TABLE>
(These fees are higher than that of most portfolios and/or mutual funds,
including most other portfolios and/or mutual funds managed by the Manager
and other investment advisers, but management of the Fund believes these fees
are justified by the additional investment research and analysis required in
connection with each Portfolio's investment strategy.)
With respect to the International Equity Portfolio, the Manager has
entered into a sub-management agreement (the "Sub-Management Agreement") with
MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for
providing investment advisory services to the Manager with respect to the
Portfolio in an amount to be determined from time to time by the Manager and
MLAM U.K. but in no event in excess of the amount that the Manager actually
receives for providing services to the Portfolio pursuant to the Management
Agreement. MLAM U.K. has offices at Ropemaker Place, 25 Ropemaker Street,
1st Floor, London EC24 9LY, England.
INTERNATIONAL EQUITY PORTFOLIO. Decisions concerning the allocation of
the Portfolio's assets among the three prime regions outside the United
States (i.e., Europe, Latin America and the Pacific Basin) will be
centralized in London, with country and individual security decisions made in
both London and Princeton, New Jersey. The names of the persons associated
with the Manager and MLAM U.K. who are primarily responsible for the day-to-
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<PAGE>
day management of the Portfolio's assets, the length of time that such
persons have been so responsible, and their business experience during the
past five years are as follows:
Andrew John Bascand, Vice President of the Fund, Director of MLAM U.K.
and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM)
since 1993. Previously, Mr. Bascand was with A.M.P. Asset Management plc in
London and had served as Chief Economist with A.M.P. Investments (NZ) in New
Zealand. He has served as Economic Adviser to the Chief Economist of the
Reserve Bank of New Zealand and as Research Officer of the Bank of England's
International Department. Mr. Bascand is the Asset Allocator for the
Portfolio and, as such, is primarily responsible for determining the
allocation of the Portfolio's assets among the three prime regions outside
the United States.
Adrian Holmes, Vice President of the Fund, Managing Director of MLAM
U.K. since 1993, Vice President from 1990 to 1993 and an employee thereof
since 1987, and Director of MLGAM since 1993. Mr. Holmes is primarily
responsible for European investments.
Stephen I. Silverman, Vice President of the Fund, Vice President of the
Manager and its predecessor since 1983. Mr. Silverman is primarily
responsible for Pacific Basin investments.
Grace Pineda, Vice President of the Fund, Vice President of the Manager
and its predecessor since 1989. Prior to joining the Manager, Ms. Pineda was
a portfolio manager with Clemente Capital, Inc. Ms. Pineda is primarily
responsible for investments in emerging markets in Europe, Asia and Latin
America.
FAR EAST PORTFOLIO. Kara Tan Bhala, a Vice President of the Fund, is
the Portfolio's manager. Ms. Bhala has been a Vice President of the Manager
and its predecessor since 1992; Vice President of Fiduciary Trust
International and responsible for Far East investments from 1990 to 1992;
Vice President of James Capel Inc. from 1988 to 1990; and Senior Investment
Analyst of James Capel (Far East) Ltd. from 1986 to 1988.
DEVELOPING CAPITAL MARKETS PORTFOLIO AND LATIN AMERICA PORTFOLIO. Grace
Pineda is the Portfolios' manager.
Each Management Agreement obligates a Portfolio to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Portfolios by the Manager, and the
Portfolios reimburse the Manager for its costs in connection with such
services on a semi-annual basis.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to
the Transfer Agency Agreement, the Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the
Transfer Agent (receives an annual fee of $______ per shareholder account,
nominal miscellaneous fees (e.g., account closing fees) and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement.)
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<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate
of both the Manager and Merrill Lynch, acts as the Distributor of the shares
of the Portfolios. Shares of the Portfolios will be offered continuously for
sale by the Distributor and other eligible securities dealers (including
Merrill Lynch). Shares of each Portfolio are available for purchase solely
by institutional "accredited investors," as defined in Regulation D of the
Securities Act. The minimum initial purchase is $5 million per Portfolio.
There is no minimum for subsequent investments.
The Fund is offering its Portfolios' shares at a public offering price
equal to the next determined net asset value per share (initially, $10.00 per
share). The applicable offering price for purchase orders is based upon the
net asset value of the Portfolios' shares next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to 4:15 p.m., New York time, which includes orders
received after the determination of net asset value on the previous day, the
applicable offering price will be based on the net asset value as of 4:15
p.m., New York time, on the day the orders are placed with the Distributor,
provided the orders are received by the Distributor prior to 4:30 p.m., New
York time, on that day. If the purchase orders are not received prior to
4:30 p.m., New York time, such orders shall be deemed received on the next
business day. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change.
To permit the Fund to invest the net proceeds from the sale of Portfolio
shares in an orderly manner or in response to conditions in the securities
markets or otherwise, the Fund or the Distributor may from time to time
suspend the sale of its shares, except for dividend reinvestments. The Fund
may, thereafter, resume such offering from time to time. The Fund also
reserves the right to limit the number of shares that may be purchased by a
person during a specified period of time or in the aggregate.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares
of the Portfolios 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, minus a redemption fee of
2.0% of the net asset value of the shares being redeemed. However, if at
least 21 calendar days prior to the intended date of redemption the Fund
receives written notice of the investor's intention to redeem its shares, the
2.0% redemption fee shall be waived. If such written notice is given, the
redemption price shall be the net asset value per share determined on the
date specified in such notice as the intended redemption date. The
redemption fee is designed to discourage short-term trading in shares of a
Portfolio and is retained by a Portfolio and may be used to cover the cost of
liquidating portfolio securities. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Portfolio(s) at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 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
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<PAGE>
for the shares to be redeemed. Redemption requests should not be sent to the
Fund. A redemption request requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as the name(s) appear(s) on
the Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices
and certain other financial institutions) as such is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but
not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment will be
mailed within seven days of receipt of a proper notice of redemption. At
various times the Fund may be requested to redeem shares for which it has not
yet received good payment (e.g., cash, Federal funds or a certified check
drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing
of a redemption check until such time as good payment has been collected for
the purchase of such shares. Normally this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to 4:00 p.m., New York
time, on the day received and is received by the Fund from such dealer not
later than 4:30 p.m., New York time, on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 4:30 p.m., New York time, 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 the
applicable redemption fee). Securities firms which do not have selected
dealer agreements with the Distributor, however, may impose a transaction
charge on the shareholder for transmitting the notice of repurchase to the
Fund. The Fund reserves the right to reject any order for repurchase, which
right of rejection might affect adversely shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender
of the certificates, if any, and stock power or letter requesting redemption,
in each instance with signatures guaranteed as noted above.
SHAREHOLDER SERVICES
The Fund offers the shareholder services and investment plan described
below which are designed to facilitate investment in shares of the
Portfolios. Instructions as to how to participate in the plan, or how to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page 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 and long-term capital gain
distributions. The statements will also show any other activity in the
account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. Shareholders may make
additions to their Investment Account any time by
27
<PAGE>
mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened, automatically, without charge
at the Transfer Agent.
Automatic Reinvestment of Dividends and Capital Gains Distributions.
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
respective Portfolio(s). Such reinvestment will be at the net asset value of
the shares of the Portfolio(s) as of the close of business on the ex-dividend
date of the dividend or distribution. Shareholders may elect in writing to
receive their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the
payment date.
Shareholders, at any time, may notify the transfer agent in writing or
by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Portfolio(s) or
vice versa, and commencing ten days after receipt by the transfer agent of
such notice, those instructions will be effected.
PERFORMANCE DATA
From time to time the Fund may include each Portfolio's average annual
total return for various specified periods in advertisements or information
furnished to present or prospective shareholders. Average annual total
return is computed in accordance with a formula specified by the Securities
and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any capital gains or losses on Portfolio
investments over such periods) that would equate the initial amount invested
to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and non-recurring expenses, including any redemption fee that would be
applicable to a complete redemption of the investment at the end of the
specified period. Dividends paid by each Portfolio with respect to all
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount.
The Fund also may quote each Portfolio's total return and aggregate
total return performance data for various specified time periods. Such data
will be calculated substantially as described above, except that the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return. Actual annual or annualized
total return data generally will be lower than average annual total return
data since the average annual rates of return reflect compounding; aggregate
total return data generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding over longer
periods of time. Each Portfolio's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate the effect of such
total return on a hypothetical $1,000 investment in a Portfolio or Portfolios
of the Fund at the beginning of each specified period.
Total return figures are based on each Portfolio's historical
performance and are not intended to indicate future performance. Each
Portfolio's total return will vary depending on market conditions, the
securities comprising the 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 each Portfolio will fluctuate, and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
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<PAGE>
On occasion, the Fund may compare its performance to the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include
each Portfolio's risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
representative of each Portfolio's relative performance for any future
period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is each Portfolio's intention to distribute all of its net investment
income, if any. Dividends from such net investment income are paid at least
annually. All net realized long- or short-term capital gains, if any, are
distributed to the Fund's shareholders at least annually. See "Determination
of Net Asset Value" below. Dividends and distributions may be reinvested
automatically in shares of the Fund at net asset value. Shareholders may, at
any time, in writing or by telephone (1-800-MER-FUND) to the Transfer Agent,
elect to receive any such dividends or distributions, or both, in cash. See
"Shareholder Services - Automatic Reinvestment of Dividends and
Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of a
Portfolio or received in cash. From time to time, a Portfolio may declare a
special distribution at or about the end of the calendar year in order to
comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the calendar year.
The per share dividends and distributions will be reduced as a result of
any account maintenance, distribution and transfer agency fees. See
"Determination of Net Asset Value" below.
Certain gains or losses attributable to foreign currency related gains
or losses from certain of a Portfolio's investments may increase or decrease
the amount of a Portfolio's income available for distribution to
shareholders. If such losses exceed other income during a taxable year, (a)
a Portfolio would not be able to make any ordinary income dividend
distributions, and (b) distributions made before the losses were realized
would be recharacterized as returns of capital to shareholders, rather than
as ordinary income dividends, reducing each shareholder's tax basis in his or
her Portfolio shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Taxes" below. If in any fiscal year a Portfolio has net
income from certain foreign currency transactions, such income will be
distributed annually.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily as of 4:15 p.m.,
New York time, on each day during which the New York Stock Exchange is open
for trading. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of
valuation. The net asset value is computed by dividing the market value of
the securities held by each 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. Expenses, including the management fees payable to
the Manager, are accrued daily.
Portfolio securities which are traded on stock exchanges are valued at
the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are being
29
<PAGE>
valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities traded in the over-the-counter
market are valued at the last available bid price in the over-the-counter
market prior to time of valuation. When a Portfolio writes a call option,
the amount of the premium received is recorded on the books of the Portfolio
as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option
written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last asked price. Options purchased by a Portfolio are valued at their last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund.
TAXES
The Fund intends to elect and to qualify the Portfolios for the special
tax treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies,
each Portfolio (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to shareholders. The Fund intends to cause each
Portfolio to distribute substantially all of such income.
Dividends paid by a Portfolio from its ordinary income and distributions
of a Portfolio's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from a Portfolio's net realized
long-term capital gains (including long-term gains from certain transactions
in futures or options) ("capital gain dividends") are taxable to shareholders
as long-term capital gains, regardless of the length of time the shareholder
has owned Portfolio shares. Distributions in excess of a Portfolio's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital
asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of a Portfolio. Not later than 60 days after the close of
its taxable year, each Portfolio will provide its shareholders with a written
notice designating the amounts of any ordinary income dividends or capital
gain dividends. Distributions by a Portfolio, whether from ordinary income
or capital gains, generally will not be eligible for the dividends received
deduction allowed to corporations under the Code. If a Portfolio pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the
Portfolio and received by its shareholders on December 31 of the year in
which such dividend was declared.
Ordinary income dividends paid by each Portfolio to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
Dividends and interest received by a Portfolio may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to
such taxes, subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in a Portfolio. If more
than 50% in value of a Portfolio's total assets at
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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 Portfolio will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in
computing their taxable incomes or, alternatively, use them as foreign tax
credits against their U.S. income taxes. No deductions for foreign taxes,
however, may be claimed by non-corporate shareholders who do not itemize
deductions. A shareholder that is a non-resident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign
taxes treated as having been paid by such shareholder. The Fund will report
annually to shareholders of each Portfolio the amount per share of the
withholding taxes paid by each Portfolio.
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 taxpayer
identification number is on file with the Portfolio or who, to the
Portfolio'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.
Each Portfolio may invest up to 10% of its total assets in securities of
closed-end investment companies. If a Portfolio purchases shares of an
investment company (or similar investment entity) organized under foreign
law, the Portfolio will be treated as owning shares in a passive foreign
investment company ("PFIC") for U.S. Federal income tax purposes. A
Portfolio may be subject to U.S. Federal income tax, and an additional tax in
the nature of interest, on a portion of distributions from such company and
on gain from the disposition of such shares (collectively referred to as
"excess distributions"), even if such excess distributions are paid by the
Portfolio as a dividend to its shareholders. A Portfolio 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 Portfolio to recognize income in a particular year in
excess of the distributions received from such PFICs. Alternatively, under
proposed regulations the Portfolio would be able to elect to "mark to market"
at the end of each taxable year all shares that it holds in PFICs. If it
made this election, the Portfolio would recognize as ordinary income any
increase in the value of such shares. Unrealized losses, however, would not
be recognized. By making the mark-to-market election, the Portfolio could
avoid imposition of the interest charge with respect to its distributions
from PFICs, but in any particular year might be required to recognize income
in excess of the distributions it received from PFICs and its proceeds from
dispositions of PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain
debt instruments, from certain forward contracts, from futures contracts that
are not "regulated futures contracts" and from unlisted options will
generally be treated as ordinary income or loss. Such Code Section 988 gains
or losses will generally increase or decrease the amount of a Portfolio'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 Portfolio would
not be able to make any ordinary income dividend distributions, and any
distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Portfolio shares and resulting in a
capital gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Portfolio shares (assuming the shares were held as
a capital asset).
A loss realized on a sale of shares of a Portfolio will be disallowed if
other shares in the same Portfolio are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
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beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative 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 U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on November 18, 1994. The
Fund is an open-end management investment company comprised of separate
series ("Series"), each of which is a separate portfolio. Each Series is to
be managed independently. At the date of this Prospectus, the Fund has
authorized capital of 100,000,000 shares of Common Stock, par value $0.10 per
share, divided into four Series as follows:
<TABLE>
<CAPTION>
Shares of
Series Common Stock
- -------- ------------
<S> <C>
International Equity Portfolio . . . . . . . . . . . . 25,000,000
Far East Portfolio . . . . . . . . . . . . . . . . . . 25,000,000
Developing Capital Markets Portfolio . . . . . . . . . 25,000,000
Latin America Portfolio . . . . . . . . . . . . . . . . 25,000,000
</TABLE>
The Board of Directors of the Fund may classify and reclassify the
shares of the Fund into additional Series at a future date without
shareholder approval.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matters submitted to a shareholder vote. The Fund does not
intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification
of selection of independent accountants. 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. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no preemptive
rights. Each share of Common Stock is entitled to participate equally in
dividends and distributions declared by the respective Series and in the net
assets of such Series upon liquidation or dissolution after satisfaction of
outstanding liabilities. The obligations and liabilities of a particular
Series are restricted to the assets of that Series and do not extend to the
assets of the Fund generally. Shares of each Series represent an interest
only in that Series and not in any other Series of the Fund.
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SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of
the number of accounts such shareholder has. If a shareholder wishes to
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account
numbers. If you have any questions regarding this, please call your Merrill
Lynch financial consultant or Financial Data Services, Inc. at
1-800-637-3863.
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APPENDIX
FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Portfolios are authorized to engage in various portfolio hedging
strategies. Those strategies are described in more detail below:
Portfolio Strategies Involving Options, Futures and Forward Foreign
Exchange Transactions. The Portfolios are authorized to engage in various
portfolio strategies to hedge their portfolios against adverse movements in
the equity, debt and currency markets. Each Portfolio has the authority to
write (i.e., sell) covered put and call options on their portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial
futures, and related options on such futures. Each Portfolio may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Although certain risks are
involved in options and futures transactions (as discussed below and in "Risk
Factors in Options and Futures Transactions"), the Manager believes that,
because each Portfolio will engage in options and futures transactions only
for hedging purposes, the options and futures portfolio strategies of the
Portfolios will not subject a Portfolio to the risks frequently associated
with the speculative use of options and futures transactions. While each
Portfolio's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of each Portfolio's
shares will fluctuate. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
There can be no assurance that a Portfolio's hedging transaction will be
effective. Suitable hedging instruments may not be available on a timely
basis and on acceptable terms. Furthermore, each Portfolio will only engage
in hedging activities from time to time and will not necessarily engage in
hedging transactions when movements in any particular equity, debt and
currency markets occur.
Set forth below are descriptions of certain hedging strategies in which
each Portfolio is authorized to engage.
Writing Covered Options. Each Portfolio is authorized to write (i.e.
sell) covered call options on the securities in which it may invest and to
enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where a Portfolio, in return for
a premium, gives another party a right to buy specified securities owned by
the Portfolio at a specified future date and price set at the time of the
contract. The principal reason for writing call options is to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. By writing covered call options, each
Portfolio gives up the opportunity, while the option is in effect, to profit
from any price increase in the underlying security above the option exercise
price. In addition, a Portfolio's ability to sell the underlying security
will be limited while the option is in effect unless the Portfolio effects a
closing purchase transaction. A closing purchase transaction cancels out the
Portfolio's position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option it has
written. Covered call options serve as a partial hedge against the price of
the underlying security declining. The International Equity Portfolio may
not write covered call options on underlying securities in an amount
exceeding 15% of the market value of its assets.
Each Portfolio also may write put options which give the holder of the
option the right to sell the underlying security to the Portfolio at the
stated exercise price. A Portfolio will receive a premium for writing a put
option which increases the Portfolio's return. Each Portfolio writes only
covered put options, which means that so long as the Portfolio is obligated
as the writer of the option it will, through its custodian, have deposited
and maintained cash, cash equivalents, U.S. Government securities or other
high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, a
Portfolio will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option
A-1
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is outstanding. Each Portfolio may engage in closing transactions in order
to terminate put options that it has written. The Far East, Developing
Capital Markets and Latin America Portfolios will not write put options if
the aggregate value of the obligations underlying the put options shall
exceed 50% of the Portfolio's respective net assets.
Purchasing Options. Each Portfolio is authorized to purchase put
options to hedge against a decline in the market value of its securities. By
buying a put option a Portfolio has a right to sell the underlying security
at the stated exercise price, thus limiting the Portfolio's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less that the
premium paid for the put option plus the related transaction costs. A
closing sale transaction cancels out the Portfolio's position as the
purchaser of an option by means of any offsetting sale of an identical option
prior to the expiration of the option it has purchased.
In certain circumstances, each Portfolio may purchase call options on
securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. No Portfolio will purchase options
on securities (including stock index options discussed below) if as a result
of such purchase, the aggregate cost of all outstanding options on securities
held by each Portfolio, respectively, would exceed 5% of the market value of
each Portfolio's total assets.
Stock Index Options and Futures and Financial Futures. Each Portfolio
is authorized to engage in transactions in stock index options and futures
and financial futures, and related options on such futures. Each Portfolio
may purchase or write put and call options on stock indices to hedge against
the risks of market-wide stock price movement in the securities in which the
Portfolio invests. Options on indices are similar to options on securities
except that on exercise or assignment, the parties to the contract pay or
receive an amount of cash equal to the difference between the closing value
of the index and the exercise price of the option times a specified multiple.
Each Portfolio may invest in stock index options based on a broad market
index or based on a narrow index representing an industry or market segment.
Each Portfolio may also purchase and sell stock index futures contracts
and financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a specified amount of a commodity, such as a type of
security, for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value
of the index between the time the contract was entered into and the time of
its settlement. Each Portfolio may effect transactions in stock index
futures contracts in connection with the equity securities in which it
invests and in financial futures contracts in connection with the debt
securities in which it invests. Transactions by a Portfolio in stock index
futures and financial futures are subject to limitations as described below
under "Restrictions on the Use of Futures Transactions".
Each Portfolio may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the
Portfolio's respective securities portfolio that might otherwise result.
When a Portfolio is not fully invested in the securities markets and
anticipates a significant market advance, it may purchase futures in order to
gain rapid market exposure that may in part or entirely offset increases in
the cost of securities that the Portfolio intends to purchase. As such
purchases are made, an equivalent amount of futures contracts will be
terminated by offsetting sales. The Manager does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It
is anticipated that, in a substantial majority of these transactions, each
Portfolio will purchase such securities upon termination of the long futures
position, whether the long position is the purchase of a futures contract or
the purchase of a call option or the writing of a put option on a future, but
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under unusual circumstances (e.g., a Portfolio experiences a significant
amount of redemptions), a long futures position may be terminated without the
corresponding purchase of securities.
Each Portfolio also has authority to purchase and write call and put
options on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies are utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) in which a Portfolio enters into futures transactions. Each
Portfolio may purchase put options or write call options on futures contracts
and stock indices rather than selling the underlying futures contract in
anticipation of a decrease in the market value of its securities. Similarly,
each Portfolio may purchase call options, or write put options on futures
contracts and stock indices, as a substitute for the purchase of such futures
to hedge against the increased cost resulting from an increase in the market
value of securities which the Portfolio intends to purchase.
Each Portfolio may engage in options and futures transactions on U.S.
and foreign exchanges and in options in the over-the-counter markets ("OTC
options"). Exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) which, in general, have standardized strike prices and
expiration dates. OTC options transactions are two-party contracts with
prices and terms negotiated by the buyer and seller. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC
options.
Foreign Currency Hedging. Each Portfolio has authority to deal in
forward foreign exchange among currencies of the different countries in which
it will invest and multinational currency units as a hedge against possible
variations in the foreign exchange rates among these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the
contract. A Portfolio's dealings in forward foreign exchange will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of a Portfolio accruing in
connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Portfolio or the payment of dividends and
distributions by the Portfolio. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. No Portfolio has a limitation on
transaction hedging. No Portfolio will speculate in foreign forward
exchange. If a Portfolio enters into a position hedging transaction, the
Portfolio's custodian will place cash or liquid debt securities in a separate
account of the Portfolio in an amount equal to the value of that Portfolio's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of that Portfolio's commitment with respect to
such contracts. Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for a Portfolio to hedge against a
devaluation that is so generally anticipated that the Portfolio is not able
to contract to sell the currency at a price above the devaluation level it
anticipates. Investors should be aware that U.S. dollar denominated
securities may not be available in some or all developing countries, that the
forward currency market for the purchase for U.S. dollars in most, if not
all, developing countries is not highly developed and that in certain
developing countries no forward market for foreign currencies currently
exists or such market may be closed to investment by each Portfolio.
Each Portfolio is also authorized to purchase or sell listed or over-
the-counter foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by a
Portfolio, sold by a Portfolio but not yet delivered, or committed or
anticipated to be purchased by a Portfolio. As an illustration, Far East
Portfolio may use such techniques to hedge the stated value in U.S. dollars
of an investment in Philippine peso denominated securities. In such
circumstances, for example, the Far East Portfolio may purchase a foreign
currency put option enabling it to sell a specified amount of Philippine
pesos for dollars at a specified price by a future date. To the extent the
hedge is successful, a loss
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in the value of the Philippine peso relative to the dollar will tend to be
offset by an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Far East Portfolio may
also sell a call option which, if exercised, requires it to sell a specified
amount of Philippine pesos for dollars at a specified price by a future date
(a technique called a "straddle"). By selling a call option in this
illustration, the Far East Portfolio gives up the opportunity to profit
without limit from increases in the relative value of the Philippine peso to
the dollar. Each Portfolio Manager believes that "straddles" of the type
which may be utilized by their respective Portfolio constitute hedging
transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right
to buy or sell a currency at a fixed price on a future date. A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date.
Futures contracts and options on futures contracts are traded on boards of
trade or futures exchanges. No Portfolio will speculate in foreign currency
options, futures or related options. Accordingly, no Portfolio will hedge a
currency substantially in excess of the market value of the securities
denominated in such currency which it owns; the expected acquisition price of
securities which it has committed or anticipates to purchase which are
denominated in such currency, and in the case of securities which have been
sold by the Portfolio but not yet delivered, the proceeds thereof in its
denominated currency. Further, each Portfolio will segregate at its
custodian U.S. Government or other high quality securities having a market
value substantially representing any subsequent net decrease in the market
value of such hedged positions, including net positions with respect to
cross-currency hedges. The International Equity Portfolio may not incur
potential net liabilities of more than 331/3% of its total assets from
foreign currency options, futures or related options. The Far East,
Developing Capital Markets and Latin America Portfolios may not incur
potential net liabilities of more than 20% of their total assets from foreign
currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission applicable to each Portfolio provide
that the futures trading activities described herein will not result in a
Portfolio being deemed a "commodity pool" under such regulations if the
Portfolio adheres to certain restrictions. In particular, each Portfolio may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the respective
Portfolio, after taking into account unrealized profits and unrealized losses
on any such contracts and options. These restrictions are in addition to
other restrictions on each Portfolio's hedging activities mentioned herein.
When a Portfolio purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will
be deposited in a segregated account with the Portfolio's respective
custodian so that the amount so segregated, plus the amount of initial and
variation margin held in the account of its broker, equals the market value
of the futures contract, thereby ensuring that the use of such futures
contract is unleveraged.
Restrictions on OTC Options. Each Portfolio will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with member
banks of the Federal Reserve System and primary dealers in U.S. Government
securities or with affiliates of such banks or dealers that have capital of
at least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million or any other bank or dealer having capital of
at least $150 million or whose obligations are guaranteed by an entity having
capital of at least $150 million.
The staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as cover for written
OTC options are illiquid securities. Therefore, each Portfolio has adopted
an investment policy pursuant to which it will not purchase or sell OTC
options (including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currency outstanding
which are held by a Portfolio, the market value of the underlying securities
covered by OTC call options currently
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outstanding which were sold by a Portfolio and margin deposits on a
Portfolio's existing OTC options on futures contracts exceeds 15% of the net
assets of the Portfolio, taken at market value, together with all other
assets of the Portfolio which are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by a Portfolio to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of
New York, and if a Portfolio has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Portfolio will treat as illiquid such amount of the underlying securities as
is equal to the repurchase price less the amount by which the option is "in-
the-money" (i.e., current market value of the underlying security minus the
option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the
premium received for the option, plus the amount by which the option is "in-
the-money". This policy as to OTC options is not a fundamental policy of any
of the Portfolios and may be amended by the Directors of each respective
Portfolio without the approval of the Portfolio's shareholders. However, a
Portfolio will change or modify this policy prior to the change or
modification by the Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of
options and futures transactions to hedge a Portfolio involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject
of the hedge. If the price of the options or futures moves more or less than
the price of the hedged securities or currencies, a Portfolio will experience
a gain or loss which will not be completely offset by movements in the price
of the subject of the hedge. The successful use of options and futures also
depends on each Portfolio's Manager's ability to predict correctly price
movements in the market involved in a particular options or futures
transaction. In addition, options and futures transactions in foreign
markets are subject to the risk factors associated with foreign investments
generally. See "Risk Factors and Special Considerations".
Each Portfolio intends to enter into options and futures transactions,
on an exchange or in the OTC market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of OTC
transactions, only if a Portfolio's Manager believes the Portfolio can
receive on each business day at least two independent bids or offers, unless
a quotation from only one dealer is available, in which case only that
dealer's price will be used, or which can be sold at a formula price provided
for in the OTC option agreement. There can be no assurance, however, that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on each
Portfolio's ability to hedge effectively its portfolio. There is also the
risk of loss by a Portfolio of margin deposits or collateral in the event of
the bankruptcy of a broker with whom the Portfolio has an open position in an
option, a futures contract or related option.
The exchanges on which each Portfolio intends to conduct options
transactions generally have established limitations governing the maximum
number of call or put options on the same underlying security or currency
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options
are written on the same or different exchanges or are held or written on one
or more accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts that any person may trade on a
particular trading day. The Managers of each respective Portfolio do not
believe that these trading and position limits will have any adverse impact
on their Portfolio's strategies for hedging that Portfolio.
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<PAGE>
No person has been authorized MERRILL LYNCH GLOBAL
to give any information or to make INSTITUTIONAL SERIES, INC.
any representations, other than
those contained in this
Prospectus, in connection with the
offer contained in this
Prospectus, and, if given or made,
such other information or
representations must not be relied
upon as having been authorized by
the Fund, the Manager or the
Distributor. This Prospectus does
not constitute an offering in any
state in which such offering may
not lawfully be made. __________________________________
______________________
PROSPECTUS
TABLE OF CONTENTS
__________________________________
Page
----
Fee Table . . . . . . . . . . 3
Risk Factors and Special
Considerations . . . . . . . 5
Investment Objective
and Policies . . . . . . . 11
Management of the Fund . . . 23
Board of Directors . . . . 23
Management and Advisory
Arrangements . . . . . . . 24 ______________ __, 1994
Transfer Agency Services . 25
Purchase of Shares . . . . . 26
Redemption of Shares . . . . 26
Redemption . . . . . . . . 26
Repurchase . . . . . . . . 26
Shareholder Services . . . . 27
Performance Data . . . . . . 28
Additional Information . . . 29
Dividends and Distributions 29
Determination of Net Asset
Value . . . . . . . . . . 29
Taxes . . . . . . . . . . . 30
Organization of the Fund . 32
Shareholder Inquiries . . . 33
Shareholder Reports . . . . 33
Authorization Form . . . .
Appendix - Futures, Options
and Foward Exchange
Transactions . . . . . . . A-1
Code #
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information does not
constitute a prospectus.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER 23, 1994
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH GLOBAL INSTITUTIONAL SERIES, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE (609) 282-2800
---------------------------
Merrill Lynch Global Institutional Series, Inc. (the "Fund") is a
non-diversified open-end management investment company. The Fund consists
of four separate portfolios: the International Equity Portfolio, the Far
East Portfolio, the Developing Capital Markets Portfolio and the Latin
America Portfolio (each a "Portfolio"). Each Portfolio has its own separate
investment objective and may employ a variety of instruments and techniques
to hedge against market and currency risk.
The International Equity Portfolio is a non-diversified portfolio
seeking long-term capital appreciation and, secondarily, income by investing
in equity securities of issuers located in countries other than the United
States. Investments may be shifted among the various equity markets of the
world outside of the U.S. depending upon the Manager's outlook with respect
to prevailing trends and developments. It is anticipated that a substantial
portion of the Portfolio's assets will be invested in the developed countries
of Europe and the Far East and that a significant portion of its assets also
may be invested in developing countries.
The Far East Portfolio is a non-diversified portfolio seeking long-term
capital appreciation by investing primarily in equity and debt securities of
issuers in developing countries located in Asia and the Pacific Basin. For
purposes of its investment objective, the portfolio considers developing
Asian-Pacific countries to be all countries in Asia and the Pacific Basin
other than Japan, Australia and New Zealand. It is expected that under
normal conditions at least 65% of the Portfolio's total assets will be
invested in developing Asian-Pacific securities.
The Developing Capital Markets Portfolio is a non-diversified portfolio
seeking long-term capital appreciation by investing in securities,
principally equities, of issuers in countries having smaller capital markets.
The Latin America Portfolio is a non-diversified portfolio seeking long-
term capital appreciation by investing primarily in equity and debt
securities of issuers in Latin America. This objective of the Portfolio
reflects the belief that investment opportunities may result in Latin America
from an evolving long-term international trend encouraging greater market
orientation and diminishing governmental intervention in economic affairs.
It is expected that under normal conditions at least 65% of the Portfolio's
total assets will be invested in Latin American securities.
--------------------------
Each Portfolio is a separate series of the Fund issuing its own shares.
Shares of each Portfolio are available for purchase solely by institutional
"accredited investors", as defined in Regulation D of the Securities Act of
1933 (the "Securities Act").
---------------------------
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
________ __, 1994 (the "Prospectus"), which has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by reference
into the Prospectus.
---------------------------
MERRILL LYNCH ASSET MANAGEMENT - MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. - DISTRIBUTOR
---------------------------
The date of this Statement of Additional Information is ________ __, 1994.
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund consists of four separate Portfolios: the International Equity
Portfolio, the Far East Portfolio, the Developing Capital Markets Portfolio,
and the Latin America Portfolio. Each of the Portfolios pursues its
investment objective through separate investment policies. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of
the investment objective and polices of each Portfolio.
While it is the policy of each Portfolio generally not to engage in
trading for short-term gains, Merrill Lynch Asset Management, L.P. (the
"Manager" or "MLAM"), which does business as Merrill Lynch Asset Management,
will effect portfolio transactions without regard to holding period, if, in
its judgment, such transactions are advisable in light of a change in
circumstances of a particular company or within a particular industry or due
to general market, economic or financial conditions. Accordingly, while each
Portfolio anticipates that its annual turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover
rates. The portfolio turnover rate is calculated by dividing the lesser of
a Portfolio's annual sales or purchases of portfolio securities (exclusive
of purchases or sales of U.S. Government securities and of all other
securities whose maturities at the time of acquisition were one year or less)
by the monthly average value of securities in the portfolio during the year.
Each Portfolio is subject to the Federal income tax requirement that less
than 30% of the Portfolio's gross income must be derived from gains from the
sale or other disposition of securities held for less than three months.
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments by U.S.
investors such as the Fund. If such restrictions should be reinstituted, it
might become necessary for each Portfolio to invest all or substantially all
of its assets in U.S. securities. In such event, a Portfolio would review
its investment objective and investment policies to determine whether changes
are appropriate. Any changes in the investment objective or fundamental
policies set forth under "Investment Restrictions" below will require the
approval of the holders of a majority of each Portfolio's outstanding voting
securities, respectively.
A Portfolio'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 each
Portfolio are redeemable on a daily basis on each day the Portfolio
determines its net assets in U.S. dollars, each Portfolio intends to manage
its assets 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
investment strategy, although there can be no assurance in this regard.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for each Portfolio's portfolio as a whole. This negative correlation
also may offset unrealized gains a Portfolio has derived from movements in
a particular market. To the extent the various markets move independently,
total portfolio volatility is reduced when the various markets are combined
into a single portfolio. Of course, movements in the various securities
markets may be offset by changes in foreign currency exchange rates.
Exchange rates frequently move independently of securities markets in a
particular country. As a result, gains in a particular securities market may
be affected by changes in exchange rates.
INTERNATIONAL EQUITY PORTFOLIO. The investment objective of the
International Equity Portfolio is to seek long-term capital appreciation and,
secondarily, income by investing in equity securities of issuers located in
countries other than the United States.
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<PAGE>
FAR EAST PORTFOLIO. The investment objective of the Far East Portfolio
is to seek long-term capital appreciation by investing primarily in
developing Asian-Pacific equity and debt securities.
DEVELOPING CAPITAL MARKETS PORTFOLIO. The investment objective of the
Developing Capital Markets Portfolio is to seek long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets.
LATIN AMERICA PORTFOLIO. The investment objective of the Latin America
Portfolio is to seek long-term capital appreciation by investing primarily
in equity and debt securities of issuers in Latin America.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion in the Prospectus' Appendix under
the caption "Futures, Options and Forward Foreign Exchange Transactions" for
information with respect to various Portfolio strategies involving options
and futures. Each Portfolio may seek to hedge its portfolio against
movements in the equity, debt and currency markets. Each Portfolio has
authority to write (i.e., sell) covered put and call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and stock futures
and financial futures, and related options on such futures. A Portfolio may
also deal in forward foreign exchange transactions, foreign currency options
and futures and related options on such futures. Each of such portfolio
strategies is described in the Prospectus. Although certain risks are
involved in options and futures transactions (as discussed in the Prospectus
and below), the Manager believes that, because each Portfolio will engage in
options and futures transactions only for hedging purposes, the options and
futures portfolio strategies of a Portfolio will not subject the Portfolio
to the risks frequently associated with the speculative use of options and
futures transactions. While a Portfolio's use of hedging strategies is
intended to reduce the volatility of the net asset value of its shares, the
net asset value of each Portfolio's shares will fluctuate. There can be no
assurance that a Portfolio's hedging transactions will be effective.
Suitable hedging instruments may not be available on a timely basis and on
acceptable terms with respect to developing market securities of issuers
located in developing countries. The following is further information
relating to portfolio strategies involving options and futures each Portfolio
may utilize.
Writing Covered Options. Each Portfolio is authorized to write (i.e.,
sell) covered call options on the securities in which it may invest and to
enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where a Portfolio, in return for
a premium, gives another party a right to buy specified securities owned by
the Portfolio at a specified future date and price set at the time of the
contract. The principal reason for writing call options is to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. By writing covered call options, a
Portfolio gives up the opportunity, while the option is in effect, to profit
from any price increase in the underlying security above the option price.
In addition, a Portfolio's ability to sell the underlying security will be
limited while the option is in effect unless the Portfolio effects a closing
purchase transaction. A closing purchase transaction cancels out a
Portfolio's position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option it has
written. Covered call options serve as a partial hedge against the price of
the underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice
at any time prior to the termination of his obligation as a writer. If an
option expires unexercised, the writer realizes a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market
value of the underlying security during the option period. If a call option
is exercised, the writer realizes a gain or loss from the sale of the
underlying security.
Each Portfolio also may write put options which give the holder of the
option the right to sell the underlying security to the Portfolio at the
stated exercise price. A Portfolio will receive a premium for writing a
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<PAGE>
put option which increases the Portfolio's return. Each Portfolio writes
only covered put options which means that so long as the Portfolio is
obligated as the writer of the option it will, through its custodian, have
deposited and maintained cash, cash equivalents, U.S. Government securities
or other high grade liquid debt securities denominated in U.S. dollars or
non-U.S. currencies with a securities depository with a value equal to or
greater than the exercise price of the underlying securities. By writing a
put, a Portfolio will be obligated to purchase the underlying security at a
price that may be higher than the market value of that security at the time
of the exercise for as long as the option is outstanding. Each Portfolio may
engage in closing transactions in order to terminate put options that it has
written. No Portfolio will write a put option if the aggregate value of the
obligations underlying the put shall exceed 50% of the Portfolio's net
assets.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges. An option position may be closed
only on an exchange which provides a secondary market for an option of the
same series. If a secondary market does not exist, it might not be possible
to effect closing transactions in particular options, with the result, in the
case of a covered call option, that a Portfolio will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the
"Clearing Corporation") may not, at all times, be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that exchange
that had been issued by the Clearing Corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their
terms.
Each Portfolio may also enter into over-the-counter options transactions
("OTC options"), which are two party contracts with prices and terms
negotiated between the buyer and seller. The staff of the Securities and
Exchange Commission has taken the position that OTC options and the assets
used as cover for written OTC options are illiquid securities.
Purchasing Options. Each Portfolio may purchase put options to hedge
against a decline in the market value of its equity holdings. By buying a
put, a Portfolio has a right to sell the underlying security at the exercise
price, thus limiting the Portfolio's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be offset partially
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction cost. A closing sale transaction cancels out
a Portfolio's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, a Portfolio may purchase call
options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. A Portfolio may
purchase either exchange-traded options or OTC options. No Portfolio will
purchase options on securities (including stock index options discussed
below) if as a result of such purchase, the aggregate cost of all outstanding
options on securities held by the Portfolio would exceed 5% of the market
value of the Portfolio's total assets.
Stock Index Options and Futures and Financial Futures. As described in
the Prospectus, each Portfolio is authorized to engage in transactions in
stock index options and futures and financial futures, and related options
on such futures. Set forth below is further information concerning futures
transactions.
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A futures contract is an agreement between two parties to buy and sell
a security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the broker and the relevant
contract market, which varies but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of
both the purchaser and seller under the futures contract. Subsequent
payments to and from the broker, called "variation margin", are required to
be made on a daily basis as the price of the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "mark to the market". At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in
the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a nominal commission
is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting these Portfolios from the provisions of Section 17(f) and Section
18(f) of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), in connection with their strategy of investing in futures
contracts. Section 17(f) relates to the custody of securities and other
assets of an investment company and may be deemed to prohibit certain
arrangements between each Portfolio and commodities brokers with respect to
initial and variation margin. Section 18(f) of the Investment Company Act
prohibits a Portfolio from issuing a "senior security" other than a borrowing
from a bank. The staff of the Securities and Exchange Commission has in the
past indicated that a futures contract may be a "senior security" under the
Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions
of each Portfolio will be conducted on a spot, i.e., cash, basis at the spot
rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than one tenth of one percent due
to the costs of converting from one currency to another. Each Portfolio has
authority, however, to deal in forward foreign exchange among currencies of
the different countries in which it may invest as a hedge against possible
variations in the foreign exchange rates among these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the
contract. A Portfolio's dealings in forward foreign exchange will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of a Portfolio accruing in
connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Portfolio or the payment of dividends and
distributions by the Portfolio. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. No Portfolio will speculate in forward
foreign exchange. No Portfolio may position hedge with respect to the
currency of a particular country to an extent greater than the aggregate
market value (at the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular foreign currency. A
Portfolio will enter into such transactions only to the extent, if any,
deemed appropriate by the Manager. No Portfolio will enter into a forward
contract with a term of more than one year. Investors should be aware that
U.S. dollar denominated securities may not be available in some or all
countries in which the Portfolios invest, that the forward currency market
for the purchase of U.S. dollars in most, if not all, such countries is not
highly developed and that in certain countries no forward market for foreign
currencies currently exists or such market may be closed to investment by a
Portfolio.
Each Portfolio is also authorized to purchase or sell listed or
over-the-counter foreign currency options, foreign currency futures and
related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-U.S. dollar
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denominated securities owned by a Portfolio, sold by a Portfolio but not yet
delivered, or committed or anticipated to be purchased by a Portfolio. As
an illustration, the Far East Portfolio may use such techniques to hedge the
stated value in U.S. dollars of an investment in a Philippine peso
denominated security. In such circumstances, for example, the Far East
Portfolio may purchase a foreign currency put option enabling it to sell a
specified amount of foreign currency for dollars at a specified price by a
future date. To the extent the hedge is successful, a loss in the value of
the Philippine pesos relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the
cost of acquiring such a put option, a Portfolio may also sell a call option
which, if exercised, requires it to sell a specified amount of Philippine
pesos for dollars at a specified price by a future date (a technique called
a "straddle"). By selling such call option in this illustration, the Far
East Portfolio gives up the opportunity to profit without limit from
increases in the relative value of the Philippine peso to the dollar. The
Manager believes that "straddles" of the type which may be utilized by each
Portfolio constitute hedging transactions and are consistent with the
policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for a Portfolio to hedge against a
devaluation that is so generally anticipated that the Portfolio is not able
to contract to sell the currency at a price above the devaluation level it
anticipates. The cost to a Portfolio of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length
of the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a
principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of
options and futures transactions involves the risk of imperfect correlation
in movements in the prices of options and futures and movements in the prices
of the securities or currencies which are the subject of the hedge. If the
price of the options and futures moves more or less than the prices of the
hedged security or currency, a Portfolio will experience a gain or loss which
will not be completely offset by movements in the prices of the subject of
the hedge. The successful use of options and futures also depends on the
Manager's ability to predict correctly price movements in the market involved
in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded options or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. A Portfolio will enter into options or future
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that
a liquid secondary market will exist for any particular call or put option
or futures contract at any specific time. Thus, it may not be possible to
close an option or futures position. A Portfolio will acquire only
over-the-counter options for which management believes the Portfolio can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option), unless a
quotation from only one dealer is available, in which case only that dealer's
price will be used, or which can be sold at a formula price provided for in
the over-the-counter option agreement. In the case of a futures position or
an option on a futures position written by a Portfolio in the event of
adverse price movements, the Portfolio would continue to be required to make
daily cash payments of variation margin. In such situations, if the
Portfolio has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, a Portfolio may be required to take
or make delivery of the currency or security underlying futures contracts it
holds. The inability to close options and futures positions also could have
an adverse impact on a Portfolio's ability to hedge effectively its
portfolio. There is also the risk of loss by a Portfolio of margin deposits
in the event of bankruptcy of a broker with whom the Portfolio has an open
position in a futures contract or related option. The risk of loss from
investing in futures transactions is theoretically unlimited.
The exchanges on which the Portfolios intend to conduct options
transactions generally have established limitations governing the maximum
number of call or put options on the same underlying security or currency
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(whether or not covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options
are written on the same or different exchanges or are held or written on one
or more accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts which any person may trade on a
particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits, and it may impose other sanctions
or restrictions. The Manager does not believe that these trading and
positions limits will have any adverse impact on the portfolio strategies for
hedging each Portfolio's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. Each Portfolio is classified as non-diversified
within the meaning of the Investment Company Act, which means that no
Portfolio is limited by such Act in the proportion of its assets that it may
invest in securities of a single issuer. Each Portfolio's investments will
be limited, however, in order to qualify for the special tax treatment
afforded "regulated investment companies" under the Internal Revenue Code of
1986, as amended (the "Code"). See "Dividends, Distributions and Taxes-
Taxes". To qualify, each Portfolio must 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 each
Portfolio'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 no Portfolio will 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 a Portfolio assumes large positions in the
securities of a small number of issuers, the Portfolio'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 Portfolio may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
When-Issued Securities and Delayed Delivery Transactions. Each
Portfolio may purchase securities on a when-issued basis, and it may purchase
or sell securities for delayed delivery. These transactions occur when
securities are purchased or sold by a Portfolio with payment and delivery
taking place in the future to secure what is considered an advantageous yield
and price to the Portfolio at the time of entering into the transaction.
Although no Portfolio has established any limit on the percentage of its
assets that may be committed in connection with such transactions, each
Portfolio will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitment in connection with
such purchase transactions.
Standby Commitment Agreements. Each Portfolio may from time to time
enter into standby commitment agreements. Such agreements commit a
Portfolio, for a stated period of time, to purchase a stated amount of a
fixed income security which may be issued and sold to the Portfolio at the
option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement a
Portfolio is paid a commitment fee, regardless of whether or not the security
is ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security that the Portfolio has committed to purchase.
A Portfolio will enter into such agreements only for the purpose of investing
in the security underlying the commitment at a yield and price that is
considered advantageous to the Portfolio. A Portfolio will not enter into
a standby commitment with a remaining term in excess of 45 days and presently
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to such commitments, together with the value
of portfolio securities subject to legal restrictions on resale, will not
exceed 15% (which presently is further limited by state law to 10%) of its
assets taken at the time of acquisition of such commitment or security. Each
Portfolio will at all times maintain a segregated account with its custodian
of cash, cash equivalents, U.S. Government securities or other high grade
liquid debt securities denominated in U.S. dollars or non-U.S. currencies in
an aggregate amount equal to the purchase price of the securities underlying
the commitment.
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There can be no assurance that the security 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. Because the
issuance of the security underlying the commitment is at the option of the
issuer, a Portfolio 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 agreement and the
related commitment fee will be recorded on the date which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Portfolio's net asset
value. The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. Each of the
Portfolios may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements may be entered into only
with a member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. A Portfolio may enter into
purchase and sale contracts only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million. Under such agreements, the
other party agrees, upon entering into the contract with a Portfolio, to
repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, often less than one week. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, a Portfolio will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Portfolio does not have the right to seek additional collateral in the case
of purchase and sale contracts. In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Portfolio but constitute only collateral for
the seller's obligation to pay the repurchase price. Therefore, a Portfolio
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from
a repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Portfolio. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to a Portfolio shall be
dependent upon intervening fluctuations of the market values of such
securities and the accrued interest on the securities. In such event, the
Portfolio would have rights against the seller for breach of contract with
respect to any losses resulting from market fluctuations following the
failure of the seller to perform. No Portfolio may invest more than 15%
(which presently is further limited to 10% by applicable state law) of its
net assets in repurchase agreements or purchase and sale contracts maturing
in more than seven days. While the substance of purchase and sale contracts
is similar to repurchase agreements, because of the different treatment with
respect to accrued interest and additional collateral, management believes
that purchase and sale contracts are not repurchase agreements as such term
is understood in the banking and brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (8)
below, each Portfolio may lend securities from its portfolio to approved
borrowers and receive collateral therefor in cash or securities issued or
guaranteed by the U.S. Government which arc maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by a Portfolio, it is invested in short-term
money market securities, and a portion of the yield received in respect of
such investment is retained by the Portfolio. Alternatively, if securities
are delivered to a Portfolio as collateral, the Portfolio and the borrower
negotiate a rate for the loan premium to be received by the Portfolio for
lending its portfolio securities. In either event, the total Portfolio yield
is increased by loans of its portfolio securities. Each Portfolio will have
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the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time, and the borrower, after notice, will be required to return borrowed
securities within five business days. Each Portfolio may pay reasonable
finder's, administrative and custodial fees in connection with such loans.
With respect to the lending of portfolio securities, there is the risk of
failure by the borrower to return the securities involved in such
transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating
to the investment of each Portfolio's assets and activities, which are
fundamental policies and may not be changed without the approval of the
holders of a majority of each Portfolio's outstanding voting securities,
respectively (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (ii) more than 50%
of the outstanding shares). No Portfolio may:
1. Invest more than 25% of its assets, taken at market value, 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 a Portfolio in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control of management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, a Portfolio may invest in securities directly or
indirectly secured by real estate or interests therein or issued by companies
which 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, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that a Portfolio 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 Fund's Prospectus and
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 each Portfolio (i) may borrow from banks
(as defined in the Investment Company Act) in amounts up to 331/3% 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. No Portfolio may pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Portfolio's investment policies as set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as a Portfolio
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that a Portfolio 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 registering as a commodity pool
operator under the Commodity Exchange Act.
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Additional non-fundamental investment restrictions adopted by the Fund,
which may be changed by the Directors without shareholder approval, provide
that no Portfolio may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. No Portfolio currently intends
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of the Portfolio's total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund has
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act and
determined to be liquid by the Fund's Board of Directors are not subject to
the limitations set forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5% of
the Portfolio's net assets; included within such limitation, but not to
exceed 2% of the Portfolio's net assets, are warrants which are not listed
on the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by a Portfolio
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than
5% of the Portfolio's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and directors
of any subsidiary thereof each owning beneficially more than one-half of one
percent of the securities of such issuer own in the aggregate more than 5%
of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that a Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's Prospectus
and Statement of Additional Information, as they may be amended from time to
time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
money or pledge its assets, except that a Portfolio (a) may borrow from a
bank as a temporary measure for extraordinary or emergency purposes or to
meet redemptions in amounts not exceeding 331/3% (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 a Portfolio from purchasing securities on
margin. The deposit or payment by a Portfolio 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 a Portfolio. Such leveraging or borrowing increases a Portfolio's
exposure to capital risk, and borrowed funds are subject to interest costs
which will reduce net income. No Portfolio will purchase securities while
borrowings exceed 5% of its total assets.
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The staff of the Commission has taken the position that purchased over-
the-counter ("OTC") options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which no Portfolio will 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 Portfolio, the
market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Portfolio and margin deposits
on the Portfolio's existing OTC options on financial futures contracts
exceeds 15% of the total assets of the Portfolio, taken at market value,
together with all other assets of the Portfolio which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the
Portfolio to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and if the Portfolio has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Portfolio will treat as illiquid such amount
of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of
the underlying securities minus the option's strike price). The repurchase
price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus
the amount by which the option is "in-the-money". This policy as to OTC
options is not a fundamental policy of the Fund and may be amended by the
Board of Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior
to the change or modification by the Securities and Exchange 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 Securities and Exchange
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.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See
"Portfolio Transactions and Brokerage". Without such an exemptive order, the
Fund would be prohibited from engaging in portfolio transactions with the
Manager or its affiliates acting as principal and from purchasing securities
in public offerings which are not registered under the Securities Act in
which such firms or any of their affiliates participate as an underwriter or
dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL - President and Director(1)(2) - President of the Manager
(which term as used herein includes its corporate predecessors) since 1977
and Chief Investment Officer since 1976; President and Chief Investment
Officer of FAM (which term as used herein includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Executive
Vice President of Merrill Lynch & Co., Inc. since 1990; Director of the
Distributor.
(To be provided by amendment)
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TERRY K. GLENN - Executive Vice President(1)(2) - Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY - Senior Vice President(1)(2) - Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
ANDREW JOHN BASCAND - Vice President - Director of MLAM U.K. and Vice
President of Merrill Lynch Global Asset Management Limited ("MLGAM") since
1993.
ADRIAN HOLMES - Vice President - Managing Director of MLAM U.K. since
1993, Vice President from 1990 to 1993 and an employee thereof since 1987,
and Director of MLGAM since 1993.
STEPHEN I. SILVERMAN - Vice President - Vice President of the Manager
and its predecessor since 1983.
GRACE PINEDA - Vice President - Vice President of and portfolio manager
with the Manager and its predecessor since 1989. Portfolio manager with
Clemente Capital, Inc. from 1982 to 1989.
KARA W.Y. TAN BHALA - Vice President(1) - Portfolio manager with the
Manager since 1992; Vice President of Fiduciary Trust International from 1990
to 1992; Vice President of James Capel Inc. from 1988 to 1990; Senior
Investment Analyst of James Capel (Far East) Ltd. from 1986 to 1988.
DONALD C. BURKE - Vice President(1)(2) - Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from
1982 to 1990.
GERALD M. RICHARD - Treasurer(1)(2) - Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
JAMES W. HARSHAW, III - Secretary(1) - Attorney at MLAM since 1994;
Associate at law firm from 1990 to 1994; judicial law clerk for the United
States Court of Appeals for the Third Circuit from 1989 to 1990.
- --------------------
(1) Interested person, as defined in the Investment Company Act, of the
Fund.
(2) Such Director or officer is a director, trustee or officer of one or
more additional investment companies for which the Manager, or its affiliate,
FAM, acts as investment adviser or manager.
At , 1994, the Directors and officers of the Fund as
-----------------
a group (___ persons) owned an aggregate of less than 1% of the outstanding
shares of any Portfolio. At such date, Mr. Zeikel, a Director of the Fund,
and the other officers of the Fund owned less than 1% of the outstanding
shares of common stock of Merrill Lynch & Co., Inc.
Pursuant to the terms of the Fund's management agreement with the
Manager relating to each Portfolio (each a "Management Agreement"), the Fund
pays each Director not affiliated with the Manager a fee of $_____ per year
plus $_____ per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the
nonaffiliated Directors, at a rate of $_____ per meeting attended. The
Chairman of the Audit Committee receives an additional fee of $_____ per
meeting.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund-Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
12
<PAGE>
The Management Agreement provides that, subject to the direction of the
Board of Directors of the Fund, the Manager is responsible for the actual
management of each Portfolio and for the review of that Portfolio's holdings
in light of its own research analysis and analyses from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager, subject to review by the Board
of Directors. The Manager supplies the portfolio managers for each
Portfolio, who consider analyses from various sources, make the necessary
investment decisions and place transactions accordingly. The Manager also
is obligated to perform certain administrative and management services for
the Portfolios and is required to provide all the office space, facilities,
equipment and personnel necessary to perform its duties under the Management
Agreement. The Manager has access to the total securities research, economic
research and computer applications facilities of Merrill Lynch and makes
extensive use of these facilities.
Securities held by the Portfolios may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which
the Manager or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Manager for the Portfolios or other
funds for which it acts as investment adviser or for its other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Manager or its
affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
As compensation for its services to the Portfolios, the Manager will
receive from each Portfolio a monthly fee based on the average daily value
of that Portfolio's net assets at the following annual rates:
<TABLE>
<CAPTION>
International Equity Developing Capital Latin American
Portfolio Far East Portfolio Markets Portfolio
Portfolio
<S> <C> <C> (C)
___% ___% ___% ___%
</TABLE>
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 Portfolios, as well as the
fees and expenses 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 Portfolios, including, among other things, taxes;
expenses for legal and auditing services; costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor);
charges of the custodian, any sub-custodian and transfer agent; expenses of
redemption of shares; Commission fees; expenses of registering the shares
under Federal, state or foreign laws: fees and expenses of unaffiliated
Directors; accounting and pricing costs (including the daily calculation of
net asset value); insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses; and other expenses properly payable
by the Fund. Certain expenses may be allocated by the Fund to the Portfolios
on the basis of asset size of the respective Portfolios. Such expenses
include the fees and expenses of the unaffiliated Directors, state franchise
taxes, costs of printing proxies and other expenses related to shareholder
meetings and general administrative expenses that can be allocated on the
basis of asset size of the respective Portfolios. The organizational
expenses of the Fund were paid by the Fund, and if additional Portfolios are
added to the Fund, organizational expenses may be allocated to such
Portfolios in a manner deemed equitable by the Board of Directors. Depending
upon the nature of a lawsuit, litigation costs may be assessed to the
specific Portfolio to which the lawsuit relates or allocated on the basis of
the asset size of the respective Portfolios. The Board of Directors has
determined that this is an appropriate method of allocation of expenses.
Accounting services are provided to the Portfolios by the Manager, and the
Portfolios reimburse the Manager for its costs in connection with such
services on a semi-annual basis.
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<PAGE>
With respect to the International Equity Portfolio, the Manager has also
entered into a sub-management agreement with MLAM U.K., a wholly-owned,
indirect subsidiary of Merrill Lynch & Co., Inc. and an affiliate of the
Manager, pursuant to which the Manager pays MLAM U.K. a fee in an amount to
be determined from time to time by the Manager and MLAM U.K. but in no event
in excess of the amount that the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement.
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc.
and Princeton Services, Inc. arc "controlling persons" of the Manager as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K. for the same reasons: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described
herein, the Management Agreements and International Equity Portfolio's sub-
management agreement will continue in effect for a period of two years from
execution and 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 subject Portfolio 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 thereto or by the vote of the shareholders of the
Portfolios.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Portfolio shares.
The Fund will offer shares of its Portfolios solely to institutional
"accredited investors", as defined in Regulation D of the Securities Act.
The minimum initial purchase is $5 million per Portfolio. There is no
minimum for subsequent investments.
The Distributor, a subsidiary of the Manager, acts as the distributor
of the shares of the Fund's Portfolios. The applicable offering price for
purchase orders is based on the net asset value of a Portfolio next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 P.M., New York
time, which includes orders received after the determination of net asset
value on the previous day, the applicable offering price will be based on the
net asset value determined as of 4:15 P.M., New York time, on the day the
orders are placed with the Distributor, provided the orders are received by
the Distributor prior to 4:30 P.M., New York time, on that day. If the
purchase orders are not received by the Distributor prior to 4:30 P.M., New
York time, such orders shall be deemed received on the next business day.
Any order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of any Portfolio's shares 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.
The Fund has entered into a distribution agreement with the Distributor
in connection with the continuous offering of shares of the Portfolios (the
"Distribution Agreement"). The Distribution Agreement obligates the
Distributor to pay certain expenses in connection with the offering of shares
of the Portfolios. 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 Agreement is subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
14
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Portfolio shares.
The right to redeem shares or to receive payment with respect to any
such redemption may be suspended only for any period during which trading on
the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission") or such Exchange is closed (other than
customary weekend and holiday closings) for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal
of portfolio securities or determination of the net asset value of a
Portfolio is not reasonably practicable, and for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
shareholders of each Portfolio.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies-Other Investment
Policies and Practices- Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund,
the Manager is primarily responsible for the portfolio decisions of each of
the Portfolios and the placing of the portfolio transactions for each of the
Portfolios. With respect to such transactions, the Manager (and MLAM U.K.,
International Equity Portfolio's sub-manager) seeks to obtain the best net
results for each Portfolio, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. Subject
to obtaining the best price and execution, brokers who provide supplemental
investment research to the Portfolios may receive orders for transactions by
the Portfolio. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager and MLAM U.K.
under the Management Agreements, and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. It is possible that certain of the supplementary investment
research so received will primarily benefit one or more other investment
companies or other accounts for which investment discretion is exercised.
Conversely, the Fund may be the primary beneficiary of the research or
services received as a result of portfolio transactions effected for such
other accounts or investment companies. In addition, consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. and policies established by the Board of Directors of the Fund, the
Manager may consider sales of shares of the Portfolios 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
generally 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 each Portfolio will endeavor to achieve the best net results in
effecting its portfolio transactions. There is generally less governmental
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
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
foreign equity securities. ADRs, EDRs and GDRs may be listed on stock
exchanges or traded in over-the-counter markets in the United States or
Europe, as the case may be. ADRs, like other securities traded in the United
States, as well as GDRs traded in the United States, will be subject to
negotiated commission rates.
The Portfolios invest in certain securities traded in the
over-the-counter market and, where possible, deal directly with the dealers
who make a market in the securities involved, except in those circumstances
in which better prices and execution are available elsewhere. Under the
Investment Company Act, persons affiliated with the Fund
15
<PAGE>
and persons who are affiliated with such persons are prohibited from dealing
with a Portfolio 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.
A Portfolio'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
Portfolios are redeemable on a daily basis in U.S. dollars, the Portfolios
intend to manage their portfolios so as to give reasonable assurance that
they 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 portfolio
strategies.
Section 11(a) of the Securities Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional
accounts which they manage unless the member (i) has obtained prior express
authorization from the account to effect such transactions, (ii) at least
annually furnishes the account with a statement disclosing 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 Portfolios 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. The
Commission has the authority to issue regulations to broaden the prohibition
contained in Section 11(a) to extend to transactions executed otherwise than
on a national securities exchange. While there is no indication that it will
do so, the Commission could under this authority issue regulations at any
time which would prohibit affiliates from executing portfolio transactions
for the Fund on foreign securities exchanges.
The Board of Directors of the Fund has considered the possibilities of
seeking to recapture for the benefit of the Fund brokerage commissions and
other expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the management fees
paid by the Fund. After considering all factors deemed relevant, the Board
of Directors made a determination not to seek such recapture. The Board of
Directors will reconsider this matter from time to time.
PORTFOLIO TURNOVER
Each Portfolio intends to comply with the various requirements of the
Internal Revenue Code so as to qualify as a "regulated investment company"
thereunder. See "Dividends, Distributions and Taxes." Among such
requirements is a limitation to less than 30% on the amount of gross income
which the Portfolios may derive from gain on the sale or other disposition
of securities held for less than three months. Accordingly, the Portfolios'
ability to effect certain portfolio transactions may be limited.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information-Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Portfolios is determined once daily
Monday through Friday as of 4:15 p.m., New York time, on each day the New
York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets
or
16
<PAGE>
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. Net asset value of a
Portfolio is computed by dividing the value of the securities held by a
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 of a Portfolio outstanding at such
time. Expenses, including the management fees, are accrued daily.
Portfolio securities which are traded on stock exchanges are valued at
the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities traded in the over-the-counter
market are valued at the last available bid price in the over-the-counter
market prior to the time of valuation. When a Portfolio writes a call
option, the amount of the premium received is recorded on the books of the
Portfolio 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 oyer-the-counter market, the
last asked price. Options purchased by a Portfolio are valued at their last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. Such valuation and
procedures will be reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the
Portfolios' shares are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New
York Stock Exchange. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of the New York Stock Exchange which will not
be reflected in the computation of the Portfolios' net asset values. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers the shareholder services and investment plan described
below which are designed to facilitate investment in shares of the
Portfolios. Instructions as to how to participate in the plan, or how to
change options with respect thereto, can be obtained from the Fund, the
Distributor or Merrill Lynch. Certain of these services are available only
to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has
an Investment Account and will receive statements, at least quarterly, from
the transfer agent. These statements will serve as transaction confirmations
for automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or
sale transaction other than reinvestment of dividends and capital gains
distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing
all or only part of the full shares in an Investment Account may be requested
by a shareholder directly from the transfer agent.
17
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method
of payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
respective Portfolios. Such reinvestment will be at the net asset value of
shares of the Portfolios(s) as of the close of business on the ex-dividend
date of the dividend or distribution. Shareholders may elect in writing to
receive either their dividends or capital gains distributions, or both, in
cash, in which event payment will be mailed or direct deposited on or about
the payment date.
Shareholders may, at any time, notify the transfer agent in writing or
by telephone ( 1-800-MER-FUND) that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Portfolio(s) or
vice versa, and commencing ten days after receipt by the transfer agent of
such notice, those instructions will be effected.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to cause each Portfolio to distribute
substantially all of its net investment income, if any. Dividends from such
net investment income are paid at least annually. All net realized long- or
short-term capital gains, if any, are distributed to the Portfolios'
shareholders at least annually. Premiums from expired options written by a
Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes. See "Shareholder
Services-Automatic Reinvestment of Dividends and Distributions" in the
Prospectus for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the respective
Portfolio. Dividends and distributions are taxable to shareholders as
described below whether they are invested in shares of the respective
Portfolio or received in cash.
TAXES
The Fund intends to elect and to qualify each Portfolio for the special
tax treatment afforded regulated investment companies ("RlCs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies,
each Portfolio (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to shareholders. The Fund intends to cause each
Portfolio to distribute substantially all of such income.
Each Portfolio of the Fund is treated as a separate corporation for
Federal income tax purposes. Each Portfolio therefore is considered to be
a separate entity in determining its treatment under the rules for RICs
described in the Prospectus. Losses in one Portfolio do not offset gains in
another Portfolio, and the requirements (other than certain organizational
requirements) for qualifying for RIC status will be determined at the
Portfolio level rather than the Fund level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund intends to cause
each Portfolio to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of each Portfolio's taxable income and capital gains
will be distributed to avoid entirely the imposition of the tax. In such
event, a Portfolio will be liable for the tax only on the amount by which it
does not meet the foregoing distribution requirements.
Dividends paid by a Portfolio from its ordinary income and distributions
of a Portfolio's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from a Portfolio's net realized
long-term capital gains (including long-term
18
<PAGE>
gains from certain transactions in futures or options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Portfolio shares.
Any loss upon the sale or exchange of Portfolio shares held for six months
or less, however, will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. Distributions of
excess of a Portfolio's earnings and profits will first reduce the adjusted
tax basis of a holder's shares and, after such adjusted tax basis is reduced
to zero, will constitute capital gains to such holder (assuming the shares
are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested
in additional shares of a Portfolio. Not later than 60 days after the close
of its taxable year, the Fund will provide its shareholders of each Portfolio
with a written notice designating the amounts of any ordinary income
dividends or capital gain dividends. Distributions by a Portfolio, whether
from ordinary income or capital gains, generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. If a
Portfolio pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date
in one of such months, then such dividend will be treated for tax purposes
as being paid by such Portfolio and received by its shareholders on December
31 of the year in which such dividend was declared.
Ordinary income dividends paid by a Portfolio to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax on ordinary income dividends, capital gain dividends
and redemption payments ("backup withholding"). Generally, shareholders
subject to backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
Dividends and interest received by the Portfolios may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to
such taxes, subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in a Portfolio. If more
than 50% in value of a Portfolio's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be
eligible, and intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Portfolio will be required to include
their proportionate shares of such withholding taxes in their U.S. income tax
returns as gross income, treat such proportionate shares as taxes paid by
them, and deduct such proportionate shares in computing their taxable incomes
or, alternatively, use them as foreign tax credits against their U.S. income
taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that
is a nonresident alien individual or a foreign corporation may be subject to
U.S. withholding tax on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders
the amount per share of such withholding taxes paid by each Portfolio.
A loss realized on a sale or exchange of shares of a Portfolio will be
disallowed if other shares in the same Portfolio are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such a ease, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Each Portfolio may invest up to 10% of its total assets in securities
of closed-end investment companies. If a Portfolio purchases shares of an
investment company (or similar investment entity) organized under foreign
law,
19
<PAGE>
the Portfolio will be treated as owning shares in a passive foreign
investment company ("PFIC") for U.S. Federal income tax purposes. The
Portfolio may be subject to U.S. Federal income tax, and an additional tax
in the nature of interest, on a portion of the distributions from such a
company and on gain from the disposition of the shares of such company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Portfolio as a dividend to its shareholders.
Each Portfolio 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 Portfolio to recognize
income in a particular year in excess of the distributions received from such
PFICs. Alternatively, under proposed regulations, each Portfolio may 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 Portfolio would recognize as
ordinary income any increase in the value of such shares. Unrealized losses,
however, would not be recognized. By making the mark-to-market election, a
Portfolio 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 receives from PFICs and
its proceeds from dispositions of PFIC stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
Each Portfolio may write, purchase or sell options, futures or 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 options 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 a Portfolio elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or
loss from contracts will be 60% long-term and 40% short-term capital gain or
loss. The mark-to-market rules outlined above, however, will not apply to
certain transactions entered into by a Portfolio 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.
Each Portfolio may, nonetheless, elect to treat the gain or loss from certain
forward foreign exchange contracts as capital. In this case, gain or loss
realized in connection with a forward foreign exchange contract that is a
Section 1256 contract will be characterized as 60% long-term and 40%
short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles" may affect the
taxation of a Portfolio's transactions in options, futures and forward
foreign exchange contracts. Under Section 1092, a Portfolio may be required
to postpone recognition for tax purposes of losses incurred in certain
closing transactions in options, futures and forward foreign exchange
contracts.
One of the requirements for qualification as a RIC is that less than 30%
of a Portfolio's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, a
Portfolio may be restricted in effecting closing transactions within three
months after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether a Portfolio 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 currency contracts will be
valued for purposes of the RIC diversification requirements applicable to
each Portfolio.
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<PAGE>
Under Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will be treated
as ordinary income or loss under Code Section 988. In certain circumstances,
a Portfolio 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 a Portfolio.
In general, however, Code Section 988 gains or losses will increase or
decrease the amount of a Portfolio'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, a Portfolio would not be able to make
any ordinary income dividend distributions, and any distributions made before
the losses were realized but in the same taxable year would be re-
characterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Portfolio shares and resulting in a capital gain
for any shareholder who received a distribution greater than the
shareholder's basis in the respective Portfolio's 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 a Portfolio 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 and interest payments with respect to
debt obligations issued in hyperinflationary currencies, which may include
the currencies of certain developing countries in which a Portfolio intends
to invest. 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 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 U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Portfolio.
PERFORMANCE DATA
From time to time the Fund may include each Portfolio's 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 each Portfolio's historical performance and are not intended to
indicate future performance.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any redemption fee, that would be
applicable to a complete redemption of the investment at the end of the
specified period.
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<PAGE>
The Fund also may quote each Portfolio's annual, average annual and
annualized total return and aggregate total return performance data, both as
a percentage and as a dollar amount based on a hypothetical $1,000
investment, for various periods other than those noted below. Such data will
be computed as described above, except that, as required by the periods of
the quotations, actual annual, annualized or aggregate data, rather than
average annual data, may be quoted. 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 longer periods of time.
On occasion, a Portfolio may compare its performance to that of the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, or performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine. As with other performance data, performance comparisons should not
be considered representative of the Portfolio's relative performance for any
future period.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on November 18, 1994. The
Fund is an open-end management investment company comprised of separate
series ("Series"), each of which is a separate portfolio. Each Series is to
be managed independently. At the date of this Statement of Additional
Information, the Fund has authorized capital of 100,000,000 shares of Common
Stock, par value $0.10 per share, divided into four Series as follows:
International Equity Portfolio Series Common Stock which consists of
25,000,000 shares; Far East Portfolio Series Common Stock which consists of
25,000,000 shares; Developing Capital Markets Portfolio Series Common Stock
which consists of 25,000,000 shares; and Latin America Portfolio Series
Common Stock which consists of 25,000,000 shares. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
Series at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. 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 stockholders
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 rights. Redemption
rights are discussed elsewhere herein and in the Prospectus. Each share of
Common Stock is entitled to participate equally in dividends and
distributions declared by the respective Series and in the net assets of the
Series upon liquidation or dissolution after satisfaction of outstanding
liabilities. The obligations and liabilities of a particular Series are
restricted to the assets of that Series and do not extend to the assets of
the Fund generally. Shares of each Series represent an interest only in that
Series and not in any other Series of the Fund. 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
2,500 shares of Common Stock of each Portfolio for an aggregate of $100,000.
Such shares were acquired for investment and can only be disposed of by
redemption. The organizational expenses of the Fund will be paid by the Fund
and amortized over a period not exceeding five years. The proceeds realized
by the Manager (or any subsequent holder) upon redemption of any of such
shares will be reduced by the proportionate amount of the unamortized
organizational expenses which the number of shares redeemed bears to the
number of shares initially purchased. As of the date of this Statement of
Additional Information, the Manager owned 100% of the outstanding shares of
Common Stock of the Fund. The
22
<PAGE>
Manager may be deemed to control the Fund until such time as it owns less
than 25% of the outstanding shares of the Fund.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the initial offering price for
shares of each Portfolio based on the projected value of each Portfolio's net
assets and projected number of shares outstanding on the date its shares are
first offered for sale to public investors is as follows:
<TABLE> TABLE
<CAPTION> Developing
International Far East Capital Latin
Equity Portfolio Markets America
Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Net Assets . . . . . . . . . . . . . . . . . . . $25,000 $25,000 $25,000 $25,000
Number of Shares Outstanding . . . . . . . . . . 2,500 2,500 2,500 2,500
Net Assets Value Per Share (net assets divided by
number of $10.00 $10.00 $10.00 $10.00
shares outstanding) . . . . . . . . . . . . . .
Offering Price . . . . . . . . . . . . . . . . . $10.00 $10.00 $10.00 $10.00
</TABLE>
INDEPENDENT AUDITORS
_____________________, ________________, ___________________________,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by each Portfolio's
shareholders. The independent auditors are responsible for auditing the
annual financial statements of each Portfolio.
CUSTODIAN
, acts as the custodian of the Fund's
-----------------------------
assets (the "Custodian"). 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 United States and with certain foreign banks and securities depositories.
The Custodian is responsible for safeguarding and controlling each
Portfolio's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Portfolio's
investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the
Fund's transfer agent (the "Transfer Agent"). The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management
of the Fund-Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
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<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. Each
Portfolio sends to its shareholders at least semi-annually reports showing
the Portfolio's portfolio and other information. An annual report,
containing financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year, shareholders will
receive Federal income tax information regarding dividends and capital gains
distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not
contain all 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 of 1933, as
amended, and the Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right
to use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Fund at any time or to grant the use
of such name to any other company, and the Fund has granted Merrill Lynch,
under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch.
24
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES AND PREFERRED STOCK
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") CORPORATE DEBT RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest 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 desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier I indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
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<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months.
Moody's makes no representations as to whether such commercial paper is by
any other definition "commercial paper" or is exempt from registration under
the Securities Act of 1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a rated
issuer or issued in conformity with any applicable law. Moody's employs the
following three designations, all judged to be investment grade, to indicate
the relative repayment ability of rated issuers.
Issuers rated PRIME-1 (or supporting institutions) have a superior
ability for repayment of short-term promissory obligations. PRIME-1
repayment ability will often be evidenced by many of the following
characteristics:
-Leading market positions in well-established industries.
-High rates of return on funds employed.
-Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning
ratings to such issuers, Moody's evaluates the financial strength of the
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement.
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<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stock and
bonds, a variation of the bond rating symbols is being used in the quality
of preferred stocks. The symbols presented below are designed to avoid
comparison with bond quality in absolute terms. It should always be borne
in mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. rh;s rating indicates good asset protection and the least
fisk of dividend impairment within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the earnings
and asset protection will remain relatively well maintained t the foreseeable
future.
"a" An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected not poorly secured. Earnings and
asset protection appear adequate at present but amy 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 per;M of time me be small.
"caa" An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can be remanded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking: and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
27
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S")
CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of
the obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However. it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal.
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<PAGE>
In the event of adverse business, financial, or economic conditions, it
is not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "B" or "B-" rating.
CC The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal 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. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
c The letter "c" indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions enumerated
in the tender option documents.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral
is federally insured and interest is adequately collateralized. In the case
of certificates of deposit, the letter "L" indicates that the deposit,
combined with other deposits being held in the same right and capacity, will
be honored for principal and accrued predefault interest up to the federal
insurance limits within 30 days after closing of the insured institution or,
in the event that the deposit is assumed by a successor insured institution,
upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood
of, or the risk of default upon failure of, such completion. The investor
should exercise his own judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming-investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United Slates and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment
Grade" ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various
29
<PAGE>
states governing legal investments impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the
relevant market. Ratings are graded into several categories, ranging from
"A-l" for the highest quality obligations to "D" for the lowest. These
categories are as follows:
A-l This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-l".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal 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.
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard &
Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the debt rating symbol assigned to, or that would
be assigned to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
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.
30
<PAGE>
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated 'AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
CCC speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of
preferred stock quality, the ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result
of changes in, or unavailability of, such information, or based on other
circumstances.
31
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objectives and
Policies . . . . . . . . . 2 MERRILL LYNCH
International Equity
Portfolio . . . . . . . . 2 GLOBAL INSTITUTIONAL
Far East Portfolio . . . . 3
Developing Capital Markets SERIES
Portfolio . . . . . . . . . . 3
Latin America Portfolio . . . 3
Portfolio Strategies Involving
Options and Futures . . . . 3
Other Investment Policies and
Practices . . . . . . . . . . 7
Investment Restrictions . . . 9
Management of the Fund . . . 11
Directors and Officers . . 11
Management and Advisory
Arrangements . . . . . . . . 12
Purchase of Shares . . . . . 14
Redemption of Shares . . . . 14
Portfolio Transactions and
Brokerage . . . . . . . . . 15
Portfolio Turnover . . . . 16
Determination of Net Asset
Value . . . . . . . . . . . 16
Shareholder Services . . . . 17
Investment Account . . . . 17
Automatic Reinvestment of
Dividends and Capital Gains , 1994
Distributions . . . . . . . 17 --------------- --
Dividends, Distributions and
Taxes . . . . . . . . . . . 18 Distributor:
Dividends and Distributions 18 Merrill Lynch
Tax Treatment of Options, Funds Distributor, Inc.
Futures and Forward Exchange
Transactions . . . . . . . 20
Special Rules for Certain
Foreign Currency
Transactions . . . . . . 20
Performance Data . . . . . . 21
General Information . . . . . 22
Description of Shares . . . 22
Computation of Offering Price
Per Share . . . . . . . . 22
Independent Auditors . . . 23
Custodian . . . . . . . . . 23
Transfer Agent . . . . . . 23
Legal Counsel . . . . . . . 23
Reports to Shareholders . . 23
Additional Information
Appendix Rating of Debt
Securities
and Preferred Stock . . . . 25
Code # xxxxx-xxxx
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part B:
Statement of Assets and Liabilities as of __________, 1994.
International Equity Portfolio
Far East Portfolio
Developing Capital Markets Portfolio
Latin America Portfolio
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
1 --Articles of Incorporation of Registrant.
2 --By-Laws of Registrant.(b)
3 --None.
4(a) --Portions of the Articles of Incorporation and By-Laws of Registrant defining the rights
of holders of shares of
common stock of the Registrant.(a)
(b) --Form of specimen certificate for shares of each Series of common stock of the
Registrant.(b)
5(a) --Form of Management Agreement between International Equity Portfolio and Merrill Lynch
Asset Management.(b)
(b) Form of Management Agreement between Far East Portfolio and Merrill Lynch Asset
Management.(b)
(c) Form of Management Agreement between Developing Capital Markets Portfolio and Merrill
Lynch Asset Management.(b)
(d) Form of Management Agreement between Latin America Portfolio and Merrill Lynch Asset
Management.(b)
6 --Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(b)
7 --None.
8 --Form of Custody Agreement between Registrant and _________________.(b)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
between Registrant and
Financial Data Services, Inc.(b)
(b) --Agreement between Merrill Lynch & Co., Inc. and Registrant relating to Registrant's use
of Merrill Lynch
name.(b)
10 --Opinion letter of Brown & Wood Counsel for Registrant.(b)
11 --Consent of , independent auditors for Registrant.(b)
12 --None.
13 --Certificate of Merrill Lynch Asset Management.(b)
14 --None.
15 --None.
16 --None.
17 --Financial Data Schedule(b).
(a) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7) and
Articles VI, VII and IX of the Registrant's Articles of Incorporation, filed
herewith as Exhibit 1 to the Registration Statement on Form N-1A and to
Article II, Article III (Sections 1, 3, 5 and 6) and Articles VI, VII, XIII
and XIV of the Registrant's By-Laws, filed herewith as Exhibit 2 to the
Registration Statement on Form N-1A.
(b) To be filed by Amendment.
</TABLE>
C-1
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Prior to the effective date of this Registration Statement, the Fund
will sell 2,500 shares of its International Equity Portfolio Common Stock,
2,500 shares of its Far East Portfolio Common Stock, 2,500 shares of its
Developing Capital Markets Portfolio Common Stock and 2,500 shares of its
Latin America Portfolio Common Stock to the Manager for an aggregate of
$100,000.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD
HOLDERS AT
, 1994
----------------
<S> <C>
Shares of Common Stock par value $0.10 per share:
International Equity Portfolio
Far East Portfolio
Developing Capital Markets Portfolio
Latin America Portfolio
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of Registrant's Articles of
Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreement.
Insofar as the conditional advancing of indemnification moneys for
actions based on the Investment Company Act of 1940 may be concerned, Article
VI of the Registrant's By-Laws provides that such payments will be made only
on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only on receipt of a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable insurance or an equivalent
form of security which assumes that any repayments may be obtained by the
Registrant without delay or litigation, which bond, insurance or other form
of security must be provided by the recipient of the advance and (b) a
majority of a quorum of the Registrant's disinterested non-party Directors,
or an independent legal counsel in a written opinion, shall determine, based
upon a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any action, suit or
proceeding) is asserted by such Director, officer or controlling person or
the principal underwriter in connection with the shares being registered, the
Registrant will, unless in the opinion
C-2
<PAGE>
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager") acts as investment
adviser for the following registered investment companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating
Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Merrill Lynch Variable Series
Funds, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of the
Manager, acts as the investment adviser for the following investment
companies: Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Emerging Tigers Fund, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
California Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured
Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior
High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate
Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646.
The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services"), Merrill Lynch Funds Distributor, Inc. ("MLFD") and Princeton
Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World
C-3
<PAGE>
Financial Center, North Tower, 250 Vesey Street, New York, New York 10281.
The address of Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
September 30, 1992, for his or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the preceding
paragraph, and Messrs. Geiger, Durnin, Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS, PROFESSION,
NAME POSITION(S) WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------
<S> <C> <C>
ML & Co. . . . . . . Limited Partner Financial Services
Holding Company
Merrill Lynch
Investment Limited Partner Investment Advisory
Management, Inc. . . Services
Princeton Services . General Partner General Partner of
FAM
Arthur Zeikel . . . . President President of FAM;
President and
Director of Princeton
Services; Director of
MLFD; Executive Vice
President of ML &
Co.; Executive Vice
President of Merrill
Lynch
Terry K. Glenn . . . Executive Vice Executive Vice
President President of FAM;
Executive Vice
President and
Director of Princeton
Services; President
and Director of MLFD;
Director of FDS;
President of
Princeton
Administrators, L.P.
Bernard J. Durnin . . Senior Vice President Senior Vice
President of FAM;
Senior Vice President
of Princeton Services
Vincent R. Giordano . Senior Vice President Senior Vice President
of FAM; Senior Vice
President of
Princeton Services
Elizabeth Griffin . . Senior Vice President Senior Vice President
of FAM
Norman R. Harvey . . Senior Vice President Senior Vice President
of FAM; Senior Vice
President of
Princeton Services
N. John Hewitt . . . Senior Vice President Senior Vice President
of FAM; Senior Vice
President of
Princeton Services
Philip L. Kirstein . Senior Vice Senior Vice
President, General President, General
Counsel and Secretary Counsel and Secretary
of FAM; Senior Vice
President, General
Counsel, Director and
Secretary of
Princeton Services;
Director of MLFD
Ronald M. Kloss . . . Senior Vice President Senior Vice President
and Controller and Controller of
FAM; Senior Vice
President and
Controller of
Princeton Services
Stephen M.M. Miller . Senior Vice President Executive Vice
President of
Princeton
Administrators, L.P.
Joseph T. Monagle, Senior Vice President Senior Vice President
Jr. . . . . . . . . . of FAM; Senior Vice
President of
Princeton Services
Gerald M. Richard . . Senior Vice President Senior Vice President
and Treasurer and Treasurer of FAM;
Senior Vice President
and Treasurer of
Princeton Services;
Vice President and
Treasurer of MLFD
Richard L. Rufener . Senior Vice President Vice President of
MLFD; Senior Vice
President of FAM;
Senior Vice President
of Princeton Services
Ronald L. Welburn . . Senior Vice President Senior Vice President
of FAM; Senior Vice
President of
Princeton Services
C-4
<PAGE>
Anthony Wiseman . . . Senior Vice President Senior Vice President
of FAM; Senior Vice
President of
Princeton Services
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for
each of the investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Fund,
MuniYield Arizona Fund, MuniYield Arizona Fund II, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc.,
MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer
of MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
</TABLE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ------------------------ ------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Sharon Creveling Vice President and None
Assistant Treasurer
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Michelle T. Lau Vice President None
Debra W. Landsman-
Yaros Vice President None
Gerald M. Richard Vice President and Treasurer
Treasurer
Richard L. Rufener Vice President None
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
C-5
<PAGE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder are maintained at the offices of the Registrant, 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its transfer agent,
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--
Management and Advisory Arrangements" in the Prospectus constituting Part A
of the Registration Statement and under "Management of the Fund--Management
and Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Registrant undertakes to file a post effective amendment using
financial statements, which need not be certified, within four to six months
from the effective date of this registration.
(b) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF PLAINSBORO, AND THE STATE OF NEW
JERSEY, ON THE 22ND DAY OF NOVEMBER, 1994.
MERRILL LYNCH GLOBAL INSTITUTIONAL
SERIES, INC.
(Registrant)
By /s/ PHILIP L. KIRSTEIN
--------------------------------
(Philip L. Kirstein, President)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES PHILIP L.
KIRSTEIN, TERRY K. GLENN AND JAMES W. HARSHAW, OR ANY OF THEM, AS ATTORNEY-
IN-FACT, TO SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED
BELOW, ANY AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING POST-
EFFECTIVE AMENDMENTS) AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH
THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE(S) INDICATED.
Signatures Title Date
---------- ----- ----
/s/ PHILIP L. KIRSTEIN President (Principal November 22, 1994
Executive Officer)
- ----------------------- and Director
(Philip L. Kirstein)
/s/ JAMES W. HARSHAW Treasurer (Principal November 22, 1994
Financial and Accounting
- ------------------------ Officer) and Director
(James W. Harshaw)
/s/ MARK B. GOLDFUS Director November 22, 1994
- ------------------------
(Mark B. Goldfus)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>
1 Articles of Incorporation of the Registrant
</TABLE>
<PAGE>
<PAGE>
ARTICLES OF INCORPORATION
MERRILL LYNCH GLOBAL INSTITUTIONAL SERIES, INC.
THE UNDERSIGNED, ROBERT C. TORCH, whose post office address is One
World Trade Center, New York, New York 10048-0557, being at least
eighteen years of age, does hereby act as an incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the
formation of corporations and with the intention of forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is MERRILL LYNCH GLOBAL INSTITUTIONAL
SERIES, INC. (the "Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed, the
powers, rights and privileges that the Corporation shall be authorized to
exercise and enjoy, and the business or objects to be transacted, carried
on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment company of
the management type.
1
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such
amounts and on such terms and conditions, for such purposes and for such
amount or kind of consideration now or hereafter permitted by the General
Laws of the State of Maryland and by these Articles of Incorporation, as
its Board of Directors may determine; provided, however, that the value of
the consideration per share to be received by the Corporation upon the
sale or other disposition of any shares of its capital stock shall not be
less than the net asset value per share of such capital stock outstanding
at the time of such event.
(4) To exchange, classify, reclassify, change the designation of,
convert, rename, redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of
the stockholders of the Corporation) shares of its issued or unissued
capital stock of any class or series, as its Board of Directors may
determine, in any manner and to the extent now or hereafter permitted by
the General Laws of the State of Maryland and by these Articles of
Incorporation.
(5) To do any and all such further acts or things and to exercise
any and all such further powers or rights as may be necessary, incidental,
relative, conducive, appropriate or
2
<PAGE>
desirable for the accomplishment, carrying out or attainment of all or any
of the foregoing purposes or objects.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereafter in force,
and the enumeration of the foregoing purposes, powers, rights and
privileges shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post office address of the resident
agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
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(1) The total number of shares of capital stock which the
Corporation shall have authority to issue is One Hundred Million
(100,000,000) shares, of the par value of Ten Cents ($.10) per share, and
of the aggregate par value of Ten Million Dollars ($10,000,000). The
capital stock initially is divided into four
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series, each of which consists of one class of common stock, as follows:
<TABLE>
<CAPTION>
Shares of
Common Stock
<S> <C>
International Equity Portfolio 25,000,000 shares
Far East Portfolio 25,000,000 shares
Developing Capital Markets Portfolio 25,000,000 shares
Latin America Portfolio 25,000,000 shares
</TABLE>
(2) The Board of Directors may classify and reclassify any unissued
shares of capital stock, of any class or series, into one or more
additional or other classes or series as may be established from time to
time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares
of any existing class or series.
(3) The Board of Directors may classify and reclassify any issued
shares of capital stock, of any class or series, into one or more
additional or other classes or series as may be established from time to
time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized
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shares of any existing class or series; provided, however, that any such
classification or reclassification shall not substantially adversely
affect the rights of holders of such issued shares. The Board's authority
pursuant to this paragraph shall include, but not be limited to, the power
to vary among all of the holders of a particular class or series (a) the
length of time shares must be held prior to reclassification to shares of
another class or series (the "Holding Period(s)"), (b) the manner in which
the time for such Holding Period(s) is determined and (c) the class or
series into which the particular class or series is being reclassified;
provided, however, that, subject to the first sentence of this section,
with respect to holders of the Corporation's shares issued on or after the
date of the Corporation's first effective prospectus which sets forth
Holding Period(s), the Holding Period(s), the manner in which the time for
such Holding Period(s) is determined and the class or series into which
the particular class or series is being reclassified shall be disclosed in
the Corporation's prospectus or statement of additional information in
effect at the time such shares, which are the subject of the
reclassification, were issued.
(4) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, the holders of each class or series of capital
stock shall be entitled to dividends and distributions in such amounts and
at such times as may be determined by the Board of Directors, and the
dividends and
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distributions paid with respect to the various classes or series of
capital stock may vary among such classes and series. Dividends on a
class or series may be declared or paid only out of the net assets of that
class or series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series of capital stock may be charged to and borne
solely by such class or series and the bearing of expenses solely by a
class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the
net asset value attributable to, and the dividend, redemption and
liquidation rights of, the shares of each class or series of capital
stock.
(5) Unless otherwise expressly provided in the charter of the
Corporation, including those matters set forth in Article II, Section (4)
hereof and including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to a vote of
stockholders, each holder of a share of capital stock of the Corporation
shall be entitled to one vote for each share standing in such holder's
name on the books of the Corporation, irrespective of the class or series
thereof, and all shares of all classes and series shall vote together as a
single class; provided, however, that (a) as to any matter with respect to
which a separate vote of any class or series is required by the Investment
Company Act of 1940, as amended, and in effect from time to time, or any
rules, regulations or orders issued
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thereunder, or by the Maryland General Corporation Law, such requirement
as to a separate vote by that class or series shall apply in lieu of a
general vote of all classes and series as described above, (b) in the
event that the separate vote requirements referred to in (a) above apply
with respect to one or more classes or series, then, subject to paragraph
(c) below, the shares of all other classes and series not entitled to a
separate class vote shall vote as a single class, and (c) as to any matter
which does not affect the interest of a particular class or series, such
class or series shall not be entitled to any vote and only the holders of
shares of the affected classes and series, if any, shall be entitled to
vote.
(6) Notwithstanding any provision of the Maryland General
Corporation Law requiring a greater proportion than a majority of the
votes of all classes or series of capital stock of the Corporation (or of
any class or series entitled to vote thereon as a separate class or
series) to take or authorize any action, the Corporation is hereby
authorized (subject to the requirements of the Investment Company Act of
1940, as amended, and in effect from time to time, and any rules,
regulations and orders issued thereunder) to take such action upon the
concurrence of a majority of the votes entitled to be cast by holders of
capital stock of the Corporation (or a majority of the votes entitled to
be cast by holders of a class or series entitled to vote thereon as a
separate class or series).
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(7) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of each class or series of capital stock of the Corporation shall
be entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation, to share ratably in the remaining net
assets of the Corporation applicable to that class or series.
(8) Any fractional shares shall carry proportionately all the rights
of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including, without limitation, the right to
vote and the right to receive dividends.
(9) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall
constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more
classes or series of stock, in which case the presence in person or by
proxy of the holders of shares entitled to cast one-third of the votes
entitled to be cast by each class or series entitled to vote as a separate
class or series shall constitute a quorum.
(10) All persons who shall acquire stock in the Corporation, of any
class or series, shall acquire the same subject to the provisions of the
charter and By-Laws of the
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Corporation. As used in the charter of the Corporation, the terms
"charter" and "Articles of Incorporation" shall mean and include the
Articles of Incorporation of the Corporation as amended, supplemented and
restated from time to time by Articles of Amendment, Articles
Supplementary, Articles of Restatement or otherwise.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
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(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but
shall never be less than three. The names of the directors who shall act
until their successors are duly elected and qualify are:
Mark B. Goldfus
James W. Harshaw, III
Philip L. Kirstein
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, of
any class or series, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable, subject to
such limitations as may be set forth in these Articles of Incorporation or
in the By-Laws of the Corporation or in the General Laws of the State of
Maryland.
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(3) No holder of stock of the Corporation shall, as such holder,
have any right to purchase or subscribe for any shares of the capital
stock of the Corporation or any other security of the Corporation which it
may issue or sell (whether out of the number of shares authorized by these
Articles of Incorporation, or out of any shares of the capital stock of
the Corporation, of any class or series, acquired by it after the issue
thereof, or otherwise) other than such right, if any, as the Board of
Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be
indemnified by the Corporation to the full extent permitted by the General
Laws of the State of Maryland, subject to the requirements of the
Investment Company Act of 1940, as amended. No amendment of these
Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this
provision in connection with any act or omission that occurred prior to
such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of
1940, as amended, no director or officer of the Corporation shall be
personally liable to the Corporation or its security holders for money
damages. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with
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any act or omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the
sole power, to the exclusion of the stockholders, to make, alter or repeal
from time to time any of the By-Laws of the Corporation except any
particular By-Law which is specified as not subject to alteration or
repeal by the Board of Directors, subject to the requirements of the
Investment Company Act of 1940, as amended.
(7) The Board of Directors of the Corporation from time to time may
change the Corporation's name, without the vote or consent of the
stockholders of the Corporation, in any manner and to the extent now or
hereafter permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
ARTICLE VI
REDEMPTION
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Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the
shares of capital stock of the Corporation standing in the name of such
holder on the books of the Corporation, and all shares of capital stock
issued by the Corporation shall be subject to redemption by the
Corporation, at the redemption price of such shares as in effect from time
to time as may be determined by the Board of Directors of the Corporation
in accordance with the provisions hereof, subject to the right of
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the Board of Directors of the Corporation to suspend the right of
redemption of shares of capital stock of the Corporation or postpone the
date of payment of such redemption price in accordance with provisions of
applicable law. The redemption price of shares of capital stock of the
Corporation shall be the net asset value thereof as determined by the
Board of Directors of the Corporation from time to time in accordance with
the provisions of applicable law, less such redemption fee or other
charge, if any, as may be fixed by resolution of the Board of Directors of
the Corporation. Payment of the redemption price shall be made in cash by
the Corporation at such time and in such manner as may be determined from
time to time by the Board of Directors of the Corporation.
ARTICLE VII
DETERMINATION BINDING
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Any determination made in good faith, so far as accounting matters
are involved, in accordance with accepted accounting practice by or
pursuant to the direction of the Board of Directors, as to the amount of
assets, obligations or liabilities of the Corporation, as to the amount of
net income of the Corporation from dividends and interest for any period
or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof,
as to the time of or purpose for creating reserves or as to the use,
alteration or cancellation of any reserves or charges
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(whether or not any obligation or liability for which such reserves or
charges shall have been created, shall have been paid or discharged or
shall be then or thereafter required to be paid or discharged), as to the
price of any security owned by the Corporation or as to any other matters
relating to the issuance, sale, redemption or other acquisition or
disposition of securities or shares of capital stock of the Corporation,
and any reasonable determination made in good faith by the Board of
Directors as to whether any transaction constitutes a purchase of
securities on "margin," a sale of securities "short," or an underwriting
or the sale of, or a participation in any underwriting or selling group in
connection with the public distribution of, any securities, shall be final
and conclusive, and shall be binding upon the Corporation and all holders
of its capital stock, past, present and future, and shares of the capital
stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations
shall be binding as aforesaid. No provision of these Articles of
Incorporation shall be effective to (a) require a waiver of compliance
with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule,
regulation or order of the Securities and Exchange Commission thereunder
or (b) protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security
holders
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to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office.
ARTICLE VIII
PERPETUAL EXISTENCE
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The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
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The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in any manner
now or hereafter prescribed by statute, including any amendment which
alters the contract rights, as expressly set forth in the charter, of any
outstanding stock and substantially adversely affects the stockholder's
rights, and all rights conferred upon stockholders herein are granted
subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH
GLOBAL INSTITUTIONAL SERIES, INC. hereby executes the foregoing Articles
of Incorporation and acknowledges the same to be his act.
Dated this 17th day of November, 1994
/s/ Robert C. Torch
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Robert C. Torch
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