<PAGE> 1
PROSPECTUS
FEBRUARY 27, 1995
MERRILL LYNCH EUROFUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch EuroFund (the "Fund") is a diversified, open-end management
investment company seeking to provide shareholders with capital appreciation
primarily through investment in equities of corporations domiciled in European
countries. Current income from dividends and interest will not be an important
consideration in selecting portfolio securities. The Fund expects that under
normal market conditions at least 80% of the Fund's net assets will be invested
in European corporate securities, primarily common stocks and debt and preferred
securities convertible into common stocks. There can be no assurance that the
investment objective of the Fund will be realized.
------------------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
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 February 27, 1995 (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> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS CLASS
A(A) CLASS B(B) CLASS C D
----- --------------------------------- -------- -----
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price).............. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on
Dividend Reinvestments....... None None None None
Deferred Sales Charge (as a
percentage of original 4.0% during the first year,
purchase price or redemption decreasing 1.0% annually
proceeds, whichever is thereafter to 0.0% after the 1% for
lower)....................... None(d) fourth year one year None(d)
Exchange Fee................... None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(E):
Investment Advisory Fees(f).... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(g):
Account Maintenance Fees..... None 0.25% 0.25% 0.25%
Distribution Fees............ None 0.75% 0.75% None
(Class B shares convert to Class
D shares automatically after
approximately eight years and
cease being subject to
distribution fees)
Other Expenses
Custodial Fees............... 0.10% 0.10% 0.10% 0.10%
Shareholder Servicing
Costs(h)................... 0.11% 0.14% 0.14% 0.11%
Other........................ 0.07% 0.07% 0.07% 0.07%
--- --- --- ---
Total Other Expenses.... 0.28% 0.31% 0.31% 0.28%
--- --- --- ---
TOTAL FUND OPERATING
EXPENSES..................... 1.03% 2.06% 2.06% 1.28%
--- --- --- ---
--- --- --- ---
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 25.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 27.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more are not subject to an initial sales charge. See "Purchase
of Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which are not
subject to an initial sales charge may instead be subject to a CDSC of 1.0%
of amounts redeemed within the first year of purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended October 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending October 31, 1995.
(f) See "Management of the Fund -- Management and Advisory Arrangements" -- page
21.
(g) See "Purchase of Shares -- Distribution Plans" -- page 31.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 23.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth above, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period:
Class A............................................. $ 62 $84 $ 106 $172
Class B............................................. $ 61 $85 $ 111 $220*
Class C............................................. $ 31 $65 $ 111 $239
Class D............................................. $ 65 $91 $ 119 $199
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................. $ 62 $84 $ 106 $172
Class B............................................. $ 21 $65 $ 111 $220*
Class C............................................. $ 21 $65 $ 111 $239
Class D............................................. $ 65 $91 $ 119 $199
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and redemptions.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") or an affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
3
<PAGE> 4
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund, and accordingly, such charges do not affect the
net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(4)
0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(footnotes continued on next page)
4
<PAGE> 5
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries (the term "subsidiaries" when used
herein with respect to Merrill Lynch & Co., Inc. includes MLAM, FAM
and certain other entities directly or indirectly wholly owned and
controlled by Merrill Lynch & Co., Inc.) and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
5.25%, which is reduced for purchases of $25,000 and over. Purchases
of $1,000,000 or more may not be subject to an initial sales charge
but if the initial sales charge is waived such purchases will be
subject to a 1% CDSC if the shares are redeemed within one year after
purchase. Sales charges are also reduced under a right of accumulation
which takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares and a CDSC if they are
redeemed within four years of purchase. Approximately eight years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares and for certain retirement plans is
modified as described under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares -- Conversion of
Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C Shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
5
<PAGE> 6
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D Shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
6
<PAGE> 7
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Charges".
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
October 31, 1994, and the independent auditors' report thereon are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing the
Fund at the telephone number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1994* 1993 1992* 1991 1990 1989 1988+
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....... $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84 $ 9.00 $ 8.83
-------- -------- ------- ------- ------- ------- -------
Investment income -- net................. .18 .26 .24 .25 .18 .09 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net.................... 1.91 3.08 (1.02) .96 .85 .77 .16
-------- -------- ------- ------- ------- ------- -------
Total from investment operations........... 2.09 3.34 (.78) 1.21 1.03 .86 .17
-------- -------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net................. -- -- (.31) (.29) (.17) -- --
Realized gain on investments -- net...... -- -- -- -- -- (.02) --
-------- -------- ------- ------- ------- ------- -------
Total dividends and distributions.......... -- -- (.31) (.29) (.17) (.02) --
-------- -------- ------- ------- ------- ------- -------
Net asset value, end of period............. $ 15.96 $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84 $ 9.00
========= ========= ======== ======== ======== ======== ========
Total Investment Return:**
Based on net asset value per share....... 15.07% 31.72% (6.90)% 11.54% 10.39% 9.62% 1.93%#
========= ========= ======== ======== ======== ======== ========
Ratios To Average Net Assets:
Expenses, net of reimbursement, excluding
account maintenance and/or distribution
fees..................................... 1.03% 1.04% 1.09% 1.14% 1.17% 1.34% 1.38%***
========= ========= ======== ======== ======== ======== ========
Expenses................................... 1.03% 1.04% 1.09% 1.14% 1.17% 1.34% 1.38%***
========= ========= ======== ======== ======== ======== ========
Investment income (loss) -- net............ 1.17% 1.50% (2.69)% 2.94% 2.62% 2.25% 10.08%***
========= ========= ======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands)... $236,288 $182,612 $87,865 $83,229 $85,798 $11,381 $ 21
========= ========= ======== ======== ======== ======== ========
Portfolio turnover......................... 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28%
========= ========= ======== ======== ======== ======== ========
</TABLE>
- ---------------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effects of sales loads.
*** Annualized.
+ Class A Shares commenced operations on October 26, 1988.
# Aggregate total investment returns.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------
1994* 1993 1992* 1991 1990 1989 1988 1987+++
---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In
Net Asset Value:
Per Share Operating
Performance:
Net asset value, beginning
of period.................... $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72 $ 9.00 $ 9.29 $ 10.00
---------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net..... .02 .16 .12 .13 .12 .08 .22 .05
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net........ 1.83 2.97 (.98) .94 .78 .66 .41 (.76)
---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations................... 1.85 3.13 (.86) 1.07 .90 .74 .63 (.71)
---------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income -- net..... -- -- (.25) (.17) (.11) -- (.18) --
Realized gain on
investments -- net......... -- -- -- -- -- (.02) (.74) --
---------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions................ -- -- (.25) (.17) (.11) (.02) (.92) --
---------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 15.28 $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72 $ 9.00 $ 9.29
========== ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value
per share.................. 13.78% 30.39% (7.73)% 10.35% 9.19% 8.28% 7.35% (7.10)%#
========== ========= ========= ========= ========= ========= ========= =========
Ratios To Average Net Assets:
Expenses, net of reimbursement,
excluding account maintenance
and/or distribution fees..... 1.06% 1.08% 1.12% 1.17% 1.20% 1.37% 1.08% 1.04%***
========== ========= ========= ========= ========= ========= ========= =========
Expenses....................... 2.06% 2.08% 2.12% 2.17% 2.20% 2.37% 2.30% 2.13%***
========== ========= ========= ========= ========= ========= ========= =========
Investment income
(loss) -- net................ 0.14% .51% (3.37)% 1.94% 1.32% .83% 1.36% .68%***
========== ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period
(in thousands)............... $1,086,480 $765,279 $447,104 $484,031 $498,600 $201,484 $261,178 $436,503
========== ========= ========= ========= ========= ========= ========= =========
Portfolio turnover............. 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28% 157.47%
========== ========= ========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effects of sales loads.
*** Annualized.
+++ Class B Shares commenced operations on January 30, 1987.
# Aggregate total investment returns.
9
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 21, 1994++
TO OCTOBER 31, 1994*
---------------------
CLASS CLASS
C D
------ ------
<S> <C> <C>
Increase (Decrease) In Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.................................................... $15.08 $15.75
------ ------
Investment income -- net.............................................................. (.01) --
Realized and unrealized gain (loss) on investments and foreign currency
transactions -- net................................................................. .21 .21
------ ------
Total from investment operations........................................................ .20 .21
------ ------
Less dividends and distributions:
Investment income -- net.............................................................. -- --
Realized gain on investments -- net................................................... -- --
------ ------
Total dividends and distributions....................................................... -- --
------ ------
Net asset value, end of period.......................................................... $15.28 $15.96
====== ======
Total Investment Return:**
Based on net asset value per share.................................................... 1.33%# 1.33%#
====== ======
Ratios To Average Net Assets:
Expenses, net of reimbursement, excluding account maintenance and/or distribution
fees.................................................................................. 1.86%*** 1.86%***
====== ======
Expenses................................................................................ 2.86%*** 2.11%***
====== ======
Investment income (loss) -- net......................................................... (2.47)%*** (1.70)%***
====== ======
Supplemental Data:
Net assets, end of period (in thousands)................................................ $ 462 $ 340
====== ======
Portfolio turnover...................................................................... 82.47% 82.47%
====== ======
</TABLE>
- ---------------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effects of sales loads.
*** Annualized.
++ Commencement of operations.
# Aggregate total investment returns.
10
<PAGE> 11
SPECIAL AND RISK CONSIDERATIONS
GENERAL
Investments on an international basis involve certain risks not involved in
domestic investments, including fluctuations in foreign exchange rates, future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. Since the Fund will
invest heavily in securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments insofar as U.S. investors are concerned. In addition, with respect
to certain foreign countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could affect investments in those countries.
Most of the securities held by the Fund 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 company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards or to practices and requirements comparable to
those applicable to domestic companies. Foreign securities markets, while
generally growing in 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 more volatile than securities of comparable domestic companies.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. The foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Delays in settlement could
result in temporary periods when assets of the Fund are uninvested and no return
is earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of such portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. There is generally
less government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities since the
expenses of the Fund, such as custodial costs, are higher. Because of its
emphasis on the economies of European countries, the Fund should be considered
as a vehicle for diversification and not as a balanced investment program.
11
<PAGE> 12
INVESTMENT IN EASTERN EUROPEAN MARKETS
It is anticipated that a majority of the Fund's investments will be in
securities of issuers domiciled in Western European countries. However, the Fund
has the ability to invest in the securities of issuers domiciled in Eastern
European countries. Investment in the securities of issuers in Eastern European
markets involves certain additional risks not involved in investment in
securities of issuers in more developed capital markets, such as (i) low or
non-existent trading volume, resulting in a lack of liquidity and increased
volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other foreign or U.S.
governmental laws or restrictions applicable to such investments, (iv) national
policies which may limit the Fund's investment opportunities such as
restrictions on investment in issuers or industries deemed sensitive to national
interests, and (v) the lack of developed legal structures governing private and
foreign investments and private property.
Eastern European capital markets are emerging in a dynamic political and
economic environment brought about by the recent events there that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that the Eastern European capital markets will
continue to present viable investment opportunities for the Fund. In the past,
Eastern European governments have expropriated substantial amounts of private
property, and most claims of the property owners have never been finally
settled. There is no assurance that such expropriations will not reoccur. In
such an event, it is possible that the Fund could lose the entire value of its
investments in the affected Eastern European markets.
Also, there may be less publicly available information about issuers in
Eastern Europe than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject. In certain Eastern European countries, no reporting
standards currently exist. As a result, traditional investment measurements used
in the U.S., such as price/earnings ratios, may not be applicable in certain
Eastern European markets. In addition, the currencies of Eastern European
countries are not, at present, freely convertible into other currencies and are
not internationally traded. Also, certain Eastern European authorities presently
require that securities of certain Eastern European issuers be held by
custodians in Eastern Europe. At this time, it is possible that certain Eastern
European countries may not have available institutions qualified under the
Investment Company Act to hold Fund assets. Therefore, the Fund may need to seek
an exemptive order from the Securities and Exchange Commission prior to
investing in certain Eastern European countries. There is no assurance that the
Securities and Exchange Commission would issue such an order.
Reforms currently underway and anticipated throughout Eastern Europe are
directed at political and economic liberalization, with efforts to develop
increasingly market-oriented economies and to decentralize the economic and
political decision-making processes currently in the forefront. There can be no
assurance that these reforms will continue or, if continued, will achieve their
goals; in addition, there is the possibility that reforms may be reversed in the
future.
12
<PAGE> 13
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek capital appreciation primarily
through investment in equities of corporations domiciled in European countries.
Current income from dividends and interest will not be an important
consideration in selecting portfolio securities. The Fund anticipates that under
normal market conditions at least 80% of its net assets will consist of European
corporate securities, primarily common stocks and securities convertible into
common stock. The investment objective of the Fund described in this paragraph
is a fundamental policy of the Fund and may not be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities.
While there will be no prescribed limits on geographic asset distribution
within the European community, it is currently anticipated that a majority of
the Fund's assets will be invested in equity securities of issuers domiciled in
Western European countries such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Finland, Portugal,
Austria and Spain. If political and economic conditions warrant, it is also
anticipated that the Fund will invest in issuers domiciled in Eastern European
countries such as Bulgaria, the Czech Republic, Hungary, Poland, Romania,
Slovakia, and the states which formerly comprised Yugoslavia and the Soviet
Union. Additional countries on the European continent may be added to this group
as circumstances dictate. In making the allocation of assets among the
securities markets, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), will consider such factors as
the condition and growth potential of the various economies and securities
markets and the issuers domiciled therein, currency and taxation investment
considerations and other pertinent financial, social, national and political
factors which may have an effect upon the climate for investing within such
securities markets.
Although the changes taking place in Eastern Europe are in their early
stages and foreign investors do not yet have direct access to many of these
markets, the Manager intends to take advantage of the business opportunities
that may emerge from the changing political, economic and legal environment in
Eastern Europe. At present, no Eastern European country has a developed stock
market, although certain countries (e.g., Hungary and Poland) have small
securities markets that are operational. Certain Eastern European countries are
currently fostering political and economic liberalization through a variety of
reform measures, including attempts to develop increasingly market-oriented
economies, to encourage foreign investment and to create a political atmosphere
conducive to multi-party political systems. Recently, laws have been enacted in
certain Eastern European countries allowing private individuals to own and
operate businesses and protecting the property rights of investors, including
foreign interests.
The Fund reserves the right as a temporary defensive measure to hold other
types of securities, including non-convertible debt and preferred securities,
government and money market securities of U.S. and non-U.S. issuers, or cash
(foreign currencies or U.S. dollars), in such proportions as, in the opinion of
the Manager, prevailing market, economic or political conditions warrant.
Investments made for defensive purposes will be maintained only during periods
in which the Manager determines that economic or financial conditions are
adverse for holding or being fully invested in equity securities of European
corporate issuers. A portion of the portfolio normally will be held in U.S.
dollars or short-term interest bearing U.S. dollar-denominated securities to
provide for possible redemptions.
The Fund has established no rating criteria for the debt securities in
which it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating
13
<PAGE> 14
categories of nationally recognized statistical rating organizations and unrated
securities of comparable quality 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. See "Investment Objective and Policies"
in the Statement of Additional Information for additional information regarding
ratings of debt securities. In purchasing such securities, the Fund will rely on
the Manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Manager
believes will be in default.
In addition to purchasing corporate securities of European issuers in
foreign markets, the Fund may invest in American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities convertible into securities of corporations domiciled in European
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. 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.
CERTAIN OTHER INVESTMENT PRACTICES
Hedging Techniques. The Fund may engage in various portfolio strategies to
hedge its portfolio against investment and currency risks. These strategies
include the use of options on portfolio securities, currency options and
futures, options on such futures and forward foreign currency transactions. The
Fund may enter into such transactions only in connection with its hedging
strategies. While the Fund's use of hedging strategies is intended to reduce the
volatility of net asset value of its shares, the net asset value of the Fund's
shares will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Although there are certain risks involved in options and futures
transactions (as discussed below in "Risk Factors in Options, Futures and
Currency Transactions"), the Manager believes that, because the Fund will engage
in options and futures transactions only for hedging purposes, the options and
futures portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies described below. See "Additional
Information -- Taxes".
The following is a description of the hedging instruments the Fund may
utilize with respect to investment and currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at or by a specified
future date and price set at the time of the
14
<PAGE> 15
contract. The principal reason for writing call options is to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. By writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a partial hedge against the price of the underlying security
declining. The Fund may not write covered call options on underlying securities
in an amount exceeding 15% of the market value of its assets.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the stated
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets. The Fund will engage in options transactions on exchanges and in
the over-the-counter markets ("OTC options"). In general, exchange traded
contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Hedging Foreign Currency Risks. The Fund is authorized 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. The Fund's
dealings in forward foreign exchange will be limited to hedging involving
15
<PAGE> 16
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase and
sale of its portfolio securities, the sale and redemption of shares of the Fund,
or the payment of dividends and distributions by the Fund. Position hedging is
the sale of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Fund will not
speculate in forward foreign exchange. Hedging against a decline in the value of
a currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Such transactions
also preclude the opportunity for gain if the value of the hedged currency
should rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a pound sterling denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency put
option enabling it to sell a specified amount of pounds for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the pound relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such a call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. The Fund will engage in OTC options 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 which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. 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. The Fund
will not speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities which it has committed or anticipates to purchase
which are denominated in such currency and, in the case of securities which have
been sold by the Fund but not yet delivered, the proceeds thereof in its
denominated currency. Further, the Fund will segregate at its custodian cash or
liquid debt securities having a market value substantially representing any
subsequent decrease in the market value of such hedged security, less any
initial or variation margin held in the account of its broker. The Fund may not
incur potential net liabilities of more than 33 1/3% of its total assets from
foreign currency options, futures or related options.
16
<PAGE> 17
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool", as under such regulations if the Fund adheres
to certain restrictions. In particular, the Fund 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 Fund's 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 the Fund's hedging
activities mentioned herein.
When the Fund 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 Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission
which exempts the Fund from certain provisions of the Investment Company Act in
connection with transactions involving futures contracts and options thereon.
Restrictions on OTC Options. The Fund will engage in OTC options,
including 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 which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on foreign currency futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% (10% to the extent required by certain state laws) of the total
assets of the Fund, taken at market value, together with all other assets of the
Fund which are illiquid or are not otherwise readily marketable. However, if the
OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., the current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Trustees 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.
17
<PAGE> 18
Risk Factors in Options, Futures and Currency Transactions. 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. If the price of the
options or futures moves more or less than the price of the hedged securities or
currencies, the Fund will experience a gain or loss which will not be completely
offset by movements in the price of the securities or currencies which are the
subject of the hedge. Transactions in options on futures contracts involve
similar risks.
The Fund 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, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option), unless there is only one dealer, in which case such
dealer's price will be used. However, there can be no assurance 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 the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
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 which any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
Portfolio Transactions. In executing portfolio transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Manager generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available. The
Fund contemplates that, consistent with its policy of obtaining the best net
results, it will place orders for transactions with a number of brokers and
dealers, including Merrill Lynch, an affiliate of the Manager. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Fund may receive orders for transactions by the Fund.
Information so received will be in addition to, and not in lieu of, the services
required to be performed by the Manager, and the expenses of the Manager will
not necessarily be reduced as a result of the receipt of such supplemental
information. See "Management of the Fund -- Management and Advisory
Arrangements". In addition, consistent with the Rules of Fair Practice of the
NASD, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period if, in its judgment, such transactions are advisable in
light of a change in circumstance of a particular company or
18
<PAGE> 19
within a particular industry or due to general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 150% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of 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 the securities in the portfolio during the year. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer spreads
and brokerage commissions, which are borne directly by the Fund. The Fund is
subject to the Federal income tax requirement that less than 30% of the Fund's
gross income must be derived from gains from the sale or other disposition of
securities held for less than three months.
Repurchase Agreements. The Fund may invest in money market securities
pursuant to repurchase agreements. 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. Under such agreements, the
bank or primary dealer or an affiliate thereof agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
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.
The Fund may not invest more than 15% (10% to the extent required by certain
state laws) of its total assets in repurchase agreements maturing in more than
seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of such a loan,
the Fund receives the income on the loaned securities and either receives 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. In the event
that the borrower defaults on its obligation to return borrowed securities,
because of insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent that
the value of the collateral fell below the market value of the borrowed
securities.
Warrants. The Fund may invest up to 10% of its total assets in warrants. A
warrant gives the holder thereof the right to subscribe by a specified date to a
stated number of shares of stock of the issuer at a fixed price. Warrants tend
to be more volatile than the underlying stock, and if at a warrant's expiration
date the stock is trading at a price below the price set in the warrant, the
warrant will expire worthless. Conversely, if at the expiration date the
underlying stock is trading at a price higher than the price set in the warrant,
the Fund can acquire the stock at a price below its market value.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a
19
<PAGE> 20
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. Among the more significant restrictions, the Fund may
not:
- Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
- Make investments for the purpose of exercising control or management.
- 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).
Nothing in the foregoing investment restrictions shall be deemed to
prohibit the Fund from purchasing the securities of any issuer pursuant to the
exercise of subscription rights distributed to the Fund by the issuer, except
that no such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or fail
to meet the diversification requirements of the Internal Revenue Code.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Trustees. Among its non-fundamental policies, the Fund
may not:
- - 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 its total assets would be invested in such securities. This restriction
shall not apply to securities which mature within seven days or securities
which the Board of Trustees of the Fund has otherwise determined to be liquid
pursuant to applicable law. Notwithstanding the 15% limitation herein, to the
extent the laws of any state in which the Fund's shares are registered or
qualified for sale require a lower limitation, the Fund will observe such
limitation. As of the date hereof, therefore, the Fund will not invest more
than 10% of its total assets in securities which are subject to this
investment restriction. Securities purchased in accordance with Rule 144A
under the Securities Act (a "Rule 144A security") and determined to be liquid
by the Fund's Board of Trustees are not subject to the limitations set forth
in this investment restriction. Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to limitations
set forth in this investment restriction, the State of Ohio does not recognize
Rule 144A securities as securities that are free of restrictions as to resale.
To the extent required by Ohio laws, the Fund will not invest more than 50% of
its total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
As noted above, the Fund may purchase Rule 144A securities. Rule 144A
securities are not registered under the Securities Act of 1933, as amended (the
"Securities Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act. Although the Fund is subject
to the above noted restrictions on the percentage of its assets invested in
illiquid investments, which may include securities for which there is no readily
available market, securities subject to contractual restrictions on resale,
certain investments in asset-backed and receivable-backed securities and
restricted securities, the Fund's Board of Trustees may continuously determine,
based on the trading markets for a specific restricted security, that it is
liquid. The Board of Trustees may adopt guidelines and delegate to the Manager
the daily function of determining and monitoring liquidity of restricted
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations.
20
<PAGE> 21
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 Trustees will monitor carefully the Fund'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 the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
The full text of the investment restrictions is set forth under "Investment
Objective and Policies -- Investment Restrictions" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
TRUSTEES
The Board of Trustees of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Trustees is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the directors
or trustees of investment companies by the Investment Company Act.
The Trustees are:
ARTHUR ZEIKEL* -- President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc.; Executive Vice President of Merrill Lynch; Director
of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia
University Graduate School of Business.
RICHARD R. WEST -- Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business as
Merrill Lynch Asset Management, is owned and controlled by Merrill Lynch & Co.,
Inc., a financial services holding company and the parent of Merrill Lynch. The
Manager provides the Fund with management and investment advisory services. The
Manager or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the
investment adviser to more than 130 other registered investment companies. The
Manager also offers portfolio management and
21
<PAGE> 22
portfolio analysis services to individual and institutional accounts. As of
January 31, 1995, the Manager and FAM had a total of approximately $166.5
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees, the Manager is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Manager. Subject to the general
oversight of the Trustees, the Manager provides the administrative services
necessary for the operation of the Fund and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
The Manager receives compensation at the annual rate of 0.75% of the
average daily net assets of the Fund. This fee is higher than that of most
mutual funds, but the Fund believes this fee, which is typical for an
international fund, is justified by the special international nature of the
Fund. For the fiscal year ended October 31, 1994, the Manager received a fee of
$10,148,764 (based on average net assets of approximately $1.3 billion). At
January 31, 1995, the net assets of the Fund aggregated approximately $1.1
billion. At this asset level, the annual management fee would aggregate
approximately $8.4 million.
The Manager has also entered into a sub-advisory agreement with Merrill
Lynch Asset Management U.K. Limited ("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 computed at the rate of 0.15%
of the average daily net assets of the Fund for providing investment advisory
services to the Manager with respect to the Fund. For the fiscal year ended
October 31, 1994, the fee paid by the Manager to MLAM U.K. pursuant to such
arrangement aggregated $2,006,345. At the Fund's January 31, 1995 asset level,
the annual fee paid by the Manager to MLAM U.K. would aggregate approximately
$1.7 million. MLAM U.K. has offices at Ropemaker Place, 25 Ropemaker Street, 1st
Floor, London EC24 9LY, England.
Adrian Holmes, Vice President of the Fund, is the Fund's Portfolio Manager.
Mr. Holmes has been a Portfolio Manager of the Manager since November 1993 and a
Vice President of the Manager since 1990. Mr. Holmes has been primarily
responsible for selecting investments for the Fund since 1993.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations, including among other things, the management fee,
legal and audit fees, unaffiliated Trustees' fees and expenses, registration
fees, custodian and transfer agency fees, accounting and pricing costs, the cost
of printing proxies, and certain of the costs of printing shareholder reports,
prospectuses and statements of additional information distributed to
shareholders. Accounting services are provided to the Fund by the Manager, and
the Fund reimburses the Manager for its costs in connection with such services.
For the fiscal year ended October 31, 1994, the amount of such reimbursement was
$97,681. For the fiscal year or period ended October 31, 1994, the ratio of
total expenses to average net assets for each class of shares was as follows:
Class A, 1.03% (for the fiscal year); Class B, 2.06% (for the fiscal year);
Class C, 2.86% (annualized) (for the period October 21, 1994 (commencement of
public offering) to October 31, 1994); and Class D, 2.11% (annualized) (for the
period October 21, 1994 (commencement of public offering) to October 31, 1994).
22
<PAGE> 23
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., 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 $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C 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.
For the fiscal year ended October 31, 1994, $1,784,073 was paid to the Transfer
Agent pursuant to the Transfer Agency Agreement. At January 31, 1995, the Fund
had 21,267 Class A shareholder accounts, 109,361 Class B shareholder accounts,
258 Class C shareholder accounts and 3,326 Class D shareholder accounts. At this
level of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $1.8 million, plus miscellaneous and out-of-pocket expenses.
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
Fund. Shares of the Fund are offered continuously for sale by the Distributor
and other eligible securities dealers (including Merrill Lynch). Shares of the
Fund may be purchased from securities dealers or by mailing a purchase order
directly to the Transfer Agent. The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans, the
minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
PricingSM System,
23
<PAGE> 24
as described below. As to purchase orders received by securities dealers prior
to the close of business on the New York Stock Exchange (generally, 4:00 p.m.,
New York time), which includes orders received after the close of business on
the previous day, the applicable offering price will be based on the net asset
value determined as of 15 minutes after the close of business on the New York
Stock Exchange on the day the orders are placed with the Distributor, provided
the orders are received by the Distributor prior to 30 minutes after the close
of business on the New York Stock Exchange on that day. The applicable offering
price for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the New York Stock Exchange, such orders shall be
deemed received on the next business day. The Fund or the Distributor may
suspend the continuous offering of the Fund's shares of any class at any time in
response to conditions in the securities markets or otherwise and may thereafter
resume such offering from time to time. Any order may be rejected by the
Distributor or the Fund. Neither the Distributor nor the dealers are permitted
to withhold placing orders to benefit themselves by a price change. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
sale of shares to such customers. Purchases directly through the Transfer Agent
are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a contingent deferred sales charge and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select PricingSM System is
set forth under "Merrill Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund, and accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
24
<PAGE> 25
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(4)
1.0%
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for 0.25% 0.75% No
one year
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
25
<PAGE> 26
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* SELECTED DEALERS
OFFERING OF THE NET AMOUNT AS A PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ---------------------------------------------- ------------- ----------------- ------------------
<S> <C> <C> <C>
Less than $25,000............................. 5.25% 5.54% 5.00%
$25,000 but less than $50,000................. 4.75 4.99 4.50
$50,000 but less than $100,000................ 4.00 4.17 3.75
$100,000 but less than $250,000............... 3.00 3.09 2.75
$250,000 but less than $1,000,000............. 2.00 2.04 1.80
$1,000,000 and over**......................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994, may be subject to a CDSC if the shares are redeemed within
one year of purchase at the following rates: 1.00% on purchases of $1,000,000
to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000; 0.40% on
purchases of $3,500,001 to $5,000,000; and 0.25% on purchases of more than
$5,000,000 in lieu of paying an initial sales charge. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended October 31, 1994, the Fund sold 12,530,353 of
its Class A shares for aggregate net proceeds to the Fund of $190,014,197. The
gross sales charges for the sale of its Class A shares for the period were
$3,058,065, of which $93,139 and $2,964,926 were received by the Distributor and
Merrill Lynch, respectively. During such period, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of the Class A
shares purchased subject to front-end sales charge waivers.
During the fiscal period October 21, 1994 (commencement of public offering)
through October 31, 1994, the Fund sold 24,171 of its Class D shares for
aggregate net proceeds to the Fund of $381,029. The gross sales charges for the
sale of its Class D shares for the period were $10,279, of which $679 and $9,600
were received by the Distributor and Merrill Lynch, respectively. During such
period, the Distributor received no CDSCs with respect to redemptions within one
year after the purchase of the Class D shares purchased subject to front-end
sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its
26
<PAGE> 27
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services and certain purchases
made in connection with the Merrill Lynch Mutual Fund Adviser program. In
addition, Class A shares are offered at net asset value to Merrill Lynch & Co.,
Inc. and its subsidiaries and their directors and employees and to members of
the Boards of MLAM-advised investment companies, including the Fund. Certain
persons who acquired shares of certain MLAM-advised closed-end funds who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the Fund
if certain conditions set forth in the Statement of Additional Information
are met. For example, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a
sale of certain of their shares of common stock of Merrill Lynch Senior
Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C
27
<PAGE> 28
shares are subject to an account maintenance fee of 0.25% of net assets and a
distribution fee of 0.75% of net assets as discussed below under "Distribution
Plans". The proceeds from the account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. Payments by the Fund to the
Distributor of the distribution fee under the Distribution Plan relating to
Class B shares may be used in whole or in part by the Distributor to this
purpose. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. Approximately
eight years after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares automatically after
approximately ten years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable to
the Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services -- Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
28
<PAGE> 29
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
YEAR SINCE AS A PERCENTAGE
PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................................. 4.00%
1-2.................................................................. 3.00
2-3.................................................................. 2.00
3-4.................................................................. 1.00
4 and thereafter..................................................... 0.00
</TABLE>
For the fiscal year ended October 31, 1994, the Distributor received CDSCs of
$1,866,124 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. For the fiscal period October 21, 1994 (commencement of public
offering) to October 31, 1994, the Distributor received no CDSCs with respect to
the redemption of Class C shares.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased after
October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(k) or eligible 401(a)
plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA, that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group, and held in such account at the
time of redemption. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information.
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Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a
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<PAGE> 31
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D shares
of the appropriate funds. Subsequent to such conversion, that Class B Retirement
Plan will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designated to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended October 31, 1994, the Fund paid the Distributor
$10,998,651 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of $1.1 billion), all of which
was paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class B shares. For the
fiscal period October 21, 1994 (commencement of public offering) to October 31,
1994, the Fund paid the Distributor $86 pursuant to the Class C Distribution
Plan (based on average net assets subject to the Class C Distribution Plan of
approximately $312,983), all of which was paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class C shares. For the fiscal period October 21, 1994
(commencement of public offering) to October 31, 1994, the Fund paid the
Distributor $13 pursuant to the Class D Distribution Plan (based on average net
assets subject to the Class D Distribution Plan of approximately $184,576), all
of which was paid to Merrill Lynch for providing account maintenance services in
connection with Class D shares. At January 31, 1995, the net assets of the Fund
subject to the Class B Distribution Plan aggregated approximately $909.2
million. At this asset level, the annual fee payable pursuant to the Class B
Distribution Plan would aggregate approximately $9.1 million. At January 31,
1995,
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<PAGE> 32
the net assets of the Fund subject to the Class C Distribution Plan aggregated
approximately $1.6 million. At this asset level, the annual fee payable pursuant
to the Class C Distribution Plan would aggregate approximately $16,199. At
January 31, 1995, the net assets of the Fund subject to the Class D Distribution
Plan aggregated approximately $18.6 million. At this asset level, the annual fee
payable pursuant to the Class D Distribution Plan would aggregate approximately
$46,450.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated" accrual basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs, and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the distribution fees and
CDSCs, and the expenses consist of financial consultant compensation.
As of December 31, 1993, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch with respect to Class B shares for the period
since January 30, 1987 (commencement of operations) exceeded fully allocated
revenues by approximately $6,347,000 (0.71% of Class B net assets at that date).
As of December 31, 1994, direct cash revenues for the period since the
commencement of operations exceeded direct cash expenses by $27,957,750 (2.58%
of Class B net assets at that date). Similar fully allocated accrual data is not
yet available with respect to Class C shares which the Fund commenced offering
to the public on October 21, 1994. As of December 31, 1994, for Class C shares,
direct cash expenses for the period since October 21, 1994 (commencement of
public offering) exceeded direct cash revenues by $590 (0.13% of Class C net
assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C shares -- Conversion of Class B shares to
Class D shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee
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payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, there will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations Department, P.O. Box 45289, Jacksonville, Florida
32232-5289. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests delivered
other than by mail should be delivered to Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations Department, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. 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, payments will be mailed within seven
days of receipt of a proper notice of redemption.
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At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 30 minutes after the close of business on
the New York Stock Exchange (generally, 4:00 p.m., New York time) on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the New York
Stock Exchange in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities dealers may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch charges its
customers a processing fee (presently $4.85) to confirm a repurchase of shares.
Purchases directly through the Transfer Agent are not subject to the processing
fee. The Fund reserves the right to reject any order for repurchase, which right
of rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by
the Fund, however, may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place purchase orders for the Fund's
shares through the Merrill Lynch Blueprint Program. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or to change options
with respect thereto, can be obtained from the Fund by calling the telephone
number on the cover page hereof or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors.
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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. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund have
an exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission (the
"Commission").
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge
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<PAGE> 36
previously paid on the Class A or Class D shares being exchanged and the sales
charge payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or telephone call (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
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Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. A Class A or Class D shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R)/CBA(R) Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
pre-arranged charges of $50 or more to his regular bank account. Investors who
maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments made
in the Fund in their CMA(R) or CBA(R) accounts or in certain related accounts in
amounts of $100 or more through the CMA(R)/CBA(R) Automated Investment Program.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any 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 will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of time.
In advertisements distributed to investors whose
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<PAGE> 38
purchases are subject to reduced sales loads in the case of Class A and Class D
shares or waiver of the CDSC in the case of Class B shares (such as investors in
certain retirement plans), the performance data may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Financial
Times -- Actuaries Europe Index, the Morgan Stanley Capital International Europe
Index, the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, or to performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News &
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine,
Fortune Magazine or other industry publications. In addition, from time to time
the Fund may include the Fund's risk-adjusted performance ratings assigned by
Morningstar Publications, Inc. in advertising or supplemental sales literature.
As with other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all 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 annually after the close of the Fund's fiscal year. From
time to time, the Fund may declare a special distribution at or about the end of
the calendar year in order to comply with a Federal income tax requirement that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year. Dividends and distributions may be reinvested
automatically in shares of the Fund at net asset value without a sales load.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and higher transfer
agency fees applicable with respect to that class. See "Additional
Information -- Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
38
<PAGE> 39
Dividends paid by the Fund from its ordinary income and distributions of
the Fund'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 the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in warrants, futures and
options) ("capital gain dividends") are taxable to shareholders as long-term
capital gains, regardless of the length of time the shareholder has owned Fund
shares. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming
the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends.
Distributions by the Fund, whether from ordinary income or capital gains,
generally will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund 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 withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
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.
39
<PAGE> 40
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, 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. In certain circumstances the Fund may elect
capital gain or loss treatment for such transactions. Such Code Section 988
gains or losses will generally increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and 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 Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax basis
in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of new shares in the absence of the
exchange privilege. Instead, such charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares of all classes of the Fund is determined once
daily as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 p.m., New York time), following the close of trading
on the New York Stock Exchange on each day during which such Exchange is open
for trading. Any assets or liabilities expressed in terms of foreign 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
40
<PAGE> 41
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time. Expenses, including the fees payable to the
Manager and any account maintenance and/or distribution fees payable to the
Distributor, 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 the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Securities and other 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 Trustees of the Fund.
Since foreign securities exchanges may be open on certain U.S. holidays on
which the Fund will not determine its net asset value and accept share orders,
portfolio securities will trade and the net asset value of the Fund's shares may
be significantly affected on days when an investor has no access to the Fund.
The per share net asset value of the Class A shares will generally be
higher than the per share net asset value of the other classes, reflecting the
daily expense accruals of the account maintenance and transfer agency fees
applicable with respect to the Class B, Class C and Class D shares; in addition,
the per share net asset value of the Class D shares generally will be higher
than the per share net asset value of the Class B and Class C shares, reflecting
the daily expense accruals of the distribution fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differentials between the
classes.
ORGANIZATION OF THE FUND
The Fund was organized on March 11, 1986, under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust". The Fund is authorized to issue an unlimited
number of shares of beneficial interest of $.10 par value of different classes.
At the date of this Prospectus, the shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Class A, Class B, Class C and Class D
shares represent interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that Class B, Class C and Class D shares bear certain expenses related to the
account maintenance associated with such shares, and Class B and Class C shares
bear certain expenses related to the distribution of such shares and that each
class has exclusive voting rights with respect to matters relating to account
maintenance and distribution expenditures, as applicable. See "Purchase of
Shares". The Fund has received an order from the Securities and Exchange
Commission (the "Commission") permitting the issuance and sale of multiple
classes of shares. Shares issued are fully paid and non-assessable and have no
preemptive rights. Shares have the
41
<PAGE> 42
conversion rights described in this Prospectus. The Trustees of the Fund may
classify and reclassify the shares of the Fund into additional classes at a
future date.
The Declaration of Trust of the Fund, as amended (the "Declaration"), does
not require that the Fund hold an annual meeting of shareholders. However, the
Fund will be required to call special meetings of shareholders in accordance
with the requirements of the Investment Company Act to seek approval of new
management and advisory arrangements, a material increase in distribution fees
or a change in the fundamental policies, objective or restrictions of the Fund.
The Fund also would be required to hold a special shareholders' meeting to elect
new Trustees at such time as less than a majority of the Trustees holding office
have been elected by shareholders. The Declaration provides that a shareholders'
meeting may be called for any reason at the request of 10% of the outstanding
shares of the Fund or by a majority of the Trustees.
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, Pierce, Fenner & Smith Incorporated
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.
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.
------------------------
The Declaration, dated March 11, 1986, and subsequently amended, a copy of
which is on file in the office of the Secretary of the Commonwealth of
Massachusetts, provides that the name "Merrill Lynch EuroFund" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Fund shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of said Fund,
but the "Trust Property" only shall be liable.
42
<PAGE> 43
MERRILL LYNCH EUROFUND -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch EuroFund and establish an Investment Account as described in
the Prospectus. In the event that I am not eligible to purchase Class A shares,
I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..................................................
2. .......................................................... 5. ..................................................
3. .......................................................... 6. ..................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
......................................................................................... Date............
(Zip Code)
</TABLE>
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer..............................................
Signature of Owner
.........................................................................
.........................................................................
................................................... .........................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch EuroFund Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ..............................Account Number........................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ..............................Date.......................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
43
<PAGE> 44
MERRILL LYNCH EUROFUND -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,19........
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch EuroFund or any other investment company with an initial sales charge or
deferred sales charge for which Merrill Lynch Funds Distributor, Inc. acts as
distributor over the next 13 month period which will equal or exceed:
<TABLE>
<S> <C> <C> <C> <C>
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch EuroFund Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch EuroFund held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch EuroFund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
................................................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
44
<PAGE> 45
MERRILL LYNCH EUROFUND -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
First Name Initial Last Name Social Security No.
or Taxpayer Identification No.
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
Name of Co-Owner (if any)...........................................................
Address.............................................................................
....................................................................................
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch EuroFund at
cost or current offering price. Withdrawals to be made either (check one) / /
Monthly on the 24th day of each month, or / / Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or holiday,
the next succeeding business day will be utilized. Begin systematic withdrawal
on _________________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $______
or / / _____ % of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
........................................................................
<TABLE>
<S> <C>
Signature of Owner........................................ Date.................
Signature of Co-Owner (if any)..................................................
</TABLE>
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
<TABLE>
<S> <C>
Name on your account...............................................
Bank Name..........................................................
Bank Number ..................... Account Number..................
Bank Address.......................................................
...................................................................
Signature of Depositor......................... Date...............
Signature of Depositor.............................................
(if joint account, both must sign)
</TABLE>
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
45
<PAGE> 46
MERRILL LYNCH EUROFUND -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
</TABLE>
of Merrill Lynch EuroFund, subject to the terms set forth below. In the event
that I am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch EuroFund as indicated below:
Amount of each check or ACH debit $..........................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning ___________ or as soon as thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE> 47
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 48
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE 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.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table........................................... 2
Merrill Lynch Select Pricing(SM) System............. 3
Financial Highlights................................ 8
Special and Risk Considerations..................... 11
General............................................ 11
Investment in Eastern European Markets............. 12
Investment Objective and Policies................... 13
Certain Other Investment Practices................. 14
Investment Restrictions............................ 19
Management of the Fund.............................. 21
Trustees........................................... 21
Management and Advisory Arrangements............... 21
Code of Ethics..................................... 23
Transfer Agency Services........................... 23
Purchase of Shares.................................. 23
Initial Sales Charge Alternatives -- Class A and
Class D Shares................................... 25
Deferred Sales Charge Alternatives -- Class B and
Class C Shares................................... 27
Distribution Plans................................. 31
Limitations on the Payment of Deferred Sales
Charges.......................................... 32
Redemption of Shares................................ 33
Redemption......................................... 33
Repurchase......................................... 34
Reinstatement Privilege -- Class A and Class D
Shares........................................... 34
Shareholder Services................................ 34
Performance Data.................................... 37
Additional Information.............................. 38
Dividends and Distributions........................ 38
Taxes.............................................. 38
Determination of Net Asset Value................... 40
Organization of the Fund........................... 41
Shareholder Reports................................ 42
Shareholder Inquiries.............................. 42
Authorization Form.................................. 43
Code # 10475-0295
</TABLE>
[LOGO]
MERRILL LYNCH
EUROFUND
ART WORK
PROSPECTUS
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH EUROFUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch EuroFund (the "Fund") is a mutual fund seeking to provide
shareholders with capital appreciation primarily through investment in equities
of corporations domiciled in European countries. Current income from dividends
and interest will not be an important consideration in selecting portfolio
securities. The Fund expects that under normal market conditions at least 80% of
the Fund's net assets will be invested in European corporate securities,
primarily common stocks and debt and preferred securities convertible into
common stocks. There can be no assurance that the investment objective of the
Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 27, 1995 (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 February 27, 1995.
<PAGE> 50
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation
primarily through investment in equities of corporations domiciled in European
countries. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), 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 the Fund anticipates that its annual
portfolio turnover rate should not exceed 150% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of 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 the
securities in the portfolio during the year. For the fiscal years ended October
31, 1993, and 1994, the Fund's portfolio turnover rates were 115.10% and 82.47%,
respectively. The Fund is subject to the Federal income tax requirement that
less than 30% of the Fund's gross income be derived from gains from the sale or
other disposition of securities held for less than three months.
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 the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund 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 would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. See "Redemption of Shares". Under present conditions, the Manager
does not believe that these considerations will have any significant effect on
its portfolio strategy, although there can be no assurance in this regard.
OTHER INVESTMENT POLICIES AND PRACTICES
Hedging Techniques. Reference is made to the discussion concerning hedging
techniques under the caption "Investment Objective and Policies -- Certain Other
Investment Practices -- Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, and options on
such futures and forward foreign currency transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate.
2
<PAGE> 51
Although certain risks are involved in options and futures transactions (as
discussed below), the Manager believes that, because the Fund will only engage
in these transactions for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
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, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against a decline in the price of
the underlying security.
The writer of a covered call option has no control over when he 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 would realize 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 would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other 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, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; 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 the Fund's position as the purchaser of an option by
means of an offsetting sale of
3
<PAGE> 52
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
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 contracts and movements in the price of the
securities and currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such option 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. The
Fund will acquire only over-the-counter options for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option),
unless there is only one dealer, in which case such dealer's price will be used.
In the case of a futures position or an option on a futures position written by
the Fund, in the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to take or make delivery of the
security or currency underlying the futures contracts it holds. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in the futures contract or related option.
The risk of loss from investing in futures transactions is theoretically
unlimited.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than one-tenth of one percent due to
the costs of converting from one currency to
4
<PAGE> 53
another. However, the Fund has authority to deal in forward foreign exchange
between currencies of the different countries in whose securities it will invest
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian will place cash or liquid securities in a separate
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of such forward contract. If the value of the
securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such contracts. The
Fund will not enter into a position hedging commitment if, as a result thereof,
the Fund would have more than 15% of the value of its assets committed to such
contracts. The Fund will not enter into a forward contract with a term of more
than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currency involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. 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. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, 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. Repurchase
agreements usually cover short periods, such as under 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. As a purchaser,
the Fund 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. 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 Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening
5
<PAGE> 54
fluctuations of the market value of such securities and the accrued interest on
the securities. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive collateral in cash or securities issued or guaranteed by
the U.S. Government which are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The purpose of
such loans is to permit the borrowers to use such securities for delivery to
purchasers when such borrowers have sold short. If cash collateral is received
by the Fund, it is invested in short-term money market securities, and a portion
of the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
Debt Securities. The Fund may hold convertible debt securities and, from
time to time as a temporary defensive measure, may also hold non-convertible
debt securities and preferred securities. The Fund has established no rating
criteria for the debt securities in which it may invest. Therefore, the Fund may
invest in debt securities either (a) rated in one of the top four rating
categories by a nationally recognized rating organization or which, in the
Manager's judgment, possess similar credit characteristics ("investment grade
securities") or (b) rated below the top four rating categories or which, in the
Manager's judgment, possess similar credit characteristics ("high yield
securities"). The Manager considers ratings as one of several factors in its
independent credit analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are 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
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield securities
is relatively new and has not weathered a major economic recession, and it is
unknown what effect such a recession might have on such securities. 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 holder of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features which
would permit issuers to repurchase such securities from the Fund. If a call were
exercised by an issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
6
<PAGE> 55
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield 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 Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (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).
Under the fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. 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).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. 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 the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund
7
<PAGE> 56
may borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Fund may purchase securities on margin to the extent permitted
by applicable law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in its 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.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which
may be changed by the Board of Trustees. Under the non-fundamental
investment restrictions, the Fund may not:
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. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Trustees are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio Law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
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 10%
of the Fund's total assets.
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 Fund's total assets would be invested in such
8
<PAGE> 57
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 Trustees 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 the Fund 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 (7) above,
borrow amounts in excess of 20% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares. In addition, the
Fund will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased over-the-counter options ("OTC options") and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 15% (10% to the extent
required by certain state laws) of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money". This policy as to
OTC options is not a fundamental policy of the Fund and may be amended by the
Trustees of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act. Because of the affiliation
of the Manager with the Fund, the Fund is prohibited from engaging in certain
transactions involving the Manager's affiliate, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") or its affiliates except for brokerage
transactions permitted under the Investment Company Act involving only usual and
customary commissions
9
<PAGE> 58
or transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage". Without such an exemptive order, the
Fund would be prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933, as
amended, in which such firm or any of its affiliates participate as an
underwriter or dealer.
The investment restrictions contain an exception that permits the Fund to
purchase securities pursuant to the exercise of subscription rights, subject to
the condition that such purchase will not result in the Fund ceasing to be a
diversified investment company. European corporations frequently issue
additional capital stock by means of subscription rights offerings to existing
shareholders at a price substantially below the market price of the shares. The
failure to exercise such rights would result in the Fund's interest in the
issuing company being diluted and may cause the Fund to forego a favorable
investment opportunity. The market for such rights is not well developed, and
accordingly, the Fund may not always realize full value on the sale of rights.
Therefore, the exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or have
already been exceeded as a result of fluctuations in the market value of the
Fund's portfolio securities with the result that the Fund would otherwise be
forced either to sell securities at a time when it might not otherwise have done
so or to forego exercising the rights.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund, their ages 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 Trustee is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (62) -- President and Trustee(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977 and Chief Investment Officer since 1976; President of Fund Asset
Management, L.P. ("FAM") (which term as used herein includes its corporate
predecessors) since 1977 and Chief Investment Officer since 1976; 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.
("ML & Co.") since 1990; Director of the Distributor.
DONALD CECIL (68) -- Trustee(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (68) -- Trustee(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (63) -- Trustee(2) -- 9 Hampton Harbor Road, Hampton
Bays, N.Y. 11946, Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc.
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<PAGE> 59
from 1979 to 1990; former Senior Vice President of Arnhold and S. Bleichroeder,
Inc. from 1973 to 1990; Adjunct Professor, Columbia University Graduate School
of Business since 1990; Adjunct Professor, Wharton School, University of
Pennsylvania, 1990; Director, Harvard Business School Alumni Association.
RICHARD R. WEST (57) -- Trustee(2) -- 482 Tepi Drive, Southbury,
Connecticut 06488. Professor of Finance since 1984, and Dean from 1984 to 1993,
of New York University Leonard N. Stern School of Business Administration;
Director of Re Capital Corp. (reinsurance holding company), Bowne & Co., Inc.
(financial printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's,
Inc. (real estate company).
EDWARD D. ZINBARG (60) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Former Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential Reinsurance
Company and former Trustee of the Prudential Foundation.
TERRY K. GLENN (54) -- 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 (61) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
ALAN J. ALBERT (47) -- Vice President(1) -- Senior Managing Director of
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") since 1993; Vice
President of the Manager since 1986.
ADRIAN HOLMES (33) -- Vice President(1) -- Managing Director of MLAM U.K.
since 1993; Vice President of the Manager since 1990 and associated therewith
since 1987.
DONALD C. BURKE (34) -- 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 (45) -- 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.
ROBERT HARRIS (43) -- Secretary(1)(2) -- Vice President of the Manager
since 1984 and attorney associated with the Manager since 1980; Secretary of the
Distributor since 1982.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee 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 January 31, 1995, the officers and Trustees of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee 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.
COMPENSATION OF TRUSTEES
The Fund pays each Trustee not affiliated with the Manager a fee of $3,500
per year plus $500 per meeting attended, together with such Trustees' actual
out-of-pocket expenses relating to attendance at
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<PAGE> 60
meetings. The Fund also compensates members of its Audit and Nominating
Committee (the "Committee"), which consists of all of the non-affiliated
Trustees, at a rate of $500 per meeting attended. The Chairman of the Committee
receives an additional fee of $250 per meeting attended. Fees and expenses paid
to the unaffiliated Trustees aggregated $35,345 for the fiscal year ended
October 31, 1994.+
The following table sets forth for the fiscal year ended October 31, 1994,
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ending December 31, 1994, the aggregate compensation paid by all
investment companies advised by the Manager and its affiliate, FAM ("MLAM/FAM
Advised Funds") to the non-interested Trustees.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID
NAME OF TRUSTEE FROM FUND OF FUND EXPENSES TO TRUSTEES(1)
- -------------------------------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
Donald Cecil................................ $9,750 None $276,350
Edward H. Meyer............................. $8,500 None $251,600
Charles C. Reilly........................... $8,500 None $276,900
Richard R. West............................. $8,500 None $300,900
Edward D. Zinbarg*.......................... $8,500 None $121,500
</TABLE>
- ---------------
* Projected annual compensation for the Fund's current fiscal year. Mr.
Zinbarg was elected to the Fund's Board of Trustees effective October 25,
1994.
(1) The Trustees served on the boards of other MLAM/FAM Advised Funds as
follows: Mr. Cecil (34 boards); Mr. Meyer (34 boards); Mr. Reilly (40
boards); Mr. West (40 boards); and Mr. Zinbarg (16 boards).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for 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.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly
- ---------------
+ During most of the fiscal year ended October 31, 1994, the Board consisted of
five Trustees, four of whom were non-interested.
12
<PAGE> 61
compensation at the annual rate of 0.75% of the average daily net assets of the
Fund. For the fiscal years ended October 31, 1992, 1993 and 1994, the total
management fees paid by the Fund to the Manager aggregated $4,363,875,
$4,484,339 and $10,148,764, respectively.
The Manager has also entered into a sub-advisory agreement with MLAM U.K.,
a wholly-owned, indirect subsidiary of ML & Co. and an affiliate of the Manager,
pursuant to which MLAM pays MLAM U.K. a fee computed at the annual rate of 0.15%
of the average daily net assets of the Fund for providing investment advisory
services to MLAM with respect to the Fund. For the fiscal years ended October
31, 1992, 1993 and 1994, the fees paid by MLAM to MLAM U.K. pursuant to such
arrangement aggregated $872,775, $896,864 and $2,006,345, respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the aggregate ordinary operating expenses of the Fund (excluding
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to the Manager during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation at the time of such payment.
The Fund has received an order from the State of California partially
waiving the expense limitations described above. Pursuant to the terms of such
order, the expense limitations that would otherwise apply are waived to the
extent the Fund's expense for custodial services, management and auditing fees
exceeds the average of such fees of a group of funds managed by the Manager or
its subsidiary which primarily invest domestically. Since the commencement of
operations of the Fund, no reimbursement of expenses has been required pursuant
to the applicable expense limitation provisions discussed above.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Trustees of the Fund who are affiliated persons of the Manager or any of its
affiliates. The Fund pays all other expenses incurred in its operation,
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 Trustees; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Manager, and the Fund reimburses the Manager for its costs in connection
with such services on a semi-annual basis. For the fiscal years ended October
31, 1992, 1993 and 1994, the amounts of such reimbursement were $99,991, $60,042
and $97,681, respectively. As required by the Fund's distribution agreements,
its underwriters will pay certain promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses in connection with
the account maintenance and/or distribution of Class B, Class C and Class D
shares will be financed by the Fund pursuant to distribution plans in compliance
with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans".
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<PAGE> 62
ML & Co. and Princeton Services, Inc. are "controlling persons" of the
Manager as defined under the Investment Company Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement and the sub-advisory agreement will remain in effect
from year to year if approved annually (a) by the Board of Trustees or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Trustees 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
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangement. Class B, Class C and Class
D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the Manager
or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement and the
sub-advisory agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended October 31, 1992, were $726,101, of which the Distributor received $32,587
and Merrill Lynch received $693,514. The gross sales
14
<PAGE> 63
charges for the sale of Class A shares for the fiscal year ended October 31,
1993, were $1,566,988, of which the Distributor received $101,049 and Merrill
Lynch received $1,465,939. The gross sales charges for the sale of Class A
shares for the fiscal year ended October 31, 1994, were $3,058,065 of which the
Distributor received $93,139 and Merrill Lynch received $2,964,926. The gross
sales charges for the sale of Class D shares for the fiscal period October 21,
1994 (commencement of public offering) to October 31, 1994, were $10,279, of
which the Distributor received $679 and Merrill Lynch received $9,600. During
such periods, the Distributor received no contingent deferred sales charges with
respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to front-end sales charge waivers.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company", as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a company
or non-qualified employee benefit plan will qualify for quantity discounts only
if the Fund and the Distributor are able to realize economies of scale in sales
effort and sales related expense by means of the company, employer or plan
making the Fund's Prospectus available to individual investors or employees and
forwarding investments by such persons to the Fund and by any such employer or
plan bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select PricingSM System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994, and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of the closed-end fund shares must be made through Merrill Lynch, and
the net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
15
<PAGE> 64
investment option. Class D shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the Fund.
In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to Senior Floating
Rate Fund in connection with a tender offer conducted by Senior Floating Rate
Fund and reinvest the proceeds immediately in the Fund. This investment option
is available only with respect to the proceeds of Senior Floating Rate Fund
shares as to which no Early Withdrawal Charge (as defined in the Senior Floating
Rate Fund prospectus) is applicable. Purchase orders from Senior Floating Rate
Fund shareholders wishing to exercise this investment option will be accepted
only on the day that the related Senior Floating Rate Fund tender offer
terminates and will be effected at the net asset value of the Fund at such day.
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this
16
<PAGE> 65
purpose. The first purchase under the Letter of Intention must be at least five
percent of the dollar amount of such Letter. If a purchase during the term of
such Letter would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to that further reduced percentage sales charge, but
there will be no retroactive reduction of the sales charges on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
The Blueprint program is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from
$300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard
sales charge rates disclosed in the Prospectus). In addition, Class A or Class
D shares of the Fund are being offered at net asset value plus a sales charge
of 1/2 of 1% for corporate or group IRA programs placing orders to purchase
their Class A or Class D shares through Blueprint. Services, including the
exchange privilege, available to Class A and Class D investors through
Blueprint, however, may differ from those available to other investors in Class
A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a Merrill
Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
deferred compensation plans within the meaning of Sections 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as "Employer Sponsored Retirement or Savings Plans", provided the
plan has accumulated
17
<PAGE> 66
$20 million or more in MLAM-advised mutual funds (in the case of Class A shares)
or $5 million or more in MLAM-advised mutual funds (in the case of Class D
shares). Class D shares may be offered at net asset value to new Employer
Sponsored Retirement or Savings Plans, provided the plan has $3 million or more
initially invested in MLAM-advised mutual funds. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. Class A shares and Class D shares also are offered at
net asset value to Employer Sponsored Retirement or Savings Plans that have at
least 1,000 employees eligible to participate in the plan (in the case of Class
A shares) or between 500 and 999 employees eligible to participate in the plan
(in the case of Class D shares). Employees eligible to participate in Employer
Sponsored Retirement or Savings Plans of the same sponsoring employer or its
affiliates may be aggregated. Tax qualified retirement plans within the meaning
of Section 401(a) and 403(b) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch BlueprintSM
Program, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement or
Savings Plan which does not meet the above described qualifications to purchase
Class A or Class D shares at net asset value has the option of (i) purchasing
Class D shares at the initial sales charge schedule disclosed in the Prospectus
for purchases of up to $1,000,000 and at 0.75% for purchases of $1,000,000 or
more, (ii) if the Employer Sponsored Retirement or Savings Plan meets the
specified requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption, or (iii) if the Employer Sponsored Retirement or Savings Plan does
not qualify to purchase Class B shares with a waiver upon redemption, purchasing
Class B or Class C shares at their respective CDSC schedule disclosed in the
prospectus.
Certain Employer Sponsored Retirement or Savings Plans, which were
permitted prior to October 21, 1994, to purchase Class A shares at the initial
sales charge schedule in the then current prospectus for purchases up to
$1,000,000 and at 0.75% for purchases of $1,000,000 or more, may purchase Class
A shares at the initial sales charge schedule disclosed in the Prospectus for
purchases of up to $1,000,000 and at 0.75% for purchases of $1,000,000 or more.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above referenced Employer Sponsored Retirement or
Savings Plans.
Purchase Privilege of Certain Persons. Trustees of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries" when used herein with
respect to ML & Co. includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
18
<PAGE> 67
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and the shares of such other
fund were subject to a sales charge either at the time of purchase or on a
deferred basis and; second, such purchase of Class D shares must be made within
90 days after such notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied. First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less that six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
TMASM Managed Trusts. Class A shares are also offered to TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Trustees shall review quarterly reports of the disbursement of the
account
19
<PAGE> 68
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Trustees must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Trustees who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Trustees"),
shall be committed to the discretion of the Independent Trustees then in office.
In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Trustees concluded that there is reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Trustees or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of the Trustees,
including a majority of the Independent Trustees who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
each Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of such Distribution Plan or such report,
the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1994, with respect to the Class B shares and as of November 30, 1994, with
respect to the Class C shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and, with
respect to Class B shares, the Distributor's voluntary maximum.
20
<PAGE> 69
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- --------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR CLASS B SHARES -- DATA
CALCULATED AS OF OCTOBER 31,
1994 (IN THOUSANDS):
Class B Shares (for the fiscal
period October 26, 1988
(commencement of public
offering) to October 31, 1994):
Under NASD Rule as Adopted........ $1,780,799 $111,300 $33,007 $144,307 $ 46,331 $97,976 $8,139
Under Distributor's Voluntary
Waiver.......................... $1,780,799 $111,300 $ 8,904 $120,204 $ 46,331 $73,873 $8,139
FOR CLASS C SHARES -- DATA
CALCULATED AS OF NOVEMBER 30,
1994 (NOT ROUNDED):
Class C Shares (for the fiscal
period October 21, 1994
(commencement of public
offering) to November 30, 1994):
Under NASD Rule as Adopted........ $ 877,273 $ 54,830 $ 251 $54,579 $ 948 $53,631 $7,826
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
period indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
7, 1993, under the distribution plan in effect at that time, at the 1.0%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge payments)
is amortizing the unpaid balance. No assurance can be given that payments of
the distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by 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 the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
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<PAGE> 70
DEFERRED SALES CHARGES -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemptions of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA, or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal years ended October 31, 1992, 1993 and 1994, the
Distributor received CDSCs of $1,181,463, $927,070 and $1,866,124, respectively,
with regard to redemptions of Class B shares all of which was paid to Merrill
Lynch. For the fiscal period October 21, 1994 (commencement of public offering)
to October 31, 1994, there were no redemptions of Class C shares resulting in
payments of CDSCs.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may differ
from those available to other investors in Class B shares. Orders for purchases
and redemptions of Class B shares of the Fund will be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase order is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a) Plan").
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC also
is waived for any Class B shares which
22
<PAGE> 71
are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held
in such account at the time of redemption. The Class B CDSC also is waived for
any Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trustees of the Fund, the Manager is
primarily responsible for the execution of the Fund's portfolio transactions and
the allocation of the brokerage. In executing such transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Manager generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available. The
Fund has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. The Fund contemplates that,
consistent with the above policy of obtaining the best net results, a portion of
its brokerage transactions with respect to equities may be conducted through
Merrill Lynch and its affiliates. For the fiscal year ended October 31, 1992,
the Fund paid total brokerage commissions of $1,651,139, of which $139,435, or
8.44%, was paid to Merrill Lynch for effecting 5.12% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. For the
fiscal year ended October 31, 1993, the Fund paid total brokerage commissions of
$2,301,225, of which $164,219 or 7.14% was paid to Merrill Lynch for effecting
6.82% of the aggregate dollar amount of transactions in which the Fund paid
brokerage commissions. For the fiscal year ended October 31, 1994, the Fund paid
total brokerage commissions of $2,510,229, of which $272,400 or 10.9% was paid
to Merrill Lynch for effecting 10.2% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Manager may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement, and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. In addition, consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
policies established by the Trustees of the Fund, the Manager may consider sales
of shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. 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.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
23
<PAGE> 72
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 Fund
may invest in securities traded in the over-the-counter markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities unless
a permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and any of its affiliates, in
connection with such transactions. See "Investment Objective and
Policies -- Investment Restrictions".
The Trustees have 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 advisory fee paid by the Fund. After considering all
factors deemed relevant, the Trustees made a determination not to seek such
recapture. The Trustees will reconsider this matter from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States 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 Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
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 Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), on each day during which
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. The Fund also
will determine its net asset value on any day in which there is sufficient
trading in its portfolio securities that the net asset value might be affected
materially, but only if on any such day the Fund is required to sell or redeem
shares. Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates quoted by one or
more banks or dealers on the day of valuation. Net asset value is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including
24
<PAGE> 73
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Manager and any account
maintenance and/or distribution fees, are accrued daily. The per share net asset
value of the Class B, Class C and Class D shares generally will be lower than
the per share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to the
Class D shares; moreover, the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
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 Trustees 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 the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Securities and assets for which market quotations are not readily available
are valued at fair market value as determined in good faith by or under the
direction of the Trustees of the Fund. Such valuations and procedures will be
reviewed periodically by the Trustees.
Since foreign securities exchanges may be open on certain U.S. holidays on
which the Fund will not determine its net asset value and accept share orders,
portfolio securities will trade and the net asset value of the Fund's shares may
be significantly affected on days when an investor has no access to the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund's shares through the
Merrill Lynch Blueprint(SM) Program. Full details as to each such service and
copies of the various plans described below can be obtained from the Fund, the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
25
<PAGE> 74
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 reinvestments of ordinary
income dividends and long-term capital gain distributions.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the transfer agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investor's bank account is required. An investor whose shares of the Fund are
held within a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund in amounts of $100 or more ($1 for retirement accounts) through
the CMA(R)/CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of the shares of the Fund, 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 capital gains distributions reinvested in shares of the Fund or vice
versa, and commencing ten days after receipt by the transfer agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
or Class D shares of the Fund having a value, based on cost or the current
offering price, of
26
<PAGE> 75
$5,000 or more and monthly withdrawals are available for shareholders with Class
A or Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value determined as of 15
minutes after the close of business of the New York Stock Exchange (generally,
4:00 p.m., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the Exchange is not open
for business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit of the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in Class A
or Class D shares of the Fund, respectively. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A
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shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, but does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D shares
are exchangeable with shares of the same class of other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a disposition
of the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares are also exchangeable for shares of certain MLAM-advised
money market funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A or Class D shares acquired through dividend reinvestment shall be deemed
to have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A or Class D shares of the Fund generally may be exchanged into
the Class A or Class D shares of the other funds or into shares of the Class A
or Class D money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after
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<PAGE> 77
having held the Fund Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption, since
by "tacking" the two and a half year holding period of Fund Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the Fund will be aggregated with previous holding periods for purposes
of reducing the CDSC. Thus, for example, an investor may exchange Class B shares
of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years and
three years later decide to redeem the shares of Institutional Fund for cash. At
the time of this redemption, the 2% CDSC that would have been due had the Class
B shares of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. ........ High current income, consistent with a policy
of limiting the degree of fluctuation in
net asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND
FUND.......................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent invest-
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ment management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Arizona income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Arkansas income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ASSET GROWTH FUND,
INC. ......................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC. ......................... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT, INC. ............. As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks, and other types
of securities, including fixed income
securities and convertible securities.
MERRILL LYNCH BASIC VALUE FUND,
INC. ......................... Capital appreciation and, secondarily, income
through investment in securities, primarily
equities that are undervalued and therefore
represent basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management through
investment in a portfolio consisting
primarily of insured California Municipal
Bonds.
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MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND
FUND.......................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade California Municipal
Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management.
MERRILL LYNCH CAPITAL FUND,
INC. ........................... The highest total investment return
consistent with prudent risk through a
fully managed investment policy utilizing
equity, debt and convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Colorado income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Connecticut income taxes as is consistent
with prudent investment management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. ................... Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. ........... Long-term capital appreciation through
investment in securities, principally
equities, of issuers in countries having
smaller capital markets.
MERRILL LYNCH DRAGON FUND,
INC. ........................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
MERRILL LYNCH FEDERAL SECURITIES
TRUST......................... High current return through investments in
U.S. Government and Government agency
securities, including GNMA mort-
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gage-backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to
own securities exempt from Florida
intangible personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management, while seeking to
offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND FOR
TOMORROW, INC. ............... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC. ................... Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited
an above-average growth rate in earnings.
MERRILL LYNCH FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain
individual retirement accounts
for which Merrill Lynch acts
as custodian)................. A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide capital
appreciation and income by investing in
securities, with at least 65% of the
portfolio's assets being invested in
equities.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. ................... High total return, consistent with prudent
risk, through a fully managed investment
policy utilizing United States and for-
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eign equity, debt and money market
securities, the combination of which will
be varied from time to time both with
respect to the types of securities and
markets in response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND
FUND FOR INVESTMENT AND
RETIREMENT.................... High total investment return from investment
in a global portfolio of debt instruments
denominated in various currencies and
multinational currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. ................... High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS,
INC. (residents of Arizona
must meet investor suitability
standards).................... The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain
individual retirement accounts
for which Merrill Lynch acts
as custodian)................. A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high total
investment return through an investment
policy utilizing United States and foreign
equity, debt and money market securities,
the combination of which will vary
depending upon changing market and economic
trends.
MERRILL LYNCH GLOBAL RESOURCES
TRUST......................... Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess
substantial natural resource assets.
MERRILL LYNCH GLOBAL SMALLCAP
FUND, INC. ................... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market
capitalizations located in various foreign
countries and in the United States.
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<PAGE> 82
MERRILL LYNCH GLOBAL UTILITY
FUND, INC..................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT..... Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE FUND,
INC. (residents of Wisconsin
must meet investor suitability
standards).................... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected to
derive a substantial portion of their sales
from products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND................... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. ................... Capital appreciation by investing primarily
in Latin American equity and debt
securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Maryland income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
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<PAGE> 83
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND
FUND.......................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Minnesota income taxes as is consistent
with prudent investment management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC. ................... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND........ Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level as possible of income exempt from
Federal income taxes by investing in
investment grade obligations with a dollar
weighted average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND
FUND.......................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
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<PAGE> 84
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and New
Jersey income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and New
Mexico income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND
FUND.......................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal, New
York State and New York City income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Ohio income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OREGON MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Oregon income taxes as is consistent with
prudent investment management.
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MERRILL LYNCH PACIFIC FUND,
INC. ......................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term investment
grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Pennsylvania income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PHOENIX
FUND, INC. ................... Long-term growth of capital by investing in
equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
MERRILL LYNCH QUALITY BOND
PORTFOLIO (available only for
exchanges by certain
individual retirement accounts
for which Merrill Lynch acts
as custodian)................. A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high level of
current income through investment in a
diversified portfolio of debt obligations,
such as corporate bonds and notes,
convertible securities, preferred stocks
and governmental obligations.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC. ............ As high a level of current income as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
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<PAGE> 86
MERRILL LYNCH SPECIAL VALUE
FUND, INC. ................... Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging
growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND
FUND.......................... Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
MERRILL LYNCH TECHNOLOGY
FUND, INC. ................... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected to
derive a substantial portion of their sales
from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by the
State of Texas, its political subdivisions,
agencies and instrumentalities.
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO
(available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian).................... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high current
return through investments in U.S.
Government and government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
government securities.
MERRILL LYNCH UTILITY INCOME
FUND, INC. ................... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in
the ownership or operation of facilities
used to generate, transmit or distribute
electricity, telecommunications, gas or
water.
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MERRILL LYNCH WORLD INCOME FUND,
INC. ......................... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies,
including multinational currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY
ASSETS TRUST.................. Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND (available
only for exchanges within
certain
retirement plans)............. Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES...................... Preservation of capital, current income and
liquidity available from investing in
direct obligations of the U.S. Government
and repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND.................... Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such obligations.
MERRILL LYNCH INSTITUTIONAL
FUND.......................... A portfolio of Merrill Lynch Funds for
Institutional Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
39
<PAGE> 88
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND............... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
MERRILL LYNCH TREASURY FUND..... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
TAXES
The Fund intends to continue to qualify 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, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund'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 the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in warrants, futures and
options) ("capital gain dividends") are taxable to shareholders as long-term
capital gains, regardless of the length of time the shareholder has owned Fund
shares. Any loss upon the sale or exchange of Fund shares held for six months or
less, however, will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
40
<PAGE> 89
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends.
Distributions by the Fund, whether from ordinary income or capital gains,
generally will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes. For this purpose, the Fund will allocate foreign taxes and
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission exemptive order permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's
41
<PAGE> 90
basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause the
Fund to accrue income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes and may be eligible for
the dividends received deduction allowed to domestic corporations under the
Code.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or interest or currency
exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange
42
<PAGE> 91
contract that is a Section 1256 contract will be characterized as 60% long-term
and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain 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
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an 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 the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and 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 Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax basis
in Fund shares (assuming the shares were held as a capital asset). The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
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.
43
<PAGE> 92
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.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, in advertisements or information furnished to present
or prospective shareholders. Total return data are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, 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, (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
44
<PAGE> 93
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------- -------------------------------- --------------------------------
REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A VALUE OF A
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT AT PERCENTAGE BASED INVESTMENT AT PERCENTAGE BASED INVESTMENT AT
ON A HYPOTHETICAL THE END OF ON A HYPOTHETICAL THE END OF ON A HYPOTHETICAL THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------- ----------------- ------------- ----------------- ------------- ----------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... 12.63% 1,003.30
One Year Ended October
31, 1994............... 9.03% $1,090.30 9.78% $1,097.80
Five Years Ended October
31, 1994............... 10.49% $1,646.30 10.53% $1,649.50
Inception (October 26,
1988) to October 31,
1994................... 10.69% $1,839.40
Inception (January 30,
1987) to October 31,
1994................... 7.73% $1,781.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... 1.33% $1,013.30
Year Ended October 31,
1994................... 15.07% $1,150.70 13.78% $1,137.80
1993................... 31.72% $1,317.20 30.39% $1,303.90
1992................... (6.90)% $ 931.00 (7.73)% $ 922.70
1991................... 11.54% $1,115.40 10.35% $1,103.50
1990................... 10.39% $1,103.90 9.19% $1,091.90
1989................... 9.62% $1,096.20 8.28% $1,082.80
1988................... 7.35% $1,073.50
Inception (January 30,
1987) to October 31,
1987................... (7.10)% $ 929.00
Inception (October 26,
1988) to October 31,
1988................... 1.93% $1,019.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... 0.33% 1,003.30
Inception (October 26,
1988) to October 31,
1994................... 83.94% $1,839.40
Inception (January 30,
1987) to October 31,
1994................... 78.13% $1,781.30
</TABLE>
<TABLE>
<CAPTION>
CLASS D
--------------------------------
REDEEMABLE
VALUE OF A
HYPOTHETICAL
EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT AT
ON A HYPOTHETICAL THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------- ----------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE
SALES CHARGES)
<S> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... (77.35)% $ 960.10
One Year Ended October
31, 1994...............
Five Years Ended October
31, 1994...............
Inception (October 26,
1988) to October 31,
1994...................
Inception (January 30,
1987) to October 31,
1994...................
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE
SALES CHARGES)
<S> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... 1.33% $1,013.30
Year Ended October 31,
1994...................
1993...................
1992...................
1991...................
1990...................
1989...................
1988...................
Inception (January 30,
1987) to October 31,
1987...................
Inception (October 26,
1988) to October 31,
1988...................
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE
SALES CHARGES)
<S> <C> <C>
Inception (October 21,
1994) to October 31,
1994................... (3.99)% $ 960.10
Inception (October 26,
1988) to October 31,
1994...................
Inception (January 30,
1987) to October 31,
1994...................
</TABLE>
45
<PAGE> 94
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.10 per share, of different classes and to divide or combine the shares of
each class into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into four classes
of shares, designated Class A, Class B, Class C and Class D. Under the
Declaration of Trust, the Trustees have the authority to issue separate classes
of shares which would represent interests in the assets of the Fund and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that (i) expenses related to the distribution of the shares of
a class may be borne solely by such class, (ii) a class may have exclusive
voting rights with respect to matters relating to the expenses being borne only
by such class and (iii) classes may have different conversion rights. The Fund
has received an order from the Commission permitting the issuance and sale of
multiple classes of shares. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any expenses which may be attributable
only to one class. Shares have no preemptive rights. The rights of redemption,
exchange and conversion are described elsewhere herein and in the Prospectus.
Shares are fully paid and non-assessable by the Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to a vote of
shareholders, except that shareholders of a class bearing account maintenance
and/or distribution expenses as provided above shall have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of Trustees can, if they
choose to do so, elect all the Trustees of the Fund, in which event the holders
of the remaining shares are unable to elect any person as a Trustee. No
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the outstanding shares of the Fund.
46
<PAGE> 95
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on October 31, 1994, and its shares outstanding on that date is as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- -------- --------
<S> <C> <C> <C> <C>
Net Assets........................... $236,288,410 $1,086,480,093 $462,160 $339,994
=========== ============= ======== ========
Number of Shares Outstanding......... 14,805,226 71,087,909 30,248 21,303
=========== ============= ======== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)....................... $ 15.96 $ 15.28 $ 15.28 $ 15.96
Sales Charge (for Class A and Class D
shares: 5.25% of offering price
(5.54%
of net amount invested*)).......... .88 ** ** .88
------------ -------------- -------- --------
Offering Price....................... $ 16.84 $ 15.28 $ 15.28 $ 16.84
=========== ============= ======== ========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian") acts as the custodian of the Fund's assets. Under its contract
with the Fund, the Custodian is authorized to establish separate accounts in
foreign currencies and to cause foreign securities owned by the Fund to be held
in its offices outside the U.S. and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 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.
47
<PAGE> 96
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors is sent to shareholders each year. After the end of each
year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 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.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on January 31, 1995.
------------------------
The Declaration of Trust establishing the Fund, dated March 11, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch EuroFund" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of the Trust shall be held
to any personal liability, nor shall resort be had to their private property for
the satisfaction of any obligation or claim of said Fund but the "Trust
Property" only shall be liable.
48
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH EUROFUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch EuroFund as of October 31, 1994,
the related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
EuroFund as of October 31, 1994, the results of its operations, the changes in
its net assets, and the financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 7, 1994
49
<PAGE> 98
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Austria
Utilities 183,950 Verbund Oesterreichische Elekrizitats AG $ 10,223,316 $ 11,532,644 0.9%
Total Investments in Austria 10,223,316 11,532,644 0.9
Belgium
Banking 66,750 Generale de Banque S.A. 16,340,010 16,202,085 1.2
Building 8,400 Glaverbel S.A. (New Shares) 1,111,200 1,246,154 0.1
Materials 8,000 Glaverbel S.A. (Ordinary) 1,069,413 1,186,813 0.1
-------------- -------------- -----
2,180,613 2,432,967 0.2
Total Investments in Belgium 18,520,623 18,635,052 1.4
Finland
Banking 6,055,480 ++Kansallis-Osake-Pankki 15,610,007 11,268,755 0.8
4,316,800 ++Unitas Bank Ltd. 13,057,655 13,092,548 1.0
-------------- -------------- -----
28,667,662 24,361,303 1.8
Metals & Mining 687,700 ++Outokumpu OY 9,764,165 14,525,726 1.1
Paper & Forest 1,123,700 Enso-Gutzeit OY 'R' (Ordinary) (Registered) 7,143,284 9,956,527 0.8
Products 362,400 Metsa Serla OY 13,741,677 16,801,040 1.3
404,425 ++++Repola OY S 5,417,944 8,454,725 0.6
-------------- -------------- -----
26,302,905 35,212,292 2.7
Total Investments in Finland 64,734,732 74,099,321 5.6
France
Automobiles &
Equipment 154,050 Peugeot S.A. 18,500,382 23,049,204 1.7
Banking 93,480 Societe Generale 9,795,323 10,539,856 0.8
Banking & 225,850 Compagnie de Suez 12,255,610 10,795,043 0.8
Financial 212,605 Compagnie Financiere de Paribas 15,453,636 14,131,033 1.1
-------------- -------------- -----
27,709,246 24,926,076 1.9
Beverages 9,881 LVMH 1,424,091 1,591,545 0.1
Chemicals 545,700 Rhone Poulenc S.A. 13,688,070 13,449,234 1.0
Diversified
Companies 177,431 Compagnie de Fives--Lille 9,488,305 16,940,821 1.3
Financial
Services 33,108 EuraFrance S.A. 10,200,148 11,449,341 0.9
Insurance 138,950 GAN S.A. 11,816,541 7,698,472 0.6
Packaging 248,200 Pechiney International S.A. 6,917,208 7,677,679 0.6
Utilities 131,332 Compagnie Generale des Eaux 14,824,484 12,016,891 0.9
Total Investments in France 124,363,798 129,339,119 9.8
</TABLE>
50
<PAGE> 99
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Germany
Automobiles & 31,550 Continental AG $ 4,743,761 $ 4,635,576 0.3%
Equipment 55,000 ++Continental AG (Warrants) (a) 3,126,602 2,411,159 0.2
11,900 Volkswagen AG 3,204,881 3,489,771 0.3
202,495 ++Volkswagen AG (Preferred) (Warrants) (a) 20,029,386 20,511,782 1.5
-------------- -------------- -----
31,104,630 31,048,288 2.3
Capital Goods 321,783 ++Kloeckner Werke AG 14,985,368 29,068,408 2.2
68,554 Mannesmann AG 18,651,219 18,305,352 1.4
53,230 ++Thyssen AG 8,158,756 10,158,073 0.8
118,808 ++Thyssen AG (Warrants) (a) 3,460,062 7,497,018 0.5
-------------- -------------- -----
45,255,405 65,028,851 4.9
Chemicals 130,660 BASF AG 21,735,516 27,624,761 2.1
118,150 ++Bayer AG (Warrants) (a) 9,222,721 14,440,120 1.1
-------------- -------------- -----
30,958,237 42,064,881 3.2
Diversified
Companies 170,000 ++Veba AG (Warrants) (a) 7,318,746 6,842,909 0.5
Insurance 7,900 Munich Reinsurance Co. 14,115,776 14,535,370 1.1
Total Investments in Germany 128,752,794 159,520,299 12.0
Ireland
Banking 610,200 Bank of Ireland 2,641,538 2,803,968 0.2
Building 617,000 CRH PLC 2,050,542 3,469,669 0.3
Materials 42,000 CRH PLC (New Shares) 156,604 236,185 0.0
-------------- -------------- -----
2,207,146 3,705,854 0.3
Total Investments in Ireland 4,848,684 6,509,822 0.5
Italy
Banking & 6,058,000 Credito Italiano S.p.A. 10,111,783 6,430,939 0.5
Financial 12,116,000 Credito Italiano S.p.A. (Rights) (b) 0 469,029 0.0
-------------- -------------- -----
10,111,783 6,899,968 0.5
Building &
Construction 2,571,700 Filippo Fochi S.p.A. 8,169,638 6,854,300 0.5
Diversified 11,979,435 Compagnie Industriali Riunite S.p.A. (CIR) 11,194,219 13,791,575 1.0
Companies
Utilities 9,559,051 Societa Finanziaria Telefonica S.p.A. (STET) 20,855,534 23,644,406 1.8
Total Investments in Italy 50,331,174 51,190,249 3.8
Netherlands
Automobiles &
Equipment 352,000 Vredestein Groep N.V. 3,504,552 2,858,566 0.2
Banking 673,150 ABN Amro Holding N.V. 21,509,836 23,901,414 1.8
Capital Goods 91,800 Ahrend Groep N.V. 6,522,706 8,586,864 0.6
Chemicals 225,000 Akzo N.V. 22,293,969 28,395,080 2.1
</TABLE>
51
<PAGE> 100
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Electrical
Equipment 1,527,200 Philips Electronics N.V. $ 37,474,112 $ 50,514,381 3.8%
Insurance 384,550 Aegon N.V. 16,109,652 23,729,493 1.8
448,700 Amev N.V. 15,296,669 18,644,855 1.4
528,228 Internationale Nederlanden Groep N.V. 18,732,904 24,704,914 1.9
-------------- -------------- -----
50,139,225 67,079,262 5.1
Papers 434,530 KNP BT (Koninklijke) 8,525,449 12,827,264 1.0
177,393 KNP BT (Koninklijke) (Preferred) 721,071 797,059 0.1
-------------- -------------- -----
9,246,520 13,624,323 1.1
Telecommunications 157,900 Royal Ptt Nederland N.V. 5,007,549 5,026,218 0.4
Transportation 653,516 KLM Royal Dutch Airlines N.V. 12,912,312 18,168,287 1.4
Total Investments in the Netherlands 168,610,781 218,154,395 16.5
Norway
Oil & Gas 228,200 Saga Petroleum A.S. (Class A) 2,697,693 2,720,611 0.2
Producers 1,102,400 Saga Petroleum A.S. (Class B) 12,575,675 12,553,122 0.9
-------------- -------------- -----
15,273,368 15,273,733 1.1
Total Investments in Norway 15,273,368 15,273,733 1.1
Spain
Banking 128,753 Banco Popular Espanol S.A. 14,089,977 16,146,800 1.2
215,800 Banco Santander S.A. 9,375,237 8,768,436 0.7
-------------- -------------- -----
23,465,214 24,915,236 1.9
Petroleum 766,268 Repsol S.A. 21,422,573 24,498,310 1.8
Utilities 2,251,170 Telefonica Nacional de Espana S.A. 28,066,764 30,460,072 2.3
Total Investments in Spain 72,954,551 79,873,618 6.0
Sweden
Appliances 293,700 Electrolux AB 14,484,076 15,251,787 1.2
Automobiles & 729,900 Volvo AB 13,808,866 14,410,461 1.1
Equipment
Banking 865,500 ++Svenska Handelsbanken AB (Class A) 13,098,934 11,672,529 0.9
Engineering 598,600 SKF AB (Class A) 11,046,752 10,736,249 0.8
277,800 SKF AB (Class B) 5,353,782 5,059,758 0.4
314,000 ++++Svedala Industry AB 5,614,776 7,290,751 0.5
-------------- -------------- -----
22,015,310 23,086,758 1.7
Insurance 228,600 Skandia Group Forsakrings AB 3,438,056 4,163,645 0.3
Metals & Mining 814,500 ++Avesta-Sheffield AB 7,119,558 8,096,984 0.6
1,078,975 Trelleborg AB (Class B) 7,282,961 16,651,775 1.3
-------------- -------------- -----
14,402,519 24,748,759 1.9
Total Investments in Sweden 81,247,761 93,333,939 7.1
</TABLE>
52
<PAGE> 101
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Switzerland
Banking 69,935 Schweizerischer Bankverein $ 19,869,184 $ 20,156,425 1.5%
Electrical
Equipment 32,110 BBC Brown Boveri & Cie (Bearer) 22,290,150 27,559,379 2.1
Insurance 1,245 Baloise 2,366,092 2,344,287 0.2
5,890 ++Baloise (Warrants) (a) 532,558 656,529 0.0
-------------- -------------- -----
2,898,650 3,000,816 0.2
Pharmaceuticals 40,155 Ciba-Geigy AG 21,790,891 23,402,436 1.8
Total Investments in Switzerland 66,848,875 74,119,056 5.6
Turkey
Automobiles & 960,600 ++++Turk Otomobil Fabrikasi A.S. 7,682,550 3,784,764 0.3
Equipment
Total Investments in Turkey 7,682,550 3,784,764 0.3
United Kingdom
Aerospace 5,137,950 Rolls Royce PLC 11,518,786 14,593,710 1.1
Building 940,000 CRH PLC 4,855,526 5,217,150 0.4
Materials 221,400 CRH PLC (New Shares) 823,556 1,228,805 0.1
5,395,400 Tarmac PLC (Ordinary) 11,851,140 10,745,090 0.8
-------------- -------------- -----
17,530,222 17,191,045 1.3
Chemicals 1,819,700 Imperial Chemical Industries PLC (Ordinary) 21,930,631 23,852,941 1.8
Consumer Goods 1,696,600 Vendome Luxury Group (Units) (c) 9,802,681 14,373,860 1.1
Electrical
Equipment 2,645,100 General Electric Co. PLC 13,322,146 11,917,297 0.9
Food & Beverage 3,833,500 Grand Metropolitan PLC 25,087,094 25,969,892 2.0
2,526,000 Tate & Lyle PLC 15,384,478 17,565,865 1.3
1,006,000 Unilever PLC 15,150,990 18,721,016 1.4
-------------- -------------- -----
55,622,562 62,256,773 4.7
Industrials 759,800 Thorn EMI PLC (Ordinary) 11,313,107 12,055,692 0.9
4,774,700 Tomkins PLC 16,966,477 16,523,747 1.2
-------------- ----------- -----
28,279,584 28,579,439 2.1
Insurance 2,143,500 Commercial Union Assurance Co. PLC 19,387,178 19,174,791 1.4
Leisure 5,886,300 Forte PLC 21,482,171 22,196,319 1.7
2,978,450 Rank Organisation PLC 18,667,845 19,691,188 1.5
-------------- -------------- -----
40,150,016 41,887,507 3.2
Oil & Related 2,061,000 The British Petroleum Co. PLC 10,252,059 14,651,859 1.1
1,380,000 The Shell Transport & Trading Co. PLC 14,671,668 16,557,433 1.3
-------------- -------------- -----
24,923,727 31,209,292 2.4
</TABLE>
53
<PAGE> 102
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
United Kingdom
(concluded)
Pharmaceuticals 4,850,700 SmithKline Beecham Corp. PLC (Class A) $ 30,096,940 $ 32,306,593 2.4%
Retail Trade 6,450,000 Asda Group PLC 5,741,489 6,317,388 0.5
8,812,200 Sears PLC 16,033,301 15,463,913 1.2
-------------- -------------- -----
21,774,790 21,781,301 1.7
Telecommunications 3,936,900 British Telecommunications PLC 23,478,968 25,352,920 1.9
Utilities-- 507,800 Cable & Wireless PLC 3,475,048 3,481,517 0.3
Communications
Total Investments in the United Kingdom 321,293,279 347,958,986 26.3
Total Stocks & Convertible Warrants 1,135,686,286 1,283,324,997 96.9
<CAPTION>
Face Amount Short-Term Securities
<S> <C> <C> <C> <C> <C>
Repurchase $22,241,000 HSBC Holdings PLC, purchased on 10/31/1994 to
Agreements* yield 4.77% to 11/01/1994 22,241,000 22,241,000 1.7
Total Investments in Short-Term Securities 22,241,000 22,241,000 1.7
<CAPTION>
Premiums
Par Value Issue Paid
<S> <C> <C> <C> <C> <C>
Currency 60,000,000 Deutschemark, expiring November 1994 at
DM 1.711 2,088,000 0 0.0
Put Options 145,000,000 French Franc, expiring November 1994 at
Frf 5.85 4,872,000 0 0.0
Purchased 95,000,000 Netherlands Guilder, expiring November 1994
at Nlg 1.92 3,239,500 0 0.0
70,000,000 Spanish Peseta, expiring November 1994 at
Pta 139.30 2,884,000 0 0.0
Total Currency Put Options Purchased 13,083,500 0 0.0
Total Investments $1,171,010,786 1,305,565,997 98.6
==============
Other Assets 18,004,660 1.4
Less Liabilities -------------- -----
Net Assets $1,323,570,657 100.0%
============== =====
<FN>
(a)Warrants entitle the Fund to purchase a predetermined number of shares of common stock.
The purchase price and number of shares are subject to adjustment under certain conditions
until the expiration date.
(b)The rights may be exercised until 11/08/94.
(c)Each unit consists of one ordinary 5p Vendome PLC and one ordinary NPC Vendome SA.
**Repurchase Agreements are fully collateralized by US Government & Agency Obligations.
++Non-income producing securities.
++++Restricted security as to resale. The value of the Fund's investment in restricted
securities was approximately $19,530,000, representing 1.5% of net assets.
</TABLE>
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Repola OY S 5/18/1993 $ 5,417,944 $ 8,454,725
Svedala Industry AB 6/17/1993 5,614,776 7,290,751
Turk Otomobil Fabrikasi A.S. 3/03/1994 7,682,550 3,784,764
Total $18,715,270 $19,530,240
=========== ===========
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 103
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of October 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,157,927,286) (Note 1a) $1,305,565,997
Options purchased (cost--$13,083,500) (Notes 1a & 1c) 0
Cash 94,883
Foreign cash 835,883
Receivables:
Securities sold $ 26,330,374
Dividends 6,481,675
Beneficial interest sold 3,089,562
Interest 2,947 35,904,558
--------------
Prepaid registration fees and other assets (Note 1f) 112,085
--------------
Total assets 1,342,513,406
--------------
Liabilities: Payables:
Capital shares redeemed 8,543,708
Securities purchased 7,584,546
Distributor (Note 2) 924,268
Investment adviser (Note 2) 848,619 17,901,141
--------------
Accrued expenses and other liabilities 1,041,608
--------------
Total liabilities 18,942,749
--------------
Net Assets: Net assets $1,323,570,657
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 1,480,523
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 7,108,791
Class C Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 3,025
Class D Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 2,130
Paid-in capital in excess of par 1,067,523,228
Undistributed realized capital gains on investments and foreign currency
transactions--net 112,731,529
Unrealized appreciation on investments and foreign currency transactions--net 134,721,431
--------------
Net assets $1,323,570,657
==============
Net Asset Value: Class A--Based on net assets of $236,288,410 and 14,805,226 shares of
beneficial interest outstanding $ 15.96
==============
Class B--Based on net assets of $1,086,480,093 and 71,087,909 shares
of beneficial interest outstanding $ 15.28
==============
Class C--Based on net assets of $462,160 and 30,248 shares of
beneficial interest outstanding $ 15.28
==============
Class D--Based on net assets of $339,994 and 21,303 shares of
beneficial interest outstanding $ 15.96
==============
See Notes to Financial Statements.
</TABLE>
55
<PAGE> 104
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended October 31, 1994
<S> <C> <C> <C>
Investment Income Dividends (net of $3,973,659 foreign withholding tax) $ 27,234,127
(Notes 1d & 1e): Interest 2,269,733
--------------
Total income 29,503,860
--------------
Expenses: Distribution fees--Class B (Note 2) $ 10,998,651
Investment advisory fees (Note 2) 10,148,764
Transfer agent fees--Class B (Note 2) 1,497,966
Custodian fees 1,333,446
Printing and shareholder reports 295,860
Transfer agent fees--Class A (Note 2) 286,107
Registration fees (Note 1f) 231,966
Accounting services (Note 2) 97,681
Professional fees 78,134
Trustees' fees and expenses 35,345
Pricing fees 5,470
Other 18,201
--------------
Total expenses 25,027,591
--------------
Investment income--net 4,476,269
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 155,293,375
(Loss) on Foreign currency transactions (9,494,117) 145,799,258
Investment & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 17,541,613
(Notes 1b, 1e & 3): Foreign currency transactions (12,418,865) 5,122,748
-------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 150,922,006
--------------
Net Increase in Net Assets Resulting from Operations $ 155,398,275
==============
See Notes to Financial Statements.
</TABLE>
56
<PAGE> 105
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 4,476,269 $ 4,063,172
Realized gain (loss) on investments and foreign currency transactions--net 145,799,258 (14,444,105)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 5,122,748 172,655,666
-------------- --------------
Net increase in net assets resulting from operations 155,398,275 162,274,733
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 220,281,320 250,646,762
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 375,679,595 412,921,495
Beginning of year 947,891,062 534,969,567
-------------- --------------
End of year $1,323,570,657 $ 947,891,062
-------------- --------------
See Notes to Financial Statements.
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994++ 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .18 .26 .24 .25 .18
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.91 3.08 (1.02) .96 .85
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.09 3.34 (.78) 1.21 1.03
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net -- -- (.31) (.29) (.17)
Realized gain on investments--net -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions -- -- (.31) (.29) (.17)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 15.96 $ 13.87 $ 10.53 $ 11.62 $ 10.70
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 15.07% 31.72% (6.90%) 11.54% 10.39%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses 1.03% 1.04% 1.09% 1.14% 1.17%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income--net 1.17% 1.50% (2.69%) 2.94% 2.62%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $ 236,288 $ 182,612 $ 87,865 $ 83,229 $ 85,798
Data: ========== ========== ========== ========== ==========
Portfolio turnover 82.47% 115.10% 109.95% 124.64% 122.67%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
57
<PAGE> 106
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994++ 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .02 .16 .12 .13 .12
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.83 2.97 (.98) .94 .78
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.85 3.13 (.86) 1.07 .90
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net -- -- (.25) (.17) (.11)
Realized gain on investments--net -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions -- -- (.25) (.17) (.11)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 15.28 $ 13.43 $ 10.30 $ 11.41 $ 10.51
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 13.78% 30.39% (7.73%) 10.35% 9.19%
Return:** ========== ========== ========== ========== ==========
Ratios to Expenses, excluding account maintenance and
Average distribution fees 1.06% 1.08% 1.12% 1.17% 1.20%
Net Assets: ========== ========== ========== ========== ==========
Expenses 2.06% 2.08% 2.12% 2.17% 2.20%
========== ========== ========== ========== ==========
Investment income--net 0.14% 0.51% (3.37%) 1.94% 1.32%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,086,480 $ 765,279 $ 447,104 $ 484,031 $ 498,600
Data: ========== ========== ========== ========== ==========
Portfolio turnover 82.47% 115.10% 109.95% 124.64% 122.67%
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++
to October 31, 1994++++
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.08 $ 15.75
Operating -------------- --------------
Performance: Investment income--net (.01) --
Realized and unrealized gain on investments and
foreign currency transactions--net .21 .21
-------------- --------------
Total from investment operations .20 .21
-------------- --------------
Net asset value, end of period $ 15.28 $ 15.96
============== ==============
Total Investment Based on net asset value per share 1.33%+++ 1.33%+++
Return:** ============== ==============
Ratios to Expenses, excluding account maintenance and distribution fees 1.86%* 1.86%*
Average ============== ==============
Net Assets: Expenses 2.86%* 2.11%*
============== ==============
Investment income--net (2.47%)* (1.70%)*
============== ==============
Supplemental Net assets, end of period (in thousands) $ 462 $ 340
Data: ============== ==============
Portfolio turnover 82.47% 82.47%
============== ==============
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
58
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch EuroFund (the "Fund") is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. The Fund
offers four classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales charge. Shares of
Class B and Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities, which are traded on
European stock exchanges, are valued at the last sales price on the exchanges
on the day the securities are being valued or, if closing prices are
unavailable, at the last traded bid price available prior to the time of
valuation. Securities traded in the over-the-counter market are valued at the
quoted bid price in the over-the-counter market prior to the time of valuation.
Portfolio securities which are traded both in the over-the- counter market and
on the stock exchange are valued on the exchange designated by or under the
authority of the Trustees as the primary market. Short-term securities are
valued at amortized cost, which approximates market value. Options which are
traded on exchanges are valued at their last sale price as of the close of such
exchanges or, lacking any sales, at the last available bid price. Securities
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 Fund's Board of
Trustees.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) receivables or payables expressed
in foreign currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange contracts as a
hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-US dollar-denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund.
(c) Options--The Fund can write covered call options and purchase put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written.
When a security is sold through an exercise of an option, the related premium
received (or paid) is deducted from (or added to) the basis of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction is less than or exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates, except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the funds are informed of the ex-dividend
59
<PAGE> 108
date. Interest income is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). Effective January 1, 1994, the investment
advisory business of MLAM was reorganized from a corporation to a limited
partnership. Both prior to and after the reorganization, ultimate control of
MLAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary
of ML & Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into a Distribution Agreement and a
Distribution Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operation of the Fund. For such services, the Fund pays a monthly fee of
0.75%, on an annual basis, of the average daily value of the Fund's net assets.
MLAM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursuant to which
MLAM pays MLAM U.K. a fee computed at the rate of 0.15% of the average daily net
assets of the Fund for providing investment advisory services to MLAM with
respect to the Fund. Certain of the states in which the shares of the Fund are
qualified for sale impose limitations on the expenses of the Fund. The most
restrictive annual expense limitation requires that the Investment Adviser
reimburse the Fund to the extent that Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets, and 1.5% of the
average daily net assets in excess thereof. MLAM's obligation to reimburse the
Fund is limited to the amount of the management fee. No fee payment will be made
to MLAM during any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment.
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates based upon
the average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Maintenance Fee Distribution Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended October 31, 1994, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $93,139 $2,964,926
Class D 679 9,600
</TABLE>
MLPF&S received contingent deferred sales charges of $1,866,124 relating to
transactions in Class B Shares, and $272,400 in commissions on the execution of
portfolio security transactions for the Fund for the year ended October 31,
1994.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
60
<PAGE> 109
Certain officers and/or trustees of the Fund are officers and/or directors of
MLAM, MLIM, PSI, MLPF&S, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were $1,238,121,662 and $1,035,945,983,
respectively.
Net realized and unrealized gains (losses) as of October 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Investments:
Long-term $154,331,814 $147,638,711
Call options written 1,110,009 --
Put options purchased (148,448) --
------------ ------------
Total investments 155,293,375 147,638,711
Currency transactions:
Put options purchased (2,241,520) (13,083,500)
Call options purchased (21,809,000) --
Call options written 12,654,901 --
Put options written 2,911,945 --
Foreign currency
transactions (1,010,443) 166,220
------------ ------------
Total currency
transactions (9,494,117) (12,917,280)
------------ ------------
Total $145,799,258 $134,721,431
============ ============
</TABLE>
Transactions in call options written for the year ended October 31, 1994 were
as follows:
<TABLE>
<CAPTION>
Premiums
Par Value Received
<S> <C> <C>
Outstanding call options
written at beginning
of year -- --
Options written $ 735,521,831 $ 16,779,939
Options exercised (735,521,831) (16,779,939)
Options closed -- --
------------- ------------
Outstanding call options
written at end of year $ -- $ --
============= ============
</TABLE>
Transactions in put options written for the year ended October 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Premiums
Par Value Paid
<S> <C> <C>
Outstanding put options
written at beginning
of year -- --
Options written $ 455,400,000 $ 3,510,630
Options exercised (455,400,000) (3,510,630)
Options closed -- --
------------- ------------
Outstanding put options
written at end of year $ -- $ --
============= ============
</TABLE>
As of October 31, 1994, net unrealized appreciation for Federal income tax
purposes aggregated $147,638,711, of which $179,668,339 related to appreciated
securities and $32,029,628 related to depreciated securities. The aggregate
cost of investments at October 31, 1994 for Federal income tax purposes was
$1,157,927,286.
4. Shares of Beneficial Interest:
Net increase in net assets derived from beneficial interest transactions was
$220,281,320 and $250,646,762 for the years ended October 31, 1994 and October
31, 1993, respectively.
Transactions in shares of beneficial interest for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year
Ended October 31, 1994 Shares Dollar Amount
<S> <C> <C>
Shares sold 12,530,353 $ 190,014,197
----------- -------------
Total issued 12,530,353 190,014,197
Shares redeemed (10,887,820) (167,629,564)
----------- -------------
Net increase 1,642,533 $ 22,384,633
=========== =============
Class A Shares for the Year
Ended October 31, 1993 Shares Dollar Amount
Shares sold 8,144,065 $ 105,277,574
----------- -------------
Total issued 8,144,065 105,277,574
Shares redeemed (3,323,921) (39,652,091)
----------- -------------
Net increase 4,820,144 $ 65,625,483
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year
Ended October 31, 1994 Shares Dollar Amount
<S> <C> <C>
Shares sold 41,040,817 $ 596,780,681
----------- -------------
Total issued 41,040,817 596,780,681
Shares redeemed (26,955,193) (399,676,122)
----------- -------------
Net increase 14,085,624 $ 197,104,559
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year
Ended October 31, 1993 Shares Dollar Amount
<S> <C> <C>
Shares sold 26,455,622 $ 332,604,731
----------- -------------
Total issued 26,455,622 332,604,731
Shares redeemed (12,880,889) (147,583,452)
----------- -------------
Net increase 13,574,733 $ 185,021,279
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares for the
Period October 21, 1994++
to October 31, 1994 Shares Dollar Amount
<S> <C> <C>
Shares sold 30,249 $ 456,068
----------- ------------
Total issued 30,249 456,068
Shares redeemed (1) (15)
----------- ------------
Net increase 30,248 $ 456,053
============ ============
<FN>
++Commencement of Operations.
</TABLE>
61
<PAGE> 110
<TABLE>
<CAPTION>
Class D Shares for the
Period October 21, 1994++
to October 31, 1994 Shares Dollar Amount
<S> <C> <C>
Shares sold 24,171 $ 381,029
----------- ------------
Total issued 24,171 381,029
Shares redeemed (2,868) (44,954)
----------- ------------
Net increase 21,303 $ 336,075
=========== ============
</TABLE>
[FN]
++Commencement of Operations.
5. Commitments:
At October 31, 1994, the Fund had outstanding forward exchange contracts under
which it had agreed to purchase and sell foreign currency aggregating
approximately $2,468,000 and $21,503,000, respectively.
6. Subsequent Event:
On December 14, 1994, the Fund's Board of Trustees declared an ordinary income
dividend in the amount of $0.889 and a capital gains distribution in the amount
of $0.737 to Class A, Class B, Class C and Class D shareholders payable on
December 21, 1994 to shareholders of record as of December 13, 1994.
62
<PAGE> 111
[This page is intentionally left blank.]
<PAGE> 112
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..... 2
Other Investment Policies and
Practices........................ 2
Investment Restrictions............. 7
Management of the Fund................ 10
Trustees and Officers............... 10
Compensation of Trustees............ 11
Management and Advisory
Arrangements..................... 12
Purchase of Shares.................... 14
Redemption of Shares.................. 21
Portfolio Transactions and
Brokerage........................... 23
Determination of Net Asset Value...... 24
Shareholder Services.................. 25
Taxes................................. 40
Performance Data...................... 44
General Information................... 46
Description of Shares............... 46
Computation of Offering Price Per
Share............................ 47
Independent Auditors................ 47
Custodian........................... 47
Transfer Agent...................... 47
Legal Counsel....................... 48
Reports to Shareholders............. 48
Additional Information.............. 48
Independent Auditors' Report.......... 49
Financial Statements.................. 50
</TABLE>
Code # 10476-0295
MERRILL LYNCH
EUROFUND
ART WORK
STATEMENT OF ADDITIONAL INFORMATION
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 113
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 308 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- --------------------------------- -----------------------------
Compass plates, circular graph Back cover of Prospectus and
paper and Merrill Lynch Logo back cover of Statement of
including stylized market bull. Additional Information.
