<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1997
SECURITIES ACT FILE NO. 33-4026
INVESTMENT COMPANY ACT FILE NO. 811-4612
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 13 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 15 [X]
(Check appropriate box or boxes)
----------------
MERRILL LYNCH EUROFUND
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH EUROFUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
BROWN & WOOD LLP
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
JOHN A. MACKINNON, ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on December 20, 1996.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial
Interest (par
value $.10 per
share)............... 22,084,979 $16.17 $329,997.36* $100
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during
Registrant's previous fiscal year was 36,730,185 shares of beneficial
interest.
(3) 14,665,614 of the shares described in (2) above have been used for
reduction pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment
Company Act of 1940 in previous filings during Registrant's current fiscal
year.
(4) 22,064,571 of the shares redeemed during Registrant's previous fiscal
year are being used for the reduction of the registration fee in this
amendment to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH EUROFUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Item 3. Condensed Financial
Information............ Financial Highlights; Performance Data
Item 4. General Description of
Registrant............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or
Repurchase............. Fee Table; Merrill Lynch Select
PricingSM System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objectives
and Policies........... Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.............. Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data....... Performance Data
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FEBRUARY 24, 1997
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 that seeks 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, debt and preferred
securities convertible into common stocks. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 13. 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 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers that 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 made 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 NOR HAS THE SECURITIES AND EXCHANGE 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 24, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever is
lower)................ None (d) 4.0% during the first year, 1.0% for one year(f) None(d)
decreasing 1.0% annually thereafter
to 0.0% after the fourth year(e)
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(g)............... 0.75% 0.75% 0.75% 0.75%
Rule 12b-1 Fees(h):
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......... 0.11% 0.11% 0.11% 0.11%
Shareholder Servicing
Costs(i).............. 0.18% 0.21% 0.23% 0.17%
Other.................. 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ----
Total Other Expenses.. 0.35% 0.38% 0.40% 0.34%
---- ---- ---- ----
Total Fund Operating 1.10% 2.13% 2.15% 1.34%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 25 and "Shareholder Services--Fee-Based Programs"--page
37.
(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 28.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares in connection with certain fee-based programs. 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 certain 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. Such
CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 37.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 37.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 37.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
21.
(h) See "Purchase of Shares--Distribution Plans"--page 31.
(i) See "Management of the Fund--Transfer Agency Services"--page 23.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- ----------------------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment including the
maximum $52.50 initial sales
charge (Class A and Class D
shares only) and assuming (1)
the Total Fund Operating
Expenses for each class set
forth on page 2, (2) a 5%
annual return throughout the
periods and (3) redemption at
the end of the period
(including any applicable CDSC
for Class B and Class C
shares):
Class A...................... $63 $86 $110 $179
Class B...................... $62 $87 $114 $227*
Class C...................... $32 $67 $115 $248
Class D...................... $65 $93 $122 $205
An investor would pay the
following expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A...................... $63 $86 $110 $179
Class B...................... $22 $67 $114 $227*
Class C...................... $22 $67 $115 $248
Class D...................... $65 $93 $122 $205
</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
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
made 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
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or
3
<PAGE>
the "Manager") or its affiliate, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing SM System
are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling
different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------------------
B CDSC for a period of four 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 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(footnotes continued on next page)
4
<PAGE>
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D share purchases of $1,000,000 or more will not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC for one
year. Such CDSC may be waived in connection with certain fee-based
programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs may be modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include participants in certain fee-based programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries"
when used herein with respect to ML & Co. includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and their directors and employees and to
members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over, and waived for purchases of Class A shares in
connection with certain fee-based programs. Purchases of $1,000,000
or more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based
programs. Sales charges are also reduced under a right of
accumulation that takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares and a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; 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
5
<PAGE>
imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans 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 of 1.0% if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor 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. The maximum initial sales charge is 5.25%, which is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may be subject to a 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for the Class D shares is the
same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B." See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares."
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 or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may 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
6
<PAGE>
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.
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 Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended October 31, 1996, 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 Fund's audited financial statements:
<TABLE>
<CAPTION>
CLASS A SHARES
----------------------------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992 1991 1990 1989 1988+
-------- -------- -------- -------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period..... $ 15.07 $ 15.96 $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84 $ 9.00 $ 8.83
-------- -------- -------- -------- ------- ------- ------- ------- ------
Investment income--net.. .32 .19 .18 .26 .24 .25 .18 .09 .01
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 2.32 .56 1.91 3.08 (1.02) .96 .85 .77 .16
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total from investment
operations.............. 2.64 .75 2.09 3.34 (.78) 1.21 1.03 .86 .17
-------- -------- -------- -------- ------- ------- ------- ------- ------
Less dividends and
distributions:
Investment income--net.. -- -- -- -- (.31) (.29) (.17) -- --
Realized gain on invest-
ments--net.............. (1.04) (1.64) -- -- -- -- -- (.02) --
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total dividends and
distributions........... (1.04) (1.64) -- -- (.31) (.29) (.17) (.02) --
-------- -------- -------- -------- ------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 16.67 $ 15.07 $ 15.96 $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84 $ 9.00
======== ======== ======== ======== ======= ======= ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 18.86% 6.19% 15.07% 31.72% (6.90)% 11.54% 10.39% 9.62% 1.93%#
======== ======== ======== ======== ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.10% 1.12% 1.03% 1.04% 1.09% 1.14% 1.17% 1.34% 1.38%*
======== ======== ======== ======== ======= ======= ======= ======= ======
Investment income
(loss)--net............. 2.04% 1.32% 1.17% 1.50% (2.69)% 2.94% 2.62% 2.25% 10.08%*
======== ======== ======== ======== ======= ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $216,056 $204,713 $236,288 $182,612 $87,865 $83,229 $85,798 $11,381 $ 21
======== ======== ======== ======== ======= ======= ======= ======= ======
Portfolio turnover...... 92.34% 72.16% 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28%
======== ======== ======== ======== ======= ======= ======= ======= ======
Average commission rate
paid##.................. $ .0046 -- -- -- -- -- -- -- --
======== ======== ======== ======== ======= ======= ======= ======= ======
</TABLE>
- ----
* Annualized.
** Total Investment returns exclude the effects of sales loads.
+ Class A Shares commenced operations on October 26, 1988.
++ Based on average shares outstanding during the period.
# Aggregate total investment returns.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS B SHARES
-----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992 1991 1990 1989 1988 1987+
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 14.20 $ 15.28 $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72 $ 9.00 $ 9.29 $ 10.00
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
Investment income--
net.................... .14 .04 .02 .16 .12 .13 .12 .08 .22 .05
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.17 .52 1.83 2.97 (.98) .94 .78 .66 .41 (.76)
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 2.31 .56 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....... (1.04) (1.64) -- -- -- -- -- (.02) (.74) --
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (1.04) (1.64) -- -- (.25) (.17) (.11) (.02) (.92) --
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 15.47 $ 14.20 $ 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........ 17.61% 5.12% 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.......... 2.13% 2.15% 2.06% 2.08% 2.12% 2.17% 2.20% 2.37% 2.68% 2.04%*
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
Expenses............... 2.13% 2.15% 2.06% 2.08% 2.12% 2.17% 2.20% 2.37% 2.30% 2.13%*
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
Investment income
(loss)--net............ 1.00% .27% .14% .51% (3.37)% 1.94% 1.32% .83% 1.36% .68%*
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $738,535 $795,469 $1,086,480 $765,279 $447,104 $484,031 $498,600 $201,484 $261,178 $436,503
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover..... 92.34% 72.16% 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28% 157.47%
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
Average commission rate
paid##................. $ .0046 -- -- -- -- -- -- -- -- --
======== ======== ========== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B Shares commenced operations on January 30, 1987.
++ Based on average shares outstanding during the period.
# Aggregate total investment returns.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
-------------------------------------- ---------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
OCTOBER 31, OCTOBER 21, 1994+ OCTOBER 31, OCTOBER 21, 1994+
-------------------- TO OCTOBER 31, -------------------- TO OCTOBER 31,
1996++ 1995++ 1994++ 1996++ 1995++ 1994++
--------- --------- ----------------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 14.19 $ 15.28 $15.08 $ 15.02 $ 15.96 $15.75
--------- -------- ------ --------- --------- ------
Investment income
(loss)--net............. .15 .01 (.01) .28 .20 .00+++
Realized and unrealized
gain on investments and
foreign currency
transactions--net....... 2.15 .54 .21 2.31 .50 .21
--------- -------- ------ --------- --------- ------
Total from investment
operations.............. 2.30 .55 .20 2.59 .70 .21
--------- -------- ------ --------- --------- ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment income--net.. -- -- -- -- -- --
Realized gain on
investments--net........ (1.04) (1.64) -- (1.04) (1.64) --
--------- -------- ------ --------- --------- ------
Total dividends and
distributions........... (1.04) (1.64) -- (1.04) (1.64) --
--------- -------- ------ --------- --------- ------
Net asset value, end of
period.................. $ 15.45 $ 14.19 $15.28 $ 16.57 $ 15.02 $15.96
========= ======== ====== ========= ========= ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 17.55% 5.04% 1.33%# 18.57% 5.85% 1.33%#
========= ======== ====== ========= ========= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.15% 2.18% 2.86%* 1.34% 1.38% 2.11%*
========= ======== ====== ========= ========= ======
Investment income
(loss)--net............. 1.04% .11% (2.47)%* 1.83% 1.37% (1.70)%*
========= ======== ====== ========= ========= ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $ 15,917 $ 9,668 $ 462 $ 114,020 $ 104,493 $ 340
========= ======== ====== ========= ========= ======
Portfolio turnover...... 92.34% 72.16% 82.47% 92.34% 72.16% 82.47%
========= ======== ====== ========= ========= ======
Average commission rate
paid ##................. $ .0046 -- -- $ .0046 -- --
========= ======== ====== ========= ========= ======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ Amount is less than $.01 per share.
# Aggregate total investment returns.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
10
<PAGE>
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 that could affect investments in those
countries.
Most of the securities held by the Fund will not be registered with the
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>
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 or relatively early development of 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 events over the last decade 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, reporting
standards vary widely. 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. 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 of 1940, as amended (the "Investment Company Act") to
hold Fund assets. Therefore, the Fund may need to seek an exemptive order from
the Commission prior to investing in certain Eastern European countries. There
is no assurance that the 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>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. 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, 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 still are in relatively
early stages, 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, the level of development of
organized stock markets within Eastern Europe varies from country to country.
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. Over the last
several years, 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>
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.
14
<PAGE>
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 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 liquid 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 that 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.
15
<PAGE>
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
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
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) that 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
16
<PAGE>
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.
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 defined 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 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 that 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 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% 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
17
<PAGE>
"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 Commission staff of its position.
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 over-the-counter ("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
18
<PAGE>
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 Conduct Rules 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 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. 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 be derived from
gains from the sale or other disposition of securities held for less than three
months.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the underlying
security to the purchaser during the term of the agreement. In all instances,
the Fund takes possession of the underlying securities when investing in
repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its
total assets in repurchase agreements or purchase and sale contracts maturing
in more than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. 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.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. During the period of
such a loan, the Fund receives the income on the loaned securities and receives
either the income on the collateral or other compensation, i.e., negotiated
loan premium or fee for entering
19
<PAGE>
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 falls below the market value of the borrowed securities.
Warrants. The Fund may invest 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's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies that are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities). In addition, the
Fund has adopted non-fundamental restrictions which may be changed by the Board
of Trustees without shareholder approval. As a non-fundamental policy, the Fund
may not 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, including to meet redemptions or to settle securities
transactions and to exercise subscription rights. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging or borrowing increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities that
cannot readily be resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
total assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation securities that are not registered under the Securities Act of 1933,
as amended (the "Securities Act"), but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Fund's Board of Trustees continuously determines, based on
the trading markets for the specific Rule 144A security, that such security 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 has determined that securities which are freely tradeable
in their primary market offshore should be deemed liquid. The Board, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
20
<PAGE>
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 of the Manager and its affiliate, FAM; President
and Director of Princeton Services, Inc.; Executive Vice President of ML & Co.;
and 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.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., 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 its affiliate, FAM, acts as the investment
adviser to more than 130 registered investment companies. The Manager also
offers portfolio management and portfolio analysis services to individual and
institutional accounts. As of January 31, 1997, the Manager and FAM had a total
of approximately $239.8 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
21
<PAGE>
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 additional investment research and analysis required
in connection with investing internationally. For the fiscal year ended October
31, 1996, the Manager received a fee of $7,971,953 (based on average net assets
of approximately $1.1 billion).
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 ML & Co. 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, 1996,
the fee paid by the Manager to MLAM U.K. pursuant to such arrangement
aggregated $1,584,850 (based on average net assets of approximately $1.1
billion).
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 the day-to-day management of the Fund's investment portfolio
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, 1996, the amount of such reimbursement
was $161,152. For the fiscal year ended October 31, 1996, the ratio of total
expenses to average net assets for each class of shares was as follows: Class
A, 1.10%; Class B, 2.13%; Class C, 2.15%; and Class D, 1.34%.
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 that incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities
22
<PAGE>
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security 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
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
transfer agency, dividend disbursing agency and shareholder servicing agency
agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an
annual fee of up to $11.00 per Class A or Class D account and up to $14.00 per
Class B or Class C account and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. The term
"account" includes a shareholder account maintained directly by the Transfer
Agent and any other account representing the beneficial interest of a person
in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended October 31, 1996, the total fee paid by the Fund to the Transfer
Agent was $2,103,120.
PURCHASE OF SHARES
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
Pricing SM System, as described below. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange (the "NYSE") (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 NYSE on that day, provided
the Distributor in turn receives the order from the securities dealer prior to
30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE on that day, such orders shall be deemed
received on the next business day. The Fund or the Distributor may suspend the
continuous offering of the Fund's shares of any class at any time in response
to conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Any order may be rejected by the Distributor
or the Fund. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale of
shares to such customers. Purchases directly through the Transfer Agent are
not subject to the processing fee.
23
<PAGE>
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM 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 CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing SM System
is set forth under "Merrill Lynch Select Pricing SM 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund, and accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. 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".
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.
24
<PAGE>
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>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during the after approximately
first year, decreasing 1.0% eight years(/5/)
annually to 0.0%(/4/)
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs 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 "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if
the initial sales charge is waived, instead may be subject to a 1.0% CDSC
if redeemed within one year. A 0.75% sales charge for 401(k) purchases
over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
25
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES 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 and on Class A purchases in connection with certain fee-
based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. A sales charge of 0.75% will
be charged on purchases of $1,000,000 or more of Class A or Class D shares
by certain employer sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended October 31, 1996, the Fund sold 3,553,169 of its Class A
shares for aggregate net proceeds to the Fund of $55,452,673. The gross sales
charges for the sale of its Class A shares for that year were $57,344, of which
$4,552 and $52,792 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemption within one year of purchase of Class A shares purchased subject
to a front-end sales charge waiver. During the fiscal year ended October 31,
1996, the Fund sold 10,577,168 of its Class D shares for aggregate net proceeds
to the Fund of $162,480,079. The gross sales charges for the sale of its Class
D shares for that year were $111,959 of which $7,829 and $104,130 were received
by the Distributor and Merrill Lynch, respectively. During such year, the
Distributor received no CDSCs with respect to redemption within one year of
purchase of Class D shares purchased subject to a front-end sales charge
waiver.
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 of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares of the Fund at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMASM
26
<PAGE>
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee and purchases made in connection with certain fee-
based programs. Class A shares are also offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain
persons who acquired shares of certain MLAM-advised closed-end funds in their
initial offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLAM-
advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans and to Employee Access
AccountsSM available through qualified employers which provide employer
sponsored retirement and savings plans that are eligible to purchase such
shares at net asset value. Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, subject to
certain conditions, Class A and Class D shares are offered at net asset value
to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are also offered at net asset value without 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
BlueprintSM Program.
27
<PAGE>
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
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 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. 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 Sales Charges" below. 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 that are
redeemed within four years after purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the
28
<PAGE>
dollar amount subject thereto. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE 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, 1996, the Distributor received CDSCs of
$1,494,280 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
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 (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans and in connection with
certain group plans placing orders through the Merrill Lynch BlueprintSM
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 and for any Class B shares that were acquired and held
at the time of the redemption in an Employee Access AccountSM available through
employers providing
29
<PAGE>
eligible 401(k) plans. 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. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year 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. No Class C CDSC will be assessed in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended October 31, 1996, the Distributor
received CDSCs of $5,421 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
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.
30
<PAGE>
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
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.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
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 designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the
31
<PAGE>
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, 1996, the Fund paid the Distributor
$7,419,497 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $741.9
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended October 31, 1996, the Fund paid the
Distributor $116,324 pursuant to the Class C Distribution Plan (based on
average net assets subject to such Class C Distribution Plan of approximately
$11.6 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended October 31, 1996, the Fund paid the
Distributor $272,012 pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$108.8 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based 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, 1995, the last date for which fully allocated accrual
information is available, 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
accrual revenues by approximately $1,844,000 (0.24% of Class B net assets at
that date). As of October 31, 1996, direct cash revenues for the period since
the commencement of operations of Class B shares exceeded direct cash expenses
by $45,536,832 (6.17% of Class B net assets at that date). Similar fully
allocated accrual data for Class C shares is not presented because such
revenues and expenses for the period October 21, 1994 (commencement of
operations) to December 31, 1995 are de minimis. As of October 31, 1996, direct
cash revenues for the period since the commencement of operations of Class C
shares exceeded direct cash expenses by $96,006 (.60% 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 Trustees of the Fund will approve the continuance of the Distribution
Plans
32
<PAGE>
from year to year. However, the Distributor intends to seek annual continuation
of the Distribution Plans. In their review of the Distribution Plans, the
Trustees 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 Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSCs). 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 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, 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 shareholders'
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, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289.
33
<PAGE>
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 Merrill Lynch Financial Data Services,
Inc., 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.
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
NYSE (generally, 4:00 p.m., New York time) 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 NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a charge on the shareholder for transmitting
the notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares to such
customers. Repurchases 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. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
34
<PAGE>
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are 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 BlueprintSM
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 how to change options with respect thereto, can be
obtained from the Fund by calling the telephone number on the cover page hereof
or from the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends 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 or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying
any applicable 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.
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<PAGE>
Shareholders considering transferring a tax-deferred retirement account such as
an IRA from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable 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
U.S. 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 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 or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
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 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 for 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
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<PAGE>
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.
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, without sales charge, at the net asset
value per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend 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.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her 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 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 or her 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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset
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<PAGE>
value. Under specified circumstances, participants in certain Programs may
deposit other classes of shares which will be exchanged for Class A shares.
Initial or deferred sales charges otherwise due in connection with such
exchanges may be waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in a Program may result in
the redemption of shares held therein or the automatic exchange thereof to
another class at net asset value, which may be shares of a money market fund.
In addition, upon termination of participation in a Program, shares that have
been held for less than specified periods within such Program may be subject to
a fee based upon the current value of such shares. These Programs also
generally prohibit such shares from being transferred to another account at
Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in
limited circumstances (which may also involve an exchange as described above),
such shares must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and distribution
and account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
Merrill Lynch Investor Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
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
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<PAGE>
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 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 may be 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 Federal tax requirements 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 charge.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Capital gains distributions will be
automatically reinvested in shares unless the shareholder elects to receive
such distributions 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."
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<PAGE>
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's ordinary income for tax purposes
available for distribution to shareholders. If such losses exceed other
ordinary income during a taxable year, (a) the Fund would not be able to make
any ordinary income dividend distributions, and (b) all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary income dividend, thereby reducing each shareholder's tax basis in
the Fund shares for Federal income tax purposes and resulting in a capital gain
for any shareholder who received such a distribution greater than the
shareholders' tax basis in Fund shares (assuming the shares were held as a
capital asset). For a detailed discussion of the Federal tax considerations
relevant to foreign currency transactions, see "Additional Information--Taxes."
If in any fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed annually.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.
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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, 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).
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 dividends 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 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
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and entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. 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.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming 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.
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If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
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 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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time) on each day during which the NYSE is open for trading
or on such other day that there is sufficient trading in portfolio securities
that the net asset value of the Fund's shares may be materially affected. The
net asset value per share 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,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily.
The per share net asset value of 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, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; in addition, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of
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<PAGE>
dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities which are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Any assets or liabilities
initially expressed in terms of foreign currencies are translated into U.S.
dollars at the prevailing market rates as obtained from one or more dealers.
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.
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. 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". Shares issued are fully
paid and non-assessable and have no preemptive rights. Shares have the
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
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<PAGE>
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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch Financial
Consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
----------------
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.
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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 (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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
45
<PAGE>
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 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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the 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.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
- - - .....................................
This form when completed should be Dealer Name and Address
mailed to:
By: .................................
Merrill Lynch EuroFund Authorized Signature of Dealer
c/o Merrill Lynch Financial Data
Services, Inc. [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch Code F/C No. ...............
Jacksonville, Florida 32232-5289 F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
46
<PAGE>
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
(Please Print)
[ ]
Name of Owner.......................... Social Security Number or
First Name Initial Last Name Taxpayer Identification
Number
Address................................
....................................... Account Number ....................
(Zip Code) (if existing account)
Name of Co-Owner (if any)..............
Address................................
.......................................
- -------------------------------------------------------------------------------
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
- ---------
(month) or as soon as possible thereafter.
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 .......................................................................
..........................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
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)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
47
<PAGE>
MERRILL LYNCH EUROFUND -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank To...............................Bank
account for investment in Merrill (Investor's Bank)
Lynch EuroFund as indicated below:
Bank Address.........................
Amount of each check or ACH debit
$................................. City...... State...... Zip Code......
Account No. ...................... As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits
the 20th of each month beginning drawn on my account by and payable
or as soon as possible to Merrill Lynch Financial Data
- ------- Services, Inc. I agree that your
(Month) thereafter. rights in respect to each such debit
I agree that you are preparing shall be the same as if it were a
these ACH debits voluntarily at my check drawn on you and signed
request and that you shall not be personally by me. This authority is
liable for any loss arising from any to remain in effect until revoked by
delay in preparing or failure to me in writing. Until you receive
prepare any such debit. If I change such notice, you shall be fully
banks or desire to terminate or protected in honoring any such
suspend this program, I agree to debit. I further agree that if any
notify you promptly in writing. I such debit be dishonored, whether
hereby authorize you to take any with or without cause and whether
action to correct erroneous ACH intentionally or inadvertently, you
debits of my bank account or shall be under no liability.
purchases of fund shares including
liquidating shares of the Fund and ............ .....................
crediting my bank account. I further Date Signature of
agree that if a debit is not honored Depositor
upon presentation, Merrill Lynch
Financial Data Services, Inc. is ............ .....................
authorized to discontinue immediately Bank Signature of Depositor
the Automatic Investment Plan and to Account (If joint account,
liquidate sufficient shares held in Number both must sign)
my account to offset the purchase
made with the dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
48
<PAGE>
[This page is intentionally left blank.]
49
<PAGE>
[This page is intentionally left blank.]
50
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION 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 PricingSM 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................................................... 20
Management of the Fund..................................................... 21
Trustees.................................................................. 21
Management and Advisory Arrangements...................................... 21
Code of Ethics............................................................ 22
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............ 28
Distribution Plans........................................................ 31
Limitations on the Payment of Deferred Sales Charges...................... 33
Redemption of Shares....................................................... 33
Redemption................................................................ 33
Repurchase................................................................ 34
Reinstatement Privilege--Class A and Class D Shares....................... 35
Shareholder Services....................................................... 35
Investment Account........................................................ 35
Exchange Privilege........................................................ 36
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 37
Systematic Withdrawal Plans............................................... 37
Automatic Investment Plans................................................ 37
Fee-Based Programs........................................................ 37
Performance Data........................................................... 38
Additional Information..................................................... 39
Dividends and Distributions............................................... 39
Taxes..................................................................... 40
Determination of Net Asset Value.......................................... 42
Organization of the Fund.................................................. 43
Shareholder Reports....................................................... 44
Shareholder Inquiries..................................................... 44
Authorization Form......................................................... 45
</TABLE>
Code #10475-0297
[LOGO] MERRILL LYNCH
Merrill Lynch
EuroFund
[ART]
PROSPECTUS
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be retained for future reference.
<PAGE>
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 that seeks 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.
----------------
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
24, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing 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 24, 1997.
<PAGE>
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. (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. 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, 1995 and 1996, the Fund's portfolio turnover rate was 72.16% and 92.34%,
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
2
<PAGE>
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.
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 or she may be
required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation
as a writer. If an option expires unexercised, the writer realizes a gain in
the amount of the premium. Such a gain, of course, may be offset by a decline
in the market value of the underlying security during the option period. If a
call option is exercised, the writer realizes a gain or loss from the sale of
the underlying security.
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 liquid 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, 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
3
<PAGE>
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.
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 prices 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 ("OTC") 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
hedge its portfolio effectively. 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
4
<PAGE>
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 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 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 and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions
which (i) have, in the opinion of the Manager, substantial capital relative to
the Fund's exposure, or (ii) have provided the Fund with a third-party guaranty
or other credit enhancement. Under a repurchase agreement or a purchase and
sale contract, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period although it may be affected by currency fluctuations. Such
agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed
5
<PAGE>
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a repurchase agreement,
as a purchaser, 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; the Fund does
not have the right to seek additional collateral in the case of purchase and
sale contracts. In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities are
not owned by the 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 or
under a purchase and sale contract, instead of the contractual fixed rate of
return, the rate of return to the Fund shall be dependent upon intervening
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
6
<PAGE>
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.
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.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. To the extent the Fund
holds high yield securities, factors adversely affecting the market value of
high yield securities are likely to adversely affect the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default on a portfolio holding or participate
in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its 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.
7
<PAGE>
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 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
8
<PAGE>
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. Securities purchased in accordance with Rule
144A under the Securities Act and determined to be liquid by the Fund's
Board of Trustees are not subject to the limitations set forth in this
investment restriction.
d. 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 Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of 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% 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 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, 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
9
<PAGE>
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 is 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 (64)--President and Trustee(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (70)--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 (70)--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 (65)--Trustee(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania, from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (59)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's, Inc. (real estate company).
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<PAGE>
Edward D. Zinbarg (62)--Trustee(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of The Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
Alan J. Albert (49)--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 (35)--Vice President(1)(2)--Managing Director of European
Equities for MLAM U.K. since 1993; Vice President of the Manager since 1990
and associated therewith since 1987.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990.
Gerald M. Richard (47)--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 (45)--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, 1997, 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 and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Fund pays each Trustee not affiliated with the Manager (each a "non-
affiliated Trustee") a fee of $3,500 per year plus $500 per meeting attended,
together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Trustees, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. Fees and expenses paid to the non-affiliated Trustees
aggregated $37,812 for the fiscal year ended October 31, 1996.
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<PAGE>
The following table sets forth for the fiscal year ended October 31, 1996,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Trustees:
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM FUND AND
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............ $8,500 None $268,933
Edward H. Meyer......... $6,500 None $227,933
Charles C. Reilly....... $7,500 None $293,833
Richard R. West......... $7,500 None $269,833
Edward D. Zinbarg....... $7,500 None $127,333
</TABLE>
- --------
(1) In addition to the Fund, the Trustees serve on the boards of MLAM/FAM
Advised Funds as follows: Mr. Cecil (36 registered investment companies
consisting of 36 portfolios); Mr. Meyer (36 registered investment
companies consisting of 36 portfolios); Mr. Reilly (41 registered
investment companies consisting of 54 portfolios); Mr. West (41 registered
investment companies consisting of 54 portfolios) and Mr. Zinbarg (18
registered investment companies consisting of 18 portfolios).
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 other investment advisory clients for which
the Manager or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Manager for the Fund or other funds
for which it acts as investment adviser or for 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 compensation at the annual rate
of 0.75% of the average daily net assets of the Fund. For the fiscal years
ended October 31, 1994, 1995 and 1996, the total management fees paid by the
Fund to the Manager aggregated $10,148,764, $8,514,893 and $7,971,953,
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, 1994, 1995 and 1996, the fees paid by MLAM to MLAM U.K. pursuant
to such arrangement aggregated $2,006,345, $1,702,979 and $1,584,850,
respectively.
12
<PAGE>
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,
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. For the fiscal years ended October 31, 1994,
1995 and 1996, the amounts of such reimbursement were $97,681, $277,433 and
$161,152, 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."
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
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,
13
<PAGE>
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 registered
investment companies advised by the Manager or its affiliate, FAM. Funds
advised by the Manager or FAM that utilize the Merrill Lynch Select PricingSM
System 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
For the fiscal years ended October 31, 1994, 1995 and 1996, the Fund sold its
Class A shares through the Distributor and Merrill Lynch, as a dealer. 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 A shares for the fiscal year ended October 31, 1995, were $55,516, of
which the Distributor received $3,461 and Merrill Lynch received $52,055. The
gross sales charges for the sale of Class A shares for the fiscal year ended
October 31, 1996, were $57,344, of which the Distributor received $4,552 and
Merrill Lynch received $52,792.
For the period October 21, 1994 (commencement of operations) to October 31,
1994 and for the fiscal years ended October 31, 1995 and 1996, the Fund sold
its Class D shares through the Distributor and Merrill Lynch, as a dealer. The
gross sales charges for the sale of Class D shares for the period October 21,
1994 (commencement of operations) to October 31, 1994, were $10,279, of which
the Distributor received $679 and Merrill Lynch received $9,600. The gross
sales charges for the sale of Class D shares for the fiscal year ended October
31, 1995, were $144,287, of which the Distributor received $8,688 and Merrill
Lynch received $135,599. The gross sales charges for the sale of Class D shares
for the fiscal year ended October 31, 1996, were $111,959, of which the
Distributor received $7,829 and Merrill Lynch received $104,130.
For the fiscal years ended October 31, 1994, 1995 and 1996, the Distributor
received no contingent deferred sales charges (CDSCs) with respect to
redemptions within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver. For the period October 21, 1994
(commencement of operations) to October 31, 1994 and for the fiscal year ended
October 31, 1996, the Distributor received no CDSCs with respect to redemption
within one year after purchase of Class D shares purchased subject to a front-
end sales charge waiver. For the fiscal year ended October 31, 1995 the
Distributor received CDSCs of $392 with respect to redemptions within one year
after purchase of Class D shares purchased subject to a front-end sales charge
waiver, all of which were paid to Merrill Lynch.
14
<PAGE>
The term "purchase", as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account (including a pension, profit-
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code of 1986, as amended (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 of shares of the Fund by employees or by employers on
behalf of employees, by means of a payroll deduction plan or otherwise.
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 its
affiliate, 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 investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares
15
<PAGE>
pursuant to this option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or Contingent Deferred Sales Charge
(each as defined in the eligible fund's prospectus) is applicable. Purchase
orders from eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender offer
terminates and will be effected at the net asset value of the designated class
of the Fund on such day.
REDUCED INITIAL SALES CHARGES--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 but, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A 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
16
<PAGE>
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 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 BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM 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 .50% 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 or savings plans
(see "Employer Sponsored Retirement or Savings Plans and Certain Other
Arrangements" 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.
TMA SM Managed Trusts. Class A shares are also offered at net asset value to
TMA SM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
17
<PAGE>
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts SM available through qualified
employers that provide employer-sponsored retirement or savings plans that are
eligible to purchase such shares at net asset value. The minimum initial
purchase for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
Purchase Privilege of Certain Persons. Trustees of the Fund, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries" when used herein with respect to ML &
Co. includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund 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
the other mutual funds and that such shares have been outstanding for a period
of no less than six months; and second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or
company acquired in a tax-free transaction may, in appropriate cases, be
adjusted to reduce possible adverse tax consequences to the Fund which might
result from an acquisition of assets having net unrealized appreciation which
is
18
<PAGE>
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).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Trustees shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the 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
19
<PAGE>
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 Conduct Rules 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.
20
<PAGE>
The following table sets forth comparative information as of October 31,
1996, with respect to Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule, and with respect to Class B shares, the Distributor's voluntary
maximum, for the periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1996
------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD JANUARY 30, 1987
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1996:
Under NASD Rule as
Adopted................ $1,853,906 $115,869 $52,097 $167,966 $ 62,277 $105,689 $ 5,538
Under Distributor's
Voluntary Waiver....... $1,853,906 $115,869 $ 9,270 $125,139 $ 62,277 $ 62,862 $ 5,538
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1996:
Under NASD Rule as
Adopted................ $ 12,375 $ 773 $ 64 $ 837 $ 120 $ 717 $ 119
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. 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 CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended by the Fund for a period of up to seven days.
Suspensions of more than seven days may not be made except (1) for any period
(a) during which the New York Stock Exchange ("NYSE") is closed other than
customary weekend and holiday closings or (b) during which trading on the NYSE
is restricted; (2) for any period during which an emergency exists as a result
of which (a) disposal by the Fund of securities owned by it is not reasonably
practicable or (b) it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (3) for such other periods as the
Commission may by order permit for the protection of security holders of the
Fund. The Commission shall by rules and regulations determine the conditions
under which (i) trading shall be deemed to be restricted and (ii) an emergency
shall be deemed to exist within the meaning of clause (2) above.
21
<PAGE>
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in 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, 1994, 1995 and 1996, with respect to redemptions of Class B shares,
the Distributor received CDSCs of $1,866,124, $2,352,273 and $1,494,280,
respectively, all of which were paid to Merrill Lynch. For the fiscal period
October 21, 1994 to October 31, 1994, the Distributor received no CDSCs, with
respect to redemptions of Class C shares. For the fiscal years ended October
31, 1995 and 1996, with respect to redemptions of Class C shares, the
Distributor received CDSCs of $2,495 and $5,421, respectively, all of which
were paid to Merrill Lynch.
Merrill Lynch BlueprintSM 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 BlueprintSM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
Employee Access AccountsSM. The CDSC is also waived for any Class B shares
that were acquired and held at the time of redemption by Employee Access
AccountsSM available through employers that provide eligible 401(k) plans. The
minimum initial purchase for such accounts is $500, except that the initial
minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
22
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Certain Other
Investment Practices--Portfolio Transactions" in the Prospectus.
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, 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. For the
fiscal year ended October 31, 1995, the Fund paid total brokerage commissions
of $2,266,109, of which $169,311, or 7.5%, was paid to Merrill Lynch for
effecting 8.9% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions. For the fiscal year ended October 31, 1996, the
Fund paid total brokerage commissions of $2,507,682, of which $194,558 or 7.8%
was paid to Merrill Lynch for effecting 10.5% 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
Conduct Rules 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.
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
OTC
23
<PAGE>
markets in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, as well as GDRs traded in the United
States, will be subject to negotiated commission rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and any of its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
See "Investment Objective and Policies--Investment Restrictions."
The Trustees have considered the possibility of seeking to recapture for the
benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering
all factors deemed relevant, the 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 U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the 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 NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is
open for trading. The NYSE is not open on New Year's Day, 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.
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Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Manager and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of Class B,
Class C and Class D shares generally will be lower than the per share net asset
value of Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares; moreover,
the per share net asset value of Class B and Class C shares generally will be
lower than the per share net asset value of Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price.
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 BlueprintSM Program. Full details as to each such service, copies
of the various plans described below and instructions as to how to participate
in the various services or plans, or how to change options with respect
thereto, can be obtained from the Fund, the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors.
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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
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 Fund's transfer
agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (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. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at Merrill
Lynch for those shares.
AUTOMATIC 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.
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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 NYSE on the ex-dividend date of such
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 PLANS--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 $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 on the NYSE (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 net asset
value next determined after the close of business on the NYSE on the preceding
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 and capital gains distributions, 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.
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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) or
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) or CBA (R) Systematic
Redemption Program, eligible shareholders should contact their Merrill Lynch
Financial Consultant.
EXCHANGE PRIVILEGE
U.S. 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 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 or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in his
or her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second 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 for 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 as follows: Class A shares
may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Tax-Exempt Institutional Fund and Merrill Lynch Treasury Fund.
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
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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 certain 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, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B 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 for 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 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 certain
money market funds 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 received in such exchange will be aggregated with previous
holding periods for purposes of reducing the CDSC, or with respect to Class B
shares, towards satisfaction of the conversion period. 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
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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 would not incur a CDSC.
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
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 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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, 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).
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 dividends 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.
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Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
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 Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to Class
A, Class B, Class C and Class D shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe.
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
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
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.
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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 minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
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 and distribute 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; in such case, if the issuer of such high yield securities is a
domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
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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 all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on 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.
33
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, in advertisements or information furnished to present
or prospective shareholders. Total return 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, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
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 CLASS D
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
October 31,
1996........... 12.62% $1,126.20 13.61% $1,136.10 16.55% $1,165.50 12.35% $1,123.50
Five Years Ended
October 31,
1996........... 11.03% $1,687.60 11.10% $1,692.40
Inception
(October 26,
1988) to
October 31,
1996........... 11.08% $2,321.80
Inception
(January 30,
1987) to
October 31,
1996........... 8.43% $2,202.20
Inception
(October 21,
1994) to
October 31,
1996........... 11.69% $1,251.10 9.64% $1,205.00
</TABLE>
(Table continues on following page)
34
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
October 31,
1996........... 18.86% $1,188.60 17.61% $1,176.10 17.55% $1,175.50 18.57% $1,185.70
Year Ended
October 31,
1995........... 6.19% $1,061.90 5.12% $1,051.20 5.04% $1,050.40 5.85% $1,058.50
Year Ended
October 31,
1994........... 15.07% $1,150.70 13.78% $1,137.80
Inception
(October 21,
1994) to
October 31,
1994........... 1.33% $1,013.30 1.33% $1,013.30
Year Ended
October 31,
1993........... 31.72% $1,317.20 30.39% $1,303.90
Year Ended
October 31,
1992........... (6.90)% $ 931.00 (7.73)% $ 922.70
Year Ended
October 31,
1991........... 11.54% $1,115.40 10.35% $1,103.50
Year Ended
October 31,
1990........... 10.39% $1,103.90 9.19% $1,091.90
Year Ended
October 31,
1989........... 9.62% $1,096.20 8.28% $1,082.80
Year Ended
October 31,
1988........... 7.35% $1,073.50
Inception
(October 26,
1988) to
October 31,
1988........... 1.93% $1,019.30
Inception
(January 30,
1987) to
October 31,
1987........... (7.10)% $ 929.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 26,
1988) to
October 31,
1996........... 132.18% $2,321.80
Inception
(January 30,
1987) to
October 31,
1996........... 120.22% $2,202.20
Inception
(October 21,
1994) to
October 31,
1996........... 25.11% $1,251.10 20.50% $1,205.00
</TABLE>
- --------
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
waiver of the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.
35
<PAGE>
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. 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. Except in limited circumstances, no amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Fund.
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, 1996, 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.................. $216,055,527 $738,535,164 $15,916,602 $114,020,513
============ ============ =========== ============
Number of Shares
Outstanding................ 12,960,165 47,730,301 1,030,257 6,879,714
============ ============ =========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............... $ 16.67 $ 15.47 $ 15.45 $ 16.57
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price (5.54% of
net asset value per
share))*................... .92 ** ** .92
------------ ------------ ----------- ------------
Offering Price.............. $ 17.59 $ 15.47 $ 15.45 $ 17.49
============ ============ =========== ============
</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
and "Redemption of Shares--Deferred Sales Charges--Class B and Class C
Shares" herein.
36
<PAGE>
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 approval by the independent Trustees 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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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 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
37
<PAGE>
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on January 31, 1997.
----------------
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.
38
<PAGE>
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, 1996,
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, 1996 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, 1996, 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 10, 1996
39
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Croatia
Banking 90,000 ++Zagrebacka Banka (GDR)* $ 1,234,184 $ 1,743,750 0.2%
Pharmaceuticals 75,000 ++Pliva D.D. (GDR)* 2,255,760 3,693,750 0.3
Total Investments in Croatia 3,489,944 5,437,500 0.5
Czech Republic
Banking 44,000 ++Komercni Banka A.S. 1,148,451 1,062,193 0.1
Investment Fund 25,520 ++Zivnobanka--Investicni Fond 424,345 467,038 0.0
Mining 36,660 ++Severoceske Doly 802,181 927,273 0.1
Telecommunications 27,500 ++SPT Telecom A.S. 2,535,302 2,944,967 0.3
Utility 55,000 Ceske Energeticke Zavody 1,659,778 1,616,203 0.1
Total Investments in the Czech Republic 6,570,057 7,017,674 0.6
Denmark
Textiles 137,502 ++Carli Gry International A/S 3,862,756 6,222,131 0.6
Total Investments in Denmark 3,862,756 6,222,131 0.6
Finland
Metals & Mining 405,100 Outokumpu OY 6,167,229 6,841,999 0.6
Paper & Forest 2,003,700 ++Enso-Gutzeit OY 'R' (Ordinary) (Registered) 14,186,087 15,704,365 1.4
Products 1,959,500 ++Metsa Serla OY (Class B) 14,945,500 13,627,467 1.3
956,252 ++UPM-Kymmene Corp. (c) 19,109,699 19,423,143 1.8
------------ -------------- ------
48,241,286 48,754,975 4.5
Total Investments in Finland 54,408,515 55,596,974 5.1
France
Automobiles & 70,682 Peugeot S.A. 9,520,592 7,375,681 0.7
Equipment 96,600 Sommer Allibert S.A. 2,862,214 2,685,540 0.2
------------ -------------- ------
12,382,806 10,061,221 0.9
Banking 87,750 Societe Generale de France S.A. 9,244,244 9,465,964 0.9
Communication 115,350 Alcatel Alsthom Cie Generale d'Electricite S.A. 10,954,707 9,846,235 0.9
Equipment
Construction 108,150 Bouygues S.A. 10,968,837 10,607,923 1.0
Electronics 213,960 ++SGS-Thomson Microelectronics N.V. 10,037,342 11,347,696 1.0
Financial Services 201,300 Compagnie de Suez S.A. 7,592,048 8,674,210 0.8
150,200 Compagnie Financiere de Paribas S.A. 8,164,002 9,674,576 0.9
48,020 EuraFrance S.A. 13,909,651 21,011,923 1.9
------------ -------------- ------
29,665,701 39,360,709 3.6
Food Manufacturing 37,620 Groupe Danone S.A. 5,976,543 5,155,644 0.5
</TABLE>
40
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
France (concluded)
Insurance 421,465 Assurances Generales de France S.A. (AGF) $ 11,424,808 $ 12,443,111 1.2%
Machinery 177,431 Compagnie de Fives-Lille S.A. 9,488,305 16,083,353 1.5
Metals & Steel 893,378 Usinor-Sacilor 13,251,879 13,266,518 1.2
Oil--Related 169,290 Elf Aquitaine S.A. 12,219,543 13,549,033 1.2
Total Investments in France 135,614,715 151,187,407 13.9
Germany
Automobiles 49,131 Volkswagen AG 18,529,557 19,360,491 1.8
Banking 89,300 Commerzbank AG (Warrants) (a) 2,484,778 2,909,583 0.3
444,600 Deutsche Bank AG (Warrants) (a) 3,812,315 2,409,438 0.2
------------ -------------- ------
6,297,093 5,319,021 0.5
Chemicals 280,965 Bayer AG 8,702,101 10,625,086 1.0
77,016 ++Henkel KGaA 3,295,326 3,425,535 0.3
693,144 Henkel KGaA (Preferred) 28,354,282 31,127,576 2.9
------------ -------------- ------
40,351,709 45,178,197 4.2
Construction 30,480 ++Philipp Holzmann AG 11,661,385 7,554,028 0.7
Engineering 321,783 ++Kloeckner Werke AG 14,985,368 11,228,698 1.0
Metals 19,014 Degussa AG 6,577,431 7,464,355 0.7
Retail Trade 30,485 Karstadt AG 11,896,585 11,127,398 1.0
55,190 Moebel Walther AG (Preferred) 2,067,520 3,414,040 0.3
------------ -------------- ------
13,964,105 14,541,438 1.3
Total Investments in Germany 112,366,648 110,646,228 10.2
Greece
Beverages 55,000 Hellenic Bottling Co. 1,677,636 1,773,820 0.2
Total Investments in Greece 1,677,636 1,773,820 0.2
Hungary
Chemicals 90,000 ++Tisza Vegyi Kombinat Reszvenytarsasag (GDR)* 792,900 778,500 0.1
Food/Grocery 27,500 Pick Szeged Reszvenytarsasag 1,236,392 1,240,095 0.1
Natural Gas 165,000 Mol Re Hung Oil & Gas 1,416,909 1,684,758 0.1
Packaging & Containers 29,500 ++Cofinec S.A. (GDR)* 1,066,831 864,350 0.1
Pharmaceuticals 104,551 Egis 2,206,693 6,455,720 0.6
220,000 Gedeon Richter (GDR)* 3,141,407 11,825,000 1.1
------------ -------------- ------
5,348,100 18,280,720 1.7
Total Investments in Hungary 9,861,132 22,848,423 2.1
</TABLE>
41
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Ireland
Paper & Forest 4,279,417 Jefferson Smurfit Group PLC $ 12,726,781 $ 11,659,507 1.1%
Products
Total Investments in Ireland 12,726,781 11,659,507 1.1
Italy
Construction/ 771,200 Italcementi S.p.A. 5,174,183 4,087,731 0.4
Building Materials
Diversified 13,030,335 ++Compagnie Industriali Riunite S.p.A. (CIR) 12,170,577 6,163,171 0.6
Holdings 22,853,050 ++Montedison S.p.A. 21,738,076 14,954,961 1.4
------------ -------------- ------
33,908,653 21,118,132 2.0
Engineering 1,267,141 ++Filippo Fochi S.p.A. 3,977,851 93,621 0.0
Insurance 8,106,664 Istituto Nazionale delle Assicurazioni (INA) 11,436,541 11,203,550 1.0
US$ 1,755,000 Republic of Italy, INA Convertible,
5% due 6/28/2001 1,755,000 1,755,000 0.2
------------ -------------- ------
13,191,541 12,958,550 1.2
Oil & Gas Producers 2,294,656 Ente Nazionale Idrocarburi S.p.A. (ENI) 9,820,120 10,997,213 1.0
1,400,000 Ente Nazionale Idrocarburi S.p.A. (ENI)
(Warrants) (a) 784,864 1,025,134 0.1
------------ -------------- ------
10,604,984 12,022,347 1.1
Telecommunications 7,347,051 Societa Finanziaria Telefonica S.p.A. (STET) 17,586,684 19,580,504 1.8
Total Investments in Italy 84,443,896 69,860,885 6.5
Netherlands
Automobiles & 152,000 Vredestein Groep N.V. 1,513,329 1,854,861 0.2
Equipment
Chemicals 103,590 Akzo Nobel 12,803,628 13,056,383 1.2
310,870 European Vinyls Corporation International N.V. 11,599,987 8,595,062 0.8
------------ -------------- ------
24,403,615 21,651,445 2.0
Diversified Holdings 141,504 Internatio-Mueller N.V. 2,822,501 3,411,846 0.3
Electrical Equipment 439,875 Philips Electronics N.V. 15,878,566 15,507,000 1.4
112,592 Twentsche Kabel Holding N.V. 4,628,319 5,250,267 0.5
------------ -------------- ------
20,506,885 20,757,267 1.9
Engineering & 114,450 Kondor Wessels Groep N.V. 4,290,980 4,318,104 0.4
Construction
Financial Services 223,135 Aegon N.V. 4,699,202 11,352,090 1.1
261,563 Fortis Amev N.V. 4,457,390 7,817,747 0.7
381,907 International Nederlanden Groep N.V. 6,632,497 11,909,969 1.1
------------ -------------- ------
15,789,089 31,079,806 2.9
Packaging & 160,100 Koninklijke KNP BT N.V. 3,741,528 3,529,883 0.3
Containers
Transportation 202,108 KLM Royal Dutch Airlines N.V. 6,051,185 4,813,514 0.4
Total Investments in the Netherlands 79,119,112 91,416,726 8.4
</TABLE>
42
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Norway
Manufacturing 222,000 Orkla A.S. (Class A) $ 11,216,632 $ 14,204,435 1.3%
Oil & Gas 605,620 Saga Petroleum A.S. (Class B) 7,158,949 9,497,538 0.9
Producers
Total Investments in Norway 18,375,581 23,701,973 2.2
Poland
Automobile 23,926 ++Stomil Olsztyn S.A. 312,543 253,762 0.0
Components
Banking 200,000 Wielkopolsky Bank Kredytowy S.A. 997,075 1,245,685 0.1
Chemicals 387,805 Polifarb Wroclaw S.A. 991,199 1,725,295 0.2
Electrical Equipment 600,000 ++Bydgoska Fabryka Kabli S.A. 1,790,810 4,185,500 0.4
73,203 Elektrobudowa S.A. 928,098 1,133,335 0.1
------------ -------------- ------
2,718,908 5,318,835 0.5
Engineering & 890,000 Elektrim S.A. 3,945,778 7,443,855 0.7
Construction 360,000 Mostostal Zabrze 1,713,606 1,473,467 0.1
------------ -------------- ------
5,659,384 8,917,322 0.8
Metals 110,000 ++Stalexport S.A. 1,887,541 1,378,083 0.1
Total Investments in Poland 12,566,650 18,838,982 1.7
Portugal
Construction/ 300,000 ++Cimpor-Cimentos de Portugal S.A. 6,108,685 6,309,080 0.6
Building Materials
Telecommunications 53,690 Portugal Telecom S.A. 1,227,704 1,396,916 0.1
Total Investments in Portugal 7,336,389 7,705,996 0.7
Russia
Natural Gas 525,000 ++Gazprom (ADR)** 8,268,750 9,843,750 0.9
Total Investments in Russia 8,268,750 9,843,750 0.9
Slovakia
Metals & Mining 27,500 VSZ 389,875 529,711 0.1
121,700 ++Zavod SNP 1,835,272 2,211,593 0.2
------------ -------------- ------
2,225,147 2,741,304 0.3
Pharmaceuticals 25,000 Slovakofarma 1,522,842 2,564,020 0.2
Total Investments in Slovakia 3,747,989 5,305,324 0.5
</TABLE>
43
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Spain
Construction 64,300 Fomento de Construcciones y Contratas S.A. $ 5,323,781 $ 5,225,510 0.5%
Utilities--Electric 135,650 Empresa Nacional de Electricidad S.A. (Endesa) 8,204,809 8,310,531 0.7
Total Investments in Spain 13,528,590 13,536,041 1.2
Sweden
Appliances 285,800 Electrolux AB 13,761,199 15,929,765 1.4
Automobile 215,600 Garphyttan Industrier AB 2,774,235 2,495,332 0.2
Components
Banking 543,146 Sparbanken Sverige AB (Class A) 6,370,723 8,602,328 0.8
Engineering 445,350 SKF AB (Class A) 8,101,991 9,732,388 0.9
468,694 Svedala Industry AB 6,063,936 7,351,783 0.7
------------ -------------- ------
14,165,927 17,084,171 1.6
Financial Services 236,965 Stadshypotek AB 3,981,527 6,225,000 0.6
Insurance 411,950 Skandia Forsakrings AB 9,778,411 11,574,625 1.1
Medical Supplies 276,100 Getinge Industrier AB (Class B) 4,708,228 5,045,610 0.5
Metals & Steel 717,884 Avesta-Sheffield AB 6,417,381 7,215,464 0.7
Paper & Forest 500,700 Mo och Domsjo AB (Class B) 11,769,975 13,801,371 1.3
Products 7,313,800 Rottneros Bruks AB 10,774,603 8,464,917 0.8
961,500 Stora Kopparbergs AB 11,893,653 12,592,553 1.1
------------ -------------- ------
34,438,231 34,858,841 3.2
Pharmaceuticals 303,100 Astra AB 'A' 13,118,109 13,939,877 1.3
Total Investments in Sweden 109,513,971 122,971,013 11.4
Switzerland
Banking 154,433 CS Holding AG (Registered) 15,844,746 15,481,313 1.4
Chemicals 20,248 Clariant AG (Registered) 6,645,306 7,090,176 0.7
Consumer Products 44,461 Societe Suisse pour la Microelectronique et
l'Horlogerie AG (Registered) 6,244,014 6,266,339 0.6
Diversified Holdings 212,567 ++Oerlikon-Buehrle Holding AG 22,632,161 21,055,847 1.9
Pharmaceuticals 19,505 Ciba-Geigy AG 13,001,098 24,114,090 2.2
7,340 Sandoz AG (Registered) 7,986,598 8,514,959 0.8
------------ -------------- ------
20,987,696 32,629,049 3.0
Retail 13,500 Fotolabo S.A. 5,606,913 5,295,379 0.5
Total Investments in Switzerland 77,960,836 87,818,103 8.1
</TABLE>
44
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Turkey
Automobiles 2,790,000 Otosan Otomobil Sanayii A.S. $ 822,460 $ 942,568 0.1%
Banking 37,799,000 Finans Bank A.S. 713,974 697,435 0.0
27,000,000 Yapi Ve Kredi Bankasi A.S. 621,321 701,663 0.1
------------ -------------- ------
1,335,295 1,399,098 0.1
Diversified 5,500,000 ++Alarko Holdings A.S. 1,052,794 971,933 0.1
Holdings 56,700,000 ++Dogan Sirketler Grubu Holding A.S. 905,183 1,075,650 0.1
16,200,000 Net Holding A.S. 510,467 547,297 0.0
------------ -------------- ------
2,468,444 2,594,880 0.2
Food Service 846,000 Usas Ucak Servisi A.S. 1,440,811 1,692,879 0.2
Investment Fund 5,154,000 Koc Yatirim Ve Sanayi Mamulleri Pazarlama S.A. 923,984 897,396 0.1
Machinery 24,206,000 ++Izmir Demir Celik Sanayii A.S. 221,366 196,265 0.0
Paper & Forest 3,693,000 Kartonsan Karton Sanayi Ve Ticaret A.S. 307,167 345,499 0.0
Products
Pharmaceuticals 22,085,000 ++Eczacibasi Ilac Sanayi Ve Ticaret A.S. 974,601 1,033,082 0.1
Printing & 26,160,000 Hurriyet Gazetecilik Ve Matbaacilik A.S. 1,088,850 1,332,474 0.1
Publishing
Textiles 3,931,000 Altinyildiz Mensucat Ve Konfeksiyon
Fabriklari A.S 570,622 602,726 0.1
Utilities--Electric 2,200,000 Cukurova Elektrik A.S. 1,857,082 1,760,915 0.2
Total Investments in Turkey 12,010,682 12,797,782 1.2
United Kingdom
Beverages 617,140 Matthew Clark PLC 6,049,421 3,071,750 0.3
Chemicals 1,495,500 Inspec Group PLC 6,707,529 5,278,699 0.5
Computer/ 248,500 Misys PLC 2,693,600 3,668,207 0.3
Commercial/Office
Diversified Holdings 6,712,250 Hanson PLC (Ordinary) 11,603,340 8,843,698 0.8
Financial Services 997,000 HSBC Holdings PLC 15,115,875 20,920,191 1.9
Food & Beverage 1,240,800 Cadbury Schweppes PLC 10,423,624 10,313,438 1.0
2,222,960 Grand Metropolitan PLC 14,283,698 16,759,542 1.5
981,800 Unilever PLC 18,696,594 20,617,217 1.9
------------ -------------- ------
43,403,916 47,690,197 4.4
Industrials 1,910,200 Tomkins PLC 6,911,157 8,016,399 0.7
Insurance 1,193,300 Prudential Corp. PLC 5,739,834 9,006,341 0.8
Pharmaceuticals 1,968,900 British Biotech PLC 6,781,494 7,109,800 0.7
785,000 Glaxo Wellcome PLC (b) 10,033,870 12,283,595 1.1
------------ -------------- ------
16,815,364 19,393,395 1.8
</TABLE>
45
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Value Percent of
Industry Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
United Kingdom
(concluded)
Real Estate 687,475 Land Securities PLC $ 6,551,222 $ 8,006,647 0.7%
Retail 6,387,680 Asda Group PLC 11,752,819 12,208,485 1.1
2,910,000 Tesco PLC 12,545,688 15,738,575 1.5
------------ -------------- ------
24,298,507 27,947,060 2.6
Shipping & 708,300 Peninsular & Oriental Steam Navigation Co. 5,666,308 6,953,049 0.6
Construction
Telecommunications 1,695,000 Cable & Wireless PLC 11,441,733 13,482,155 1.3
Tobacco 671,225 ++Imperial Tobacco Group PLC 4,763,476 3,925,073 0.4
Utilities--Electric, 458,350 Anglian Water PLC 4,170,424 4,048,348 0.4
Gas & Water 517,175 Severn Trent PLC 5,282,947 5,182,019 0.5
831,000 South West Water PLC 6,526,211 7,853,404 0.7
687,000 Thames Water PLC 5,710,625 6,190,807 0.6
609,500 United Utilities PLC 5,559,936 5,641,138 0.5
529,650 Yorkshire Water PLC 5,154,410 5,324,247 0.5
------------ -------------- ------
32,404,553 34,239,963 3.2
Total Investments in the United Kingdom 200,165,835 220,442,824 20.3
United States
Chemicals 95,889 ++Millennium Chemicals Inc. 2,801,966 1,941,752 0.2
Total Investments in the United States 2,801,966 1,941,752 0.2
<CAPTION>
Face
Amount Short-Term Securities
<S> <S> <C> <S> <C> <C> <C>
Repurchase US$ 28,597,000 SBC Warburg Inc., purchased on 10/31/96
Agreement*** to yield 5.52% to 11/01/1996 28,597,000 28,597,000 2.6
Total Investments in Short-Term Securities 28,597,000 28,597,000 2.6
Total Investments $999,015,431 1,087,167,815 100.2
============
Liabilities in Excess of Other Assets (2,640,009) (0.2)
-------------- ------
Net Assets $1,084,527,806 100.0%
============== ======
<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)Formerly Glaxo Holdings PLC.
(c)Created from merger of Kymmene Corporation and Repola
Ltd.
*Global Depositary Receipts (GDR).
**American Depositary Receipts (ADR).
***Repurchase Agreements are fully collateralized by US
Government & Agency Obligations.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$999,015,431) (Note 1a) $ 1,087,167,815
Cash 1,308
Foreign cash (Note 1b) 12,098,442
Receivables:
Securities sold $ 6,931,948
Dividends 2,904,876
Beneficial interest sold 1,385,142
Interest 34,594 11,256,560
--------------
Prepaid registration fees and other assets (Note 1f) 110,942
---------------
Total assets 1,110,635,067
---------------
Liabilities: Payables:
Securities purchased 22,379,595
Beneficial interest redeemed 1,472,070
Investment adviser (Note 2) 683,515
Distributor (Note 2) 659,538 25,194,718
--------------
Accrued expenses and other liabilities 912,543
---------------
Total liabilities 26,107,261
---------------
Net Assets: Net assets $ 1,084,527,806
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 1,296,016
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 4,773,030
Class C Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 103,026
Class D Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 687,971
Paid-in capital in excess of par 820,868,509
Undistributed investment income--net 13,058,543
Undistributed realized capital gains on investments and foreign
currency transactions--net 155,609,563
Unrealized appreciation on investments and foreign currency
transactions--net 88,131,148
---------------
Net assets $ 1,084,527,806
===============
Net Asset Value: Class A--Based on net assets of $216,055,527 and 12,960,165 shares of
beneficial interest outstanding $ 16.67
===============
Class B--Based on net assets of $738,535,164 and 47,730,301 shares of
beneficial interest outstanding $ 15.47
===============
Class C--Based on net assets of $15,916,602 and 1,030,257 shares of
beneficial interest outstanding $ 15.45
===============
Class D--Based on net assets of $114,020,513 and 6,879,714 shares of
beneficial interest outstanding $ 16.57
===============
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended October 31, 1996
<S> <S> <C> <C>
Investment Income Dividends (net of $4,946,431 foreign withholding tax) $ 31,528,605
(Notes 1d & 1e): Interest 1,890,557
---------------
Total income 33,419,162
---------------
Expenses: Investment advisory fees (Note 2) $ 7,971,953
Account maintenance & distribution fees--Class B (Note 2) 7,419,497
Transfer agent fees--Class B (Note 2) 1,538,128
Custodian fees 1,178,609
Transfer agent fees--Class A (Note 2) 348,943
Account maintenance fees--Class D (Note 2) 272,012
Printing and shareholder reports 241,535
Transfer agent fees--Class D (Note 2) 189,470
Accounting services (Note 2) 161,152
Account maintenance & distribution fees--Class C (Note 2) 116,324
Registration fees (Note 1f) 108,387
Professional fees 94,383
Trustees' fees and expenses 37,812
Transfer agent fees--Class C (Note 2) 26,579
Pricing fees 10,146
Other 20,799
--------------
Total expenses 19,735,729
---------------
Investment income--net 13,683,433
---------------
Realized & Realized gain from:
Unrealized Gain Investments--net 153,272,806
(Loss) on Foreign currency transactions--net 21,489,985 174,762,791
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (16,562,776)
(Notes 1b, 1c, Foreign currency transactions--net 3,455,287 (13,107,489)
1e & 3): -------------- ---------------
Net realized and unrealized gain on investments and
foreign currency transactions 161,655,302
---------------
Net Increase in Net Assets Resulting from Operations $ 175,338,735
===============
</TABLE>
See Notes to Financial Statements.
48
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended October 31,
1996 1995
Increase (Decrease) in Net Assets:
<S> <S> <C> <C>
Operations: Investment income--net $ 13,683,433 $ 5,821,964
Realized gain on investments and foreign currency transactions--net 174,762,791 74,008,615
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (13,107,489) (33,482,794)
-------------- ---------------
Net increase in net assets resulting from operations 175,338,735 46,347,785
-------------- ---------------
Distributions to Realized gain on investments--net:
Shareholders Class A (13,622,154) (22,844,949)
(Note 1g): Class B (56,048,905) (110,166,564)
Class C (685,313) (139,938)
Class D (6,991,081) (1,841,772)
-------------- ---------------
Net decrease in net assets resulting from distributions to shareholders (77,347,453) (134,993,223)
-------------- ---------------
Beneficial Net decrease in net assets derived from beneficial interest transactions (127,806,154) (120,582,541)
Interest -------------- ---------------
Transactions
(Note 4):
Net Assets: Total decrease in net assets (29,814,872) (209,227,979)
Beginning of year 1,114,342,678 1,323,570,657
-------------- ---------------
End of year* $1,084,527,806 $ 1,114,342,678
============== ===============
<FN>
*Undistributed investment income--net (Note 1h) $ 13,058,543 $ --
============== ===============
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.07 $ 15.96 $ 13.87 $ 10.53 $ 11.62
Operating -------- -------- ---------- -------- --------
Performance: Investment income--net .32 .19 .18 .26 .24
Realized and unrealized gain (loss) on invest-
ments and foreign currency transactions--net 2.32 .56 1.91 3.08 (1.02)
-------- -------- ---------- -------- --------
Total from investment operations 2.64 .75 2.09 3.34 (.78)
-------- -------- ---------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.31)
Realized gain on investments--net (1.04) (1.64) -- -- --
-------- -------- ---------- -------- --------
Total dividends and distributions (1.04) (1.64) -- -- (.31)
-------- -------- ---------- -------- --------
Net asset value, end of year $ 16.67 $ 15.07 $ 15.96 $ 13.87 $ 10.53
======== ======== ========== ======== ========
Total Investment Based on net asset value per share 18.86% 6.19% 15.07% 31.72% (6.90%)
Return:* ======== ======== ========== ======== ========
Ratios to Expenses 1.10% 1.12% 1.03% 1.04% 1.09%
Average ======== ======== ========== ======== ========
Net Assets: Investment income (loss)--net 2.04% 1.32% 1.17% 1.50% (2.69%)
======== ======== ========== ======== ========
Supplemental Net assets, end of year (in thousands) $216,056 $204,713 $ 236,288 $182,612 $ 87,865
Data: ======== ======== ========== ======== ========
Portfolio turnover 92.34% 72.16% 82.47% 115.10% 109.95%
======== ======== ========== ======== ========
Average commission paid+++ $ .0046 -- -- -- --
======== ======== ========== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
+++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may affect the rate shown.
</TABLE>
See Notes to Financial Statements.
50
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 14.20 $ 15.28 $ 13.43 $ 10.30 $ 11.41
Operating -------- -------- ---------- -------- --------
Performance: Investment income--net .14 .04 .02 .16 .12
Realized and unrealized gain (loss) on invest-
ments and foreign currency transactions--net 2.17 .52 1.83 2.97 (.98)
-------- -------- ---------- -------- --------
Total from investment operations 2.31 .56 1.85 3.13 (.86)
-------- -------- ---------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.25)
Realized gain on investments--net (1.04) (1.64) -- -- --
-------- -------- ---------- -------- --------
Total dividends and distributions (1.04) (1.64) -- -- (.25)
-------- -------- ---------- -------- --------
Net asset value, end of year $ 15.47 $ 14.20 $ 15.28 $ 13.43 $ 10.30
======== ======== ========== ======== ========
Total Investment Based on net asset value per share 17.61% 5.12% 13.78% 30.39% (7.73%)
Return:* ======== ======== ========== ======== ========
Ratios to Expenses 2.13% 2.15% 2.06% 2.08% 2.12%
Average ======== ======== ========== ======== ========
Net Assets: Investment income (loss)--net 1.00% .27% .14% .51% (3.37%)
======== ======== ========== ======== ========
Supplemental Net assets, end of year (in thousands) $738,535 $795,469 $1,086,480 $765,279 $447,104
Data: ======== ======== ========== ======== ========
Portfolio turnover 92.34% 72.16% 82.47% 115.10% 109.95%
======== ======== ========== ======== ========
Average commission paid+++ $ .0046 -- -- -- --
======== ======== ========== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
+++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may affect the rate shown.
</TABLE>
See Notes to Financial Statements.
51
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
Period Period
The following per share data and ratios have been derived Oct. 21, Oct. 21,
from information provided in the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended October 31, Oct. 31, Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994++++ 1996++++ 1995++++ 1994++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.19 $ 15.28 $ 15.08 $ 15.02 $ 15.96 $ 15.75
Operating -------- -------- ------- ---------- -------- --------
Performance: Investment income (loss)--net .15 .01 (.01) .28 .20 .00++++++
Realized and unrealized gain on
investments and foreign currency
transactions--net 2.15 .54 .21 2.31 .50 .21
-------- -------- ------- ---------- -------- --------
Total from investment operations 2.30 .55 .20 2.59 .70 .21
-------- -------- ------- ---------- -------- --------
Less distributions from realized gain
on investments--net (1.04) (1.64) -- (1.04) (1.64) --
-------- -------- ------- ---------- -------- --------
Net asset value, end of period $ 15.45 $ 14.19 $ 15.28 $ 16.57 $ 15.02 $ 15.96
======== ======== ======= ========== ======== ========
Total Investment Based on net asset value per share 17.55% 5.04% 1.33%++++ 18.57% 5.85% 1.33%+++
Return:** ======== ======== ======= ========== ======== ========
Ratios to Expenses 2.15% 2.18% 2.86%* 1.34% 1.38% 2.11%*
Average ======== ======== ======= ========== ======== ========
Net Assets: Investment income (loss)--net 1.04% .11% (2.47%)* 1.83% 1.37% (1.70%)*
======== ======== ======= ========== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 15,917 $ 9,668 $ 462 $ 114,020 $104,493 $ 340
======== ======== ======= ========== ======== ========
Portfolio turnover 92.34% 72.16% 82.47% 92.34% 72.16% 82.47%
======== ======== ======= ========== ======== ========
Average commission paid+++++++ $ .0046 -- -- $ .0046 -- --
======== ======== ======= ========== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
+++++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may affect the rate shown.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++Amount is less than $.01 per share.
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch EuroFund (the "Fund") is registered
under the Investment Company Act of 1940 as a diver-
sified, 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 stock exchanges are valued at the last
sale price on the exchange on which such securities are
traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-
the-counter market are valued at the last available bid
price prior to the time of valuation. In cases where
securities are traded on more than one exchange, the
securities are valued on the exchange designated by or
under the authority of the Board of Trustees as the
primary market. Securities which are traded both in
the over-the-counter and on a stock exchange are valued
according to the broadest and most representative
market. Options written are valued at the last sale
price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter market,
the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter
market, the last bid price. Short-term securities are
valued at amortized cost, which approximates market
value. Other investments, including futures contracts
and related options, are stated at market value. Securi-
ties and assets for which market quotations are not
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) assets or liabilities expressed
in foreign currencies into US dollars. Realized and
unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may
engage in various portfolio strategies to seek to increase
its return by hedging its portfolio against adverse move-
ments in the equity, debt, and currency markets. Losses
may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
* Foreign currency options and futures--The Fund may
also purchase or sell listed or over-the-counter foreign
currency options, foreign currency futures and related
options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned
by the Fund, sold by the Fund but not yet delivered,
or committed or anticipated to be purchased by
the Fund.
* Forward foreign exchange contracts--The Fund is
authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions
or portfolio positions. Such contracts are not entered
on the Fund's records. However, the effect on operations
is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the
life of the contracts.
* Options--The Fund is authorized to 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 sub-
sequently marked to market to reflect the current
market value of the option written. When a security is
purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or
paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income
producing investments.
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
(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 provi-
sion 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 Fund
is informed of the ex-dividend 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 distri-
butions paid by the Fund are recorded on the ex-dividend
dates.
(h) Reclassification--Generally accepted accounting
principles require that certain components of net assets
be reclassified to reflect permanent differences between
financial and tax reporting. Accordingly, current year's
permanent book/tax differences of $624,890 have been
reclassified between undistributed net realized capital
gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset
values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with Merrill Lynch Asset Management, L.P.
("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned sub-
sidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which
is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLAM is responsible for the management of the Fund's
portfolio and provides the necessary personnel, facili-
ties, equipment and certain other services necessary to
the operations 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. For
the year ended October 31, 1996, MLAM paid MLAM UK
a fee of $1,584,850 pursuant to such Agreement.
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 mainte-
nance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
Account
Maintenance Fee Distribution Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
a subsidiary of ML & Co., also provides account main-
tenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account main-
tenance services to Class B, Class C and Class D share-
holders. 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, 1996, MLFD earned
underwriting discounts and commissions and MLPF&S
earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A $4,552 $ 52,792
Class D $7,829 $104,130
For the year ended October 31, 1996, MLPF&S received
contingent deferred sales charges of $1,494,280 and
$5,421 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $178,182 in commissions
on the execution of portfolio security transactions for
the Fund for the year ended October 31, 1996.
54
<PAGE>
Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
a wholly-owned subsidiary of ML & Co., is the Fund's
transfer agent.
Accounting services are provided to the Fund by MLAM
at cost.
Certain officers and/or trustees of the Fund are officers
and/or directors of MLAM, PSI, MLPF&S, MLFDS,
MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the year ended October 31, 1996
were $942,483,642 and $1,033,819,663, respectively.
Net realized and unrealized gains (losses) as of October
31, 1996, were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $153,272,806 $ 88,152,384
------------ -------------
Currency transactions:
Options purchased (1,120,982) --
Options written 5,423,750 --
Foreign currency transactions 13,489,647 (21,236)
Forward foreign
exchange contracts 3,697,570 --
------------ -------------
Total currency transactions 21,489,985 (21,236)
------------ -------------
Total $174,762,791 $ 88,131,148
============ =============
Transactions in put options written for the year ended
October 31, 1996 were as follows:
Premiums
Par Value Received
Outstanding put options
written at beginning of year $560,000,000 $ 5,498,550
Options expired (474,000,000) (4,650,200)
Options closed (86,000,000) (848,350)
------------ -------------
Outstanding put options
written at end of year $ -- $ --
============ =============
As of October 31, 1996, net unrealized appreciation for
Federal income tax purposes aggregated $74,877,236, of
which $134,069,273 related to appreciated securities
and $59,192,037 related to depreciated securities. The
aggregate cost of investments at October 31, 1996 for
Federal income tax purposes was $1,012,290,579.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $127,806,154 and $120,582,541
for the years ended October 31, 1996 and October 31,
1995, respectively.
Transactions in shares of beneficial interest for each
class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 3,553,169 $ 55,452,673
Shares issued to shareholders
in reinvestment of
distributions 885,595 12,345,189
------------ -------------
Total issued 4,438,764 67,797,862
Shares redeemed (5,064,026) (77,283,493)
------------ -------------
Net decrease (625,262) $ (9,485,631)
============ =============
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 3,992,118 $ 59,286,758
Shares issued to shareholders
in reinvestment of
distributions 1,491,120 19,695,986
------------ -------------
Total issued 5,483,238 78,982,744
Shares redeemed (6,703,037) (97,147,606)
------------ -------------
Net decrease (1,219,799) $ (18,164,862)
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 6,274,132 $ 90,913,954
Shares issued to shareholders
in reinvestment of
distributions 3,757,600 49,074,253
------------ -------------
Total issued 10,031,732 139,988,207
Shares redeemed (17,727,472) (252,558,644)
Automatic conversion of
shares (592,963) (8,462,694)
------------ -------------
Net decrease (8,288,703) $(121,033,131)
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 8,300,407 $ 118,574,899
Shares issued to shareholders
in reinvestment of
distributions 7,573,598 95,092,943
------------ -------------
Total issued 15,874,005 213,667,842
Shares redeemed (23,991,158) (330,882,601)
Automatic conversion of
shares (6,951,752) (95,508,046)
------------ -------------
Net decrease (15,068,905) $(212,722,805)
============ =============
Class C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 2,608,151 $ 37,883,986
Shares issued to shareholders
in reinvestment of
distributions 48,252 629,693
------------ -------------
Total issued 2,656,403 38,513,679
Shares redeemed (2,307,504) (33,480,305)
------------ -------------
Net increase 348,899 $ 5,033,374
============ =============
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,234,402 $ 17,745,431
Shares issued to shareholders
in reinvestment of
distributions 10,171 128,000
------------ -------------
Total issued 1,244,573 17,873,431
Shares redeemed (593,463) (8,515,458)
------------ -------------
Net increase 651,110 $ 9,357,973
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 10,577,168 $ 162,480,079
Automatic conversion of
shares 557,082 8,462,694
Shares issued to shareholders
in reinvestment of
distributions 421,472 5,854,244
------------ -------------
Total issued 11,555,722 176,797,017
Shares redeemed (11,631,183) (179,117,783)
------------ -------------
Net decrease (75,461) $ (2,320,766)
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 2,264,532 $ 34,246,830
Automatic conversion of
shares 6,576,119 95,508,046
Shares issued to shareholders
in reinvestment of
distributions 127,438 1,690,498
------------ -------------
Total issued 8,968,089 131,445,374
Shares redeemed (2,034,217) (30,498,221)
------------ -------------
Net increase 6,933,872 $ 100,947,153
============ =============
5. Commitments:
At October 31, 1996, the Fund had outstanding foreign
exchange contracts under which it had agreed to
purchase and sell foreign currency aggregating approxi-
mately $17,657,000 and $15,321,000, respectively.
56
<PAGE>
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57
<PAGE>
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58
<PAGE>
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59
<PAGE>
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........................................................ 13
Initial Sales Charge Alternatives--Class A and
Class D Shares.......................................................... 14
Reduced Initial Sales Charges--Class A and Class D Shares................ 16
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 19
Distribution Plans....................................................... 19
Limitations on the Payment of Deferred Sales Charges..................... 20
Redemption of Shares...................................................... 21
Deferred Sales Charges--Class B and Class C Shares....................... 22
Portfolio Transactions and Brokerage...................................... 23
Determination of Net Asset Value.......................................... 24
Shareholder Services...................................................... 25
Investment Account....................................................... 26
Automatic Investment Plans............................................... 26
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 27
Systematic Withdrawal Plans--Class A and Class D Shares.................. 27
Exchange Privilege....................................................... 28
Taxes..................................................................... 30
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 32
Special Rules for Certain Foreign Currency Transactions.................. 33
Performance Data.......................................................... 34
General Information....................................................... 36
Description of Shares.................................................... 36
Computation of Offering Price Per Share.................................. 36
Independent Auditors..................................................... 37
Custodian................................................................ 37
Transfer Agent........................................................... 37
Legal Counsel............................................................ 37
Reports to Shareholders.................................................. 37
Additional Information................................................... 37
Security Ownership of Certain Beneficial Owners.......................... 38
Independent Auditors' Report.............................................. 39
Financial Statements...................................................... 40
</TABLE>
Code # 10476-0297
[LOGO] MERRILL LYNCH
Merrill Lynch
EuroFund
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the nine-year period
ended October 31, 1996, and for the period January 30, 1987
(commencement of operations) to October 31, 1987.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1996.
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended October 31, 1996.
Financial Highlights for each of the years in the five-year period
ended October 31, 1996.
(b)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated March 11, 1986.(a)
(b) --Amendment to Declaration of Trust of the Registrant, dated May 19,
1986.(a)
(c) --Amendment to Declaration of Trust of the Registrant, dated December
15, 1986.(a)
(d) --Instrument establishing Class A shares and Class B shares of the
Registrant, dated October 3, 1988.(a)
(e) --Certification of Amendment to Declaration of Trust and Establishment
and Designation of Classes, dated October 17, 1994.(a)
2 --By-Laws of the Registrant.(a)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Declaration of Trust, as amended, and
By-Laws of the Registrant.(b)
5(a) --Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc.(c)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, Inc.
and Merrill Lynch Asset Management U.K. Limited.(c)
6(a) --Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(b) --Class B Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
(c) --Class C Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(d) --Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
7 --None.
8 --Custody Agreement between Registrant and Brown Brothers Harriman &
Co.(c)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc.(c)
10 --Opinion of Brown & Wood LLP, Counsel for the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(c)
14 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
15(a) --Class B Shares Distribution Plan and Class B Shares Distribution
Plan Sub-Agreement of the Registrant.(e)
(b) --Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
(c) --Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(c)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(c)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
shares.(a)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
shares.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-
3.(f)
</TABLE>
- --------
(a) Filed on February 27, 1995 as an Exhibit to Post-Effective Amendment No. 11
to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File No. 33-4026) (the "Registration
Statement").
(b) Reference is made to Article I, Article II (Sections 2.2, 2.3, 2.4 and
2.7), Article III (Sections 3.1 and 3.4), Article IV (Sections 4.1, 4.3 and
4.4), Article V (Sections 5.1, 5.2, 5.3 and 5.5), Article VI (Sections 6.2,
6.3, 6.4, 6.5, 6.7 and 6.8), Article VII (Section 7.1), Article VIII
(Sections 8.2 and 8.3), Article X (Sections 10.3, 10.4, 10.5, 10.6, 10.7
and 10.8), Article XI (Sections 11.3, 11.4 and 11.5) and Article XII
(Section 12.6) of the Registrant's Declaration of Trust, as amended, filed
as Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) to this Registration Statement
on Form N-1A; and Article I, Article V and Article VI of the Registrant's
By-Laws filed as Exhibit 2 to this Registration Statement on Form N-1A.
(c) Filed on February 27, 1996 as an Exhibit to Post-Effective Amendment No. 12
to the Registration Statement.
(d) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 10
to the Registration Statement.
(e) Filed on February 25, 1994 as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A of Merrill Lynch New York
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
(File No. 2-99473), filed on January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JANUARY 31, 1997
-------------- ----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per
share....................................................... 37,024
Class B shares of beneficial interest, par value $0.10 per
share....................................................... 78,334
Class C shares of beneficial interest, par value $0.10 per
share....................................................... 3,500
Class D shares of beneficial interest, par value $0.10 per
share....................................................... 13,540
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgements, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any Person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no Person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any Person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification".
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended, (the "1940 Act") may
be concerned, such payments will be made only on the following conditions:
(i) the advances must be limited to amounts used, or to be used, for the
preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the recipient to repay
that amount of the advance which exceeds the amount which it is ultimately
determined that he is entitled to receive from the Registrant by reason of
indemnification; and (iii) (a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which assures that
any repayments may be obtained by the Registrant without delay or litigation,
which bond, insurance or other form of security must be provided by the
recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or as independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
C-3
<PAGE>
In Section 9 of the Class A, Class B, Class C and Class D Shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended, (the
"1933 Act") against certain types of civil liabilities arising in connection
with the Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) Fund Asset Management L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
C-4
<PAGE>
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., and Merrill Lynch Variable Series Funds, Inc., and for the following
closed-end investment companies: Convertible Holdings Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is North Tower, World Financial Center, 250 Vesey Street, New
York, New York 10281-1201. The address of the Fund's transfer agent, Merrill
Lynch Financial Data Services, Inc. ("MLFDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November 1, 1994 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies listed in the first two
paragraphs of this Item and Messrs. Giordano, Harvey, Kirstein and Monagle are
directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<C> <C> <S>
ML & Co. ................... Limited Partner Financial Services
Holding Company,
Limited Partner of FAM
Princeton Services.......... General Partner General Partner of FAM
Arthur Zeikel............... President President of FAM;
President and Director
of Princeton Services;
Director of MLFD;
Executive Vice
President of ML & Co.
Terry K. Glenn.............. Executive Vice Executive Vice President
President of FAM; Executive Vice
President and Director
of Princeton Services;
President and Director
of MLFD; Director of
MLFDS; President of
Princeton
Administrators, L.P.
Vincent R. Giordano......... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Elizabeth Griffin........... Senior Vice President Senior Vice President of
FAM
Norman R. Harvey............ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Michael J. Hennewinkel...... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<C> <C> <S>
Philip L. Kirstein.......... Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of FAM;
Secretary Senior Vice President,
General Counsel,
Director and Secretary
of Princeton Services;
Director of MLFD
Ronald M. Kloss............. Senior Vice President Senior Vice President
and Controller and Controller of FAM;
Senior Vice President
and Controller of
Princeton Services
Stephen M. M. Miller........ Senior Vice President Executive Vice President
of Princeton
Administrators, L.P.;
Senior Vice President
of Princeton Services
Joseph T. Monagle Jr........ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Michael L. Quinn............ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services; Managing
Director and First Vice
President of Merrill
Lynch 1989-1995
Richard L. Reller........... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Gerald M. Richard........... Senior Vice President Senior Vice President
and Treasurer and Treasurer of FAM;
Senior Vice President
and Treasurer of
Princeton Services;
Vice President and
Treasurer of MLFD
Ronald L. Welburn........... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Anthony Wiseman............. Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc. Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since November 1, 1994, for
his or her own account or in the capacity of director, officer, partner or
trustee. In
C-6
<PAGE>
addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<C> <C> <S>
Arthur Zeikel............... Director and Chairman President of the Manager
and FAM; President and
Director of Princeton
Services; Director of
MLFD; Executive Vice
President of ML&Co.
Alan J. Albert.............. Senior Managing Vice President of the
Director Manager
Terry K. Glenn.............. Director Executive Vice President
of the Manager and FAM;
Executive Vice President
and Director of
Princeton Services;
President and Director
of MLFD; Director of
MLFDS; President of
Princeton
Administrators, L.P.
Adrian Holmes............... Managing Director Director of Merrill Lynch
Global Asset Management
Andrew John Bascand......... Director Director of Merrill Lynch
Global Asset Management
Edward Gobora............... Director Director of Merrill Lynch
Global Asset Management
Richard Kilbride............ Director Managing Director of
Merrill Lynch Global
Asset Management
Robert M. Ryan.............. Director Vice President,
Institutional Marketing,
Debt and Equity Group,
Merrill Lynch Capital
Markets from 1989 to
1994
Gerald M. Richard........... Senior Vice President Senior Vice President and
Treasurer of the Manager
and FAM; Senior Vice
President and Treasurer
of Princeton Services;
Vice President and
Treasurer of MLFD
Stephen J. Yardley.......... Director Director of Merrill Lynch
Global Asset Management
Carol Ann Langham........... Company Secretary None
Debra Anne Searle........... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc. and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
C-7
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn........... President and Director Executive Vice President
Arthur Zeikel............ Director President and Trustee
Philip L. Kirstein....... Director None
William E. Aldrich....... Senior Vice President None
Robert W. Crook.......... Senior Vice President None
Kevin P. Boman........... Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
Michael G. Clark......... Vice President None
Mark A. DeSario.......... Vice President None
James T. Fatseas......... Vice President None
Michelle T. Lau.......... Vice President None
Debra W. Landsman-Yaros.. Vice President None
Gerald M. Richard........ Vice President and Treasurer Treasurer
Salvatore Venezia........ Vice President None
William Wasel............ Vice President None
Robert Harris............ Secretary Secretary
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and its transfer agent, Merrill Lynch Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under the caption "Management of the Fund--
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant
is not a party to any management-related service contracts.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 21st day of
February 1997.
Merrill Lynch EuroFund
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE(S)
Arthur Zeikel*
- ------------------------------------- President and
(ARTHUR ZEIKEL) Trustee
(Principal Executive Officer)
Treasurer (Principal Financial
Gerald M. Richard* and Accounting
- ------------------------------------- Officer)
(GERALD M. RICHARD)
Donald Cecil* Trustee
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Trustee
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Trustee
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Trustee
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Trustee
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Gerald M. Richard February 21,
*By: ________________________________ 1997
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10 --Opinion of Brown & Wood LLP, counsel to the Registrant.......
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant....................................................
17(a) --Financial Data Schedule for Class A Shares...................
(b) --Financial Data Schedule for Class B Shares...................
(c) --Financial Data Schedule for Class C Shares...................
(d) --Financial Data Schedule for Class D Shares...................
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH EUROFUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 999015431
<INVESTMENTS-AT-VALUE> 1087167815
<RECEIVABLES> 11256560
<ASSETS-OTHER> 12210692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1110635067
<PAYABLE-FOR-SECURITIES> 22379595
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3727666
<TOTAL-LIABILITIES> 26107261
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 827728552
<SHARES-COMMON-STOCK> 12960165
<SHARES-COMMON-PRIOR> 13585427
<ACCUMULATED-NII-CURRENT> 13058543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 155609563
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88131148
<NET-ASSETS> 216055527
<DIVIDEND-INCOME> 31528605
<INTEREST-INCOME> 1890557
<OTHER-INCOME> 0
<EXPENSES-NET> (19735729)
<NET-INVESTMENT-INCOME> 13683433
<REALIZED-GAINS-CURRENT> 174762791
<APPREC-INCREASE-CURRENT> (13107489)
<NET-CHANGE-FROM-OPS> 175338735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (13622154)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3553169
<NUMBER-OF-SHARES-REDEEMED> (5064026)
<SHARES-REINVESTED> 885595
<NET-CHANGE-IN-ASSETS> (29814872)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57569335
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7971953
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19735729
<AVERAGE-NET-ASSETS> 200539764
<PER-SHARE-NAV-BEGIN> 15.07
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> 2.32
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.67
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH EUROFUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 999015431
<INVESTMENTS-AT-VALUE> 1087167815
<RECEIVABLES> 11256560
<ASSETS-OTHER> 12210692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1110635067
<PAYABLE-FOR-SECURITIES> 22379595
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3727666
<TOTAL-LIABILITIES> 26107261
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 827728552
<SHARES-COMMON-STOCK> 47730301
<SHARES-COMMON-PRIOR> 56019004
<ACCUMULATED-NII-CURRENT> 13058543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 155609563
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88131148
<NET-ASSETS> 738535164
<DIVIDEND-INCOME> 31528605
<INTEREST-INCOME> 1890557
<OTHER-INCOME> 0
<EXPENSES-NET> (19735729)
<NET-INVESTMENT-INCOME> 13683433
<REALIZED-GAINS-CURRENT> 174762791
<APPREC-INCREASE-CURRENT> (13107489)
<NET-CHANGE-FROM-OPS> 175338735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (56048905)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6274132
<NUMBER-OF-SHARES-REDEEMED> (18320435)
<SHARES-REINVESTED> 3757600
<NET-CHANGE-IN-ASSETS> (29814872)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57569335
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7971953
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19735729
<AVERAGE-NET-ASSETS> 741949697
<PER-SHARE-NAV-BEGIN> 14.20
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 2.17
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.47
<EXPENSE-RATIO> 2.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH EUROFUND - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 999015431
<INVESTMENTS-AT-VALUE> 1087167815
<RECEIVABLES> 11256560
<ASSETS-OTHER> 12210692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1110635067
<PAYABLE-FOR-SECURITIES> 22379595
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3727666
<TOTAL-LIABILITIES> 26107261
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 827728552
<SHARES-COMMON-STOCK> 1030257
<SHARES-COMMON-PRIOR> 681358
<ACCUMULATED-NII-CURRENT> 13058543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 155609563
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88131148
<NET-ASSETS> 15916602
<DIVIDEND-INCOME> 31528605
<INTEREST-INCOME> 1890557
<OTHER-INCOME> 0
<EXPENSES-NET> (19735729)
<NET-INVESTMENT-INCOME> 13683433
<REALIZED-GAINS-CURRENT> 174762791
<APPREC-INCREASE-CURRENT> (13107489)
<NET-CHANGE-FROM-OPS> 175338735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (685313)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2608151
<NUMBER-OF-SHARES-REDEEMED> (2307504)
<SHARES-REINVESTED> 48252
<NET-CHANGE-IN-ASSETS> (29814872)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57569335
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7971953
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19735729
<AVERAGE-NET-ASSETS> 11632362
<PER-SHARE-NAV-BEGIN> 14.19
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> 2.15
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.45
<EXPENSE-RATIO> 2.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH EUROFUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 999015431
<INVESTMENTS-AT-VALUE> 1087167815
<RECEIVABLES> 11256560
<ASSETS-OTHER> 12210692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1110635067
<PAYABLE-FOR-SECURITIES> 22379595
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3727666
<TOTAL-LIABILITIES> 26107261
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 827728552
<SHARES-COMMON-STOCK> 6879714
<SHARES-COMMON-PRIOR> 6955175
<ACCUMULATED-NII-CURRENT> 13058543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 155609563
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88131148
<NET-ASSETS> 114020513
<DIVIDEND-INCOME> 31528605
<INTEREST-INCOME> 1890557
<OTHER-INCOME> 0
<EXPENSES-NET> (19735729)
<NET-INVESTMENT-INCOME> 13683433
<REALIZED-GAINS-CURRENT> 174762791
<APPREC-INCREASE-CURRENT> (13107489)
<NET-CHANGE-FROM-OPS> 175338735
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6991081)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11134250
<NUMBER-OF-SHARES-REDEEMED> (11631183)
<SHARES-REINVESTED> 421472
<NET-CHANGE-IN-ASSETS> (29814872)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57569335
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7971953
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19735729
<AVERAGE-NET-ASSETS> 108805220
<PER-SHARE-NAV-BEGIN> 15.02
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> 2.31
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.57
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
February 24, 1997
Merrill Lynch EuroFund
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch EuroFund, a Massachusetts business trust (the "Trust"), of
shares of beneficial interest, par value $0.10 per share, of the Trust (the
"Shares"), under the Securities Act of 1933, as amended, pursuant to the Trust's
registration statement on Form N-1A (File No. 33-4026), as amended (the
"Registration Statement"), in the amount set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest, except that shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch EuroFund:
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-4026 of our report dated December 10, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 20, 1997
