<PAGE>
PROSPECTUS
JANUARY 30, 1998
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 Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM 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 selected 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,
and for participants in certain fee-based programs, the minimum initial
purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through
Merrill Lynch Financial Data Services, Inc. (the "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 January 30, 1998 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund. 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 None (d) 4.0% during the first year, 1.0% for one year(f) None(d)
lower)................ 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
Shareholder Servicing
Costs(i).............. 0.15% 0.18% 0.20% 0.15%
Other.................. 0.13% 0.13% 0.13% 0.13%
---- ---- ---- ----
Total Other Expenses.. 0.28% 0.31% 0.33% 0.28%
---- ---- ---- ----
Total Fund Operating 1.03% 2.06% 2.08% 1.28%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain retirement plans and certain participants
in fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 22 and "Shareholder
Services--Fee-Based Programs"--page 34.
(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 24.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants 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 22.
(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 that
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 34.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 34.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 34.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
17.
(h) See "Purchase of Shares--Distribution Plans"--page 27.
(i) See "Management of the Fund--Transfer Agency Services"--page 19.
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...................... $ 62 $ 84 $ 106 $ 172
Class B...................... $ 61 $ 85 $ 111 $ 220*
Class C...................... $ 31 $ 65 $ 112 $ 241
Class D...................... $ 65 $ 91 $ 119 $ 199
An investor would pay the
following expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A...................... $ 62 $ 84 $ 106 $ 172
Class B...................... $ 21 $ 65 $ 111 $ 220*
Class C...................... $ 21 $ 65 $ 112 $ 241
Class D...................... $ 65 $ 91 $ 119 $ 199
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
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
$5.35) 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 PRICING SM 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The 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 by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. 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 certain retirement plans and 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 of 5.25%, is reduced for purchases of
$25,000 and over, and waived for purchases of Class A shares by
certain retirement plans and participants 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 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 who 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 by retirement plans and participants 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 that 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, 1997 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
--------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------------------
1997++ 1996++ 1995++ 1994++ 1993 1992 1991 1990 1989 1988+
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
<S> <C> <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..... $ 16.67 $ 15.07 $ 15.96 $ 13.87 $ 10.53 $ 11.62 $ 10.70 $ 9.84 $ 9.00 $ 8.83
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
Investment income--net.. .26 .32 .19 .18 .26 .24 .25 .18 .09 .01
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 4.31 2.32 .56 1.91 3.08 (1.02) .96 .85 .77 .16
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
Total from investment
operations.............. 4.57 2.64 .75 2.09 3.34 (.78) 1.21 1.03 .86 .17
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
Less dividends and
distributions:
Investment income--net.. (.44) -- -- -- -- (.31) (.29) (.17) -- --
In excess of investment
income-net.............. (.15) -- -- -- -- -- -- -- -- --
Realized gain on invest-
ments--net.............. (2.18) (1.04) (1.64) -- -- -- -- -- (.02) --
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
Total dividends and
distributions........... (2.77) (1.04) (1.64) -- -- (.31) (.29) (.17) (.02) --
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 18.47 $ 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............... 32.13% 18.86% 6.19% 15.07% 31.72% (6.90)% 11.54% 10.39% 9.62% 1.93%#
======== ======== ======== ======== ======== ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.03% 1.10% 1.12% 1.03% 1.04% 1.09% 1.14% 1.17% 1.34% 1.38%*
======== ======== ======== ======== ======== ======= ======= ======= ======= ======
Investment income
(loss)--net............. 1.53% 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)... $563,098 $216,056 $204,713 $236,288 $182,612 $87,865 $83,229 $85,798 $11,381 $ 21
======== ======== ======== ======== ======== ======= ======= ======= ======= ======
Portfolio turnover...... 92.65% 92.34% 72.16% 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28%
======== ======== ======== ======== ======== ======= ======= ======= ======= ======
Average commission rate
paid##.................. $ .0029 $ .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,
-----------------------------------------------------------------------------------------------------
1997+ 1996+ 1995+ 1994+ 1993 1992 1991 1990 1989 1988
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
<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 year...... $ 15.47 $ 14.20 $ 15.28 $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72 $ 9.00 $ 9.29
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
Investment income--
net.................... .07 .14 .04 .02 .16 .12 .13 .12 .08 .22
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 3.99 2.17 .52 1.83 2.97 (.98) .94 .78 .66 .41
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 4.06 2.31 .56 1.85 3.13 (.86) 1.07 .90 .74 .63
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--
net.................... (.32) -- -- -- -- (.25) (.17) (.11) -- (.18)
In excess of investment
income--net............ (.11) -- -- -- -- -- -- -- -- --
Realized gain on
investments--net....... (2.18) (1.04) (1.64) -- -- -- -- -- (.02) (.74)
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (2.61) (1.04) (1.64) -- -- (.25) (.17) (.11) (.02) (.92)
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 16.92 $ 15.47 $ 14.20 $ 15.28 $ 13.43 $ 10.30 $ 11.41 $ 10.51 $ 9.72 $ 9.00
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset
value per share........ 30.84% 17.61% 5.12% 13.78% 30.39% (7.73)% 10.35% 9.19% 8.28% 7.35%
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... 2.06% 2.13% 2.15% 2.06% 2.08% 2.12% 2.17% 2.20% 2.37% 2.68%
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
Expenses............... 2.06% 2.13% 2.15% 2.06% 2.08% 2.12% 2.17% 2.20% 2.37% 2.30%
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
Investment income
(loss)--net............ .45% 1.00% .27% .14% .51% (3.37)% 1.94% 1.32% .83% 1.36%
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $811,859 $738,535 $795,469 $1,086,480 $765,279 $447,104 $484,031 $498,600 $201,484 $261,178
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
Portfolio turnover..... 92.65% 92.34% 72.16% 82.47% 115.10% 109.95% 124.64% 122.67% 106.29% 161.28%
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
Average commission rate
paid#.................. $ .0029 $ .0046 -- -- -- -- -- -- -- --
======== ======== ======== ========== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Total investment returns exclude the effects 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 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,
1997 1996 1995 1994 1997 1996 1995 1994
------- ------- ------ ----------------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 15.45 $ 14.19 $15.28 $15.08 $ 16.57 $ 15.02 $ 15.96 $15.75
------- ------- ------ ------ -------- -------- -------- ------
Investment income
(loss)--net............. .07 .15 .01 (.01) .20 .28 .20 -- +++
Realized and unrealized
gain on investments and
foreign currency
transactions--net....... 3.97 2.15 .54 .21 4.31 2.31 .50 .21
------- ------- ------ ------ -------- -------- -------- ------
Total from investment
operations.............. 4.04 2.30 .55 .20 4.51 2.59 .70 .21
------- ------- ------ ------ -------- -------- -------- ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment income--net.. (.36) -- -- -- (.41) -- -- --
In excess of investment
income--net............. (.13) -- -- -- (.14) -- -- --
Realized gain on
investments--net........ (2.18) (1.04) (1.64) -- (2.18) (1.04) (1.64) --
------- ------- ------ ------ -------- -------- -------- ------
Total dividends and
distributions........... (2.67) (1.04) (1.64) -- (2.73) (1.04) (1.64) --
------- ------- ------ ------ -------- -------- -------- ------
Net asset value, end of
period.................. $ 16.82 $ 15.45 $14.19 $15.28 $ 18.35 $ 16.57 $ 15.02 $15.96
======= ======= ====== ====== ======== ======== ======== ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 30.81% 17.55% 5.04% 1.33%# 31.84% 18.57% 5.85% 1.33%#
======= ======= ====== ====== ======== ======== ======== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.08% 2.15% 2.18% 2.86%* 1.28% 1.34% 1.38% 2.11%*
======= ======= ====== ====== ======== ======== ======== ======
Investment income
(loss)--net............. .43% 1.04% .11% (2.47)%* 1.21% 1.83% 1.37% (1.70)%*
======= ======= ====== ====== ======== ======== ======== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $22,260 $15,917 $9,668 $ 462 $150,474 $114,020 $104,493 $ 340
======= ======= ====== ====== ======== ======== ======== ======
Portfolio turnover...... 92.65% 92.34% 72.16% 82.47% 92.65% 92.34% 72.16% 82.47%
======= ======= ====== ====== ======== ======== ======== ======
Average commission rate
paid ##................. $ .0029 $ .0046 -- -- $ .0029 $ .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.
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 are 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
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange, which may expose
the Fund to certain risks. These investment practices and the associated risks
are described in detail in the Appendix attached to this Prospectus.
Portfolio Transactions. In executing portfolio transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Manager generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available. The
Fund contemplates that, consistent with its policy of obtaining the best net
results, it will place orders for transactions with a number of brokers and
dealers, including Merrill Lynch, an affiliate of the Manager. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Fund may receive orders for transactions by the
Fund. Information so received will be in addition to, and not in lieu of, the
services required to be performed by the Manager, and the expenses of the
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. See "Management of the Fund--Management and Advisory
Arrangements." In addition, consistent with the 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
14
<PAGE>
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.
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 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, which are securities permitting,
but not obligating, their holder to subscribe for other securities. Warrants do
not carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. As a result, an investment in
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
15
<PAGE>
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 of
1940, as amended (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.
The full text of the investment restrictions is set forth under "Investment
Objective and Policies--Investment Restrictions" in the Statement of Additional
Information.
16
<PAGE>
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*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc.; and Executive Vice President of ML & Co.
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 140 registered investment companies. The Manager also
offers portfolio management services to individual and institutional accounts.
As of December 31, 1997, the Manager and FAM had a total of approximately
$278.7 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees, the Manager is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Manager. Subject to the general
oversight of the Trustees, the Manager provides the administrative services
necessary for the operation of the Fund and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
17
<PAGE>
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, 1997, the Manager received a fee of $10,128,366 (based on average net
assets of approximately $1.4 billion).
The Manager has also entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), a
wholly owned, subsidiary of ML & Co. and an affiliate of the Manager, pursuant
to which the Manager pays MLAM U.K. a fee for providing investment advisory
services to the Manager with respect to the Fund in an amount to be determined
from time to time by the Manager and MLAM U.K. but in no event in excess of the
amount the Manager actually receives for providing services to the Fund
pursuant to the Management Agreement. For the fiscal year ended October 31,
1997, the fee paid by the Manager to MLAM U.K. pursuant to such arrangement
aggregated $1,761,720 (based on average daily net assets of approximately $1.4
billion). MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA,
England.
Adrian Holmes, Senior Vice President of the Fund, is the Fund's Portfolio
Manager. Mr. Holmes has been a Portfolio Manager of the Manager since 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, 1997, the amount of such reimbursement
was $132,782. For the fiscal year ended October 31, 1997, the ratio of total
expenses to average net assets for each class of shares was as follows: Class
A, 1.03%; Class B, 2.06%; Class C, 2.08%; and Class D, 1.28%.
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 in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund
18
<PAGE>
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
The Transfer Agent, a subsidiary of ML & Co., acts as the Fund's transfer
agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives 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 certain transaction charges and out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. Additionally, a
$.20 monthly closed account charge will be assessed on all accounts which
close during the calendar year. Application of this fee will commence the
month following the month the account is closed. At the end of the calendar
year, no further fees will be due. For purposes of the Transfer Agency
Agreement the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML
& Co. For the fiscal year ended October 31, 1997, the total fee paid by the
Fund to the Transfer Agent was $2,298,761 pursuant to the Transfer Agency
Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of 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, and for participants in certain
fee-based programs, the minimum initial purchase is $500 and the minimum
subsequent purchase is $50.
The Fund offers 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
19
<PAGE>
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 $5.35) to
confirm a sale of shares to such customers. Purchases made directly through
the Transfer Agent are not subject to the processing fee.
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. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. 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 (except that Class B shareholders may vote upon any material changes
to expenses charged under the Class D Distribution Plan). 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 CDSCs and distribution fees with respect to 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.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
20
<PAGE>
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.
<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 may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more 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. Such CDSC may be waived in connection with
certain fee-based programs. 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, certain retirement
plans and certain fee-based programs 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.
21
<PAGE>
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.
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 by certain retirement plan
investors and participants 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. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1,000,000 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, 1997, the Fund sold 26,338,718 of its
Class A shares for aggregate net proceeds to the Fund of $430,396,173. The
gross sales charges for the sale of its Class A shares for that year were
$97,591, of which $5,476 and $92,115 were received by the Distributor and
Merrill Lynch, respectively. During such year, the Distributor received no
CDSCs with respect to redemption within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. During the fiscal
year ended October 31, 1997, the Fund sold 9,883,349 of its Class D shares for
aggregate net proceeds to the Fund of $166,073,878. The gross sales charges
for the sale of its Class D shares for that year were $141,405, of which
$9,679 and $131,726 were received by the Distributor and Merrill Lynch,
respectively. During such year, 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.
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
22
<PAGE>
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 and U.S. branches of foreign owned
banking institutions provided that the program or branch has $3 million or
more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA SM Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. 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
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
23
<PAGE>
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."
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" on page 27.
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 Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the dealers' 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 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.
24
<PAGE>
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, 1997, the Distributor received CDSCs of
$1,421,145 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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 Blueprint SM
Program. The CDSC also is waived for any Class B shares that are purchased by
eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC also is waived for any Class B shares
that are purchased by a Merrill Lynch rollover IRA, that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group, and held in such account at the time of redemption. The
25
<PAGE>
Class B CDSC also is waived for any Class B shares purchased within qualifying
Employee Access SM Accounts. 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $8,568 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.
26
<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
27
<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, 1997, the Fund paid the Distributor
$7,960,479 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $796
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, 1997, the Fund paid the
Distributor $208,327 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $20.8 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, 1997,
the Fund paid the Distributor $328,429 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $131.4 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, 1996, the last date for which fully allocated accrual
information is available, the fully allocated accrual revenues received 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 expenses by approximately $3,855,000 (0.50% of Class B net assets at
that date). As of October 31, 1997, direct cash revenues for the period since
the commencement of operations of Class B shares exceeded direct cash expenses
by $53,529,966 (6.59% of Class B net assets at that date). As of December 31,
1996, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch with respect to Class C shares for the period since October 21,
1994 (commencement of operations) exceeded fully allocated accrual revenues by
approximately $49,000 (0.26% of Class C net assets at that date). As of October
31, 1997, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $250,878 (1.13%
of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Fund will approve the continuance of the Distribution
Plans
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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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The 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, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
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32232-5289. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. Redemption
requests delivered other than by mail should be delivered to 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 in either event 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 certificates, 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 it has assured itself that
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 that 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 $5.35) to confirm a repurchase of shares to such
customers. Repurchases made 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.
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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 Blueprint SM
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. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for such shares and then
must turn the certificates over to the
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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.
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 Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the 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 that 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 any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
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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 of the exchanged
shares and a purchase of the acquired shares 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 (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 both dividends and
capital gains distributions, paid in cash, rather than reinvested, in which
event payment will be mailed on or about the payment date. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks. 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 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 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, subject to certain conditions. With respect to redemptions
of Class B or Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales Charges--
Class B Shares" and "--Contingent Deferred Sales Charges--Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."
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<PAGE>
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or 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) or 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 value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(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
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<PAGE>
to all shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same amount,
except that account maintenance and distribution fees and any incremental
transfer agency costs relating to each class of shares will be borne
exclusively by that class. The Fund will include performance data for all
classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements distributed to investors whose 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 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.
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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 capital gains, if any, are distributed to the Fund's shareholders
annually after the close of the Fund's fiscal year. 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." Dividends and distributions will be automatically reinvested in
shares of the Fund at net asset value without a sales charge. However, a
shareholder whose account is maintained at the Transfer Agent or whose account
is maintained through Merrill Lynch may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as discussed below whether they are reinvested in
shares of the Fund or received in cash. 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 year. Capital gains
distributions will be automatically reinvested in shares unless the shareholder
elects to receive such distributions in cash.
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 cash payment.
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"). As long as 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
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<PAGE>
length of time the shareholder has owned Fund shares. Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends as well as the amounts
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January 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 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. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both the shareholder and the RIC. No deductions for
foreign taxes, moreover, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to 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 and other
information needed to claim the foreign tax credit.
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").
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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.
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.
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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 sum of 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 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 for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. 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.
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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 relating to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses relating to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to distribution and/or account maintenance
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 or other classes
at a future date.
The Declaration of Trust of the Fund, as amended (the "Declaration"), does
not require that the Fund hold an annual meeting of shareholders. However, the
Fund will be required to call special meetings of shareholders in accordance
with the requirements of the Investment Company Act to seek approval of new
management and advisory arrangements, a material increase in distribution fees
or a change in the fundamental policies, objective or restrictions of the Fund.
The Fund also would be required to hold a special shareholders' meeting to
elect new Trustees at such time as less than a majority of the Trustees holding
office have been elected by shareholders. The Declaration provides that a
shareholders' meeting may be called for any reason at the request of 10% of the
outstanding shares of the Fund or by a majority of the Trustees.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
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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APPENDIX
INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS, FUTURES
AND FOREIGN EXCHANGE
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, as described below. Such
instruments, which may be regarded as derivatives, are referred to collectively
herein as "Strategic Instruments."
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up-front payment (the
"option premium"), the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. In the event the market value of the portfolio
holdings underlying the put option increases rather than decreases, however,
the Fund will lose the option premium and will consequently realize a lower
return on the portfolio holdings than would have been realized without the
purchase of the put.
The Fund is also authorized to purchase call options on securities it intends
to purchase or securities indices the performance of which substantially
correlates with the performance of the types of securities it intends to
purchase. When the Fund purchases a call option, in consideration for the
option premium, the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before the expiration date, in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index increases beyond a specified
level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund may also purchase put or call options in connection with closing out
put or call options it has previously sold. However, the Fund will not purchase
options on securities if, as a result of such purchase, the aggregate cost
(option premiums paid) of all outstanding options on securities held by the
Fund would exceed 5% of the market value of the Fund's total assets.
Writing Options. The Fund is authorized to write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund writes a call option, in return for an option premium, the Fund gives
another party the right
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to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before the expiration date, in the case of
an option on a securities index. The Fund may write call options to earn
income, through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than
the exercise price, the Fund will partially offset any decline in the value of
the underlying securities through the receipt of the option premium and will
realize a greater return than would have been realized on the underlying
securities alone. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding. 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 may also write put options on securities or securities indices. When
the Fund writes a put option, in return for an option premium, the Fund gives
another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party the amount of any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its right
under the option because the value of the underlying securities is greater than
the exercise price, the Fund will profit by the amount of the option premium.
By writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund is using the
put as an anticipatory hedge or is writing the put in connection with trading
strategies involving combinations of options, for example, the sale and
purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency Instruments"
below. A call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the option (or, in
the case of an option on a securities index, securities which substantially
replicate the performance of such index) or owns a call option, warrant or
convertible instrument which is immediately exercisable for, or convertible
into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their
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obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Investments" below.
FUTURES
The Fund may engage in transactions in futures, including stock index futures
contracts and financial futures contracts, and options thereon. Financial
futures contracts are standardized, exchange-traded contracts which obligate a
purchaser to take delivery, and a seller to make delivery, of a specific amount
of a commodity at a specified future date at a specified price. Stock index
futures contracts are similar to other futures contracts except that they do
not require actual delivery of securities but instead result in cash settlement
based on the difference in value of the index between the time the contract was
entered into and the time of its settlement.
No price is paid upon entering into a futures contract. Rather, upon
purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
The sale of a futures contract for hedging purposes limits the Fund's risk of
loss through a decline in the market value of portfolio holdings correlated
with the futures contract prior to the expiration date of the futures contract.
In the event the market value of the portfolio holdings correlated with the
futures contract increases rather than decreases, however, the Fund will
realize a loss on the futures position and a lower return on the portfolio
holdings than would have been realized without the purchase of the futures
contract.
The purchase of a futures contract as an anticipatory hedge may protect the
Fund from having to pay more for securities as a consequence of increases in
the market value for such securities during a period when the Fund was
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
in a futures contract, however, the Fund may realize a loss relating to the
futures position.
The Fund will limit transactions in futures and options on futures to the
extent necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for the purpose of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the United
States dollar.
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Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions for the purpose of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future. The Fund may also hedge
portfolio positions through currency swaps, which are transactions in which
one currency is simultaneously bought for a second currency on a spot basis
and sold for the second currency on a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through the use of currency options. Currency
options are similar to options on securities, but in consideration for an
option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a
specified amount of another currency. The Fund may engage in transactions in
options on currencies either on exchanges or OTC markets. See "Options on
Securities and Securities Indices--Types of Options" above and "Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments" below.
When entering into a transaction in a Currency Instrument, the Fund will not
hedge a currency substantially in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated
in such currency. The Fund may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). The Fund will only enter into a
cross-hedge if the Manager believes that (i) there is a demonstrably high
correlation between the currency in which the cross-hedge is denominated and
the currency being hedged and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly more
cost-effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.~ The Fund
will not incur potential net liabilities of more than 33 1/3% of its total
assets from Currency Instruments.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund's
hedging strategies will be ineffective. To the extent that the Fund hedges
against anticipated currency movements which do not occur, the Fund may
realize losses, and lower its total return, as the result of its hedging
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transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur. It may not be possible for the Fund to hedge
against currency exchange rate movements, even if correctly anticipated, in the
event that (i) the currency exchange rate movement is so generally anticipated
that the Fund is not able to enter into a hedging transaction at an effective
price or (ii) the currency exchange rate movement relates to a market with
respect to which Currency Instruments are not available (such as certain
developing markets) and it is not possible to engage in effective foreign
currency hedging.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the
Fund will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
The Fund intends to enter transactions involving Strategic Instruments only
if there appears to be a liquid secondary market for such instruments or, in
the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a Strategic Instrument or the Fund will otherwise be able
to sell such instrument at an acceptable price. It may therefore not be
possible to close a position in a Strategic Instrument without incurring
substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign exchange
transactions, futures transactions, sales of put options) may expose the Fund
to potential losses which exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold or
(ii) for which the Manager anticipates the Fund can receive on each business
day at least two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an
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investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the securities underlying OTC
call options currently outstanding which have been sold by the Fund and margin
deposits on the Fund's outstanding OTC options exceeds 15% of the total assets
of the Fund, taken at market value, together with all other assets of the Fund
which are deemed to be illiquid or are otherwise not readily marketable.
However, if an OTC option is sold by the Fund to a dealer in U.S. government
securities recognized as a "primary dealer" by the Federal Reserve Bank of New
York and the Fund has the unconditional contractual right to repurchase such
OTC option 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 exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a third-
party guaranty or other credit enhancement. In particular, the Fund will engage
in OTC Options, including OTC 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.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited from purchasing directly by its
investment restrictions.
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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
SELECT [_] Reinvest ONE: [_] Reinvest
ONE: [_] Cash [_] 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.
47
<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
This form when completed should be Letter of Intention, Automatic
mailed to: Investment Plan or Systematic
Withdrawal Plan. We guarantee the
Merrill Lynch EuroFund shareholder's signature.
c/o Merrill Lynch Financial Data
Services, Inc. .....................................
P.O. Box 45289 Dealer Name and Address
Jacksonville, Florida 32232-5289
By: .................................
Authorized Signature of Dealer
----- -------
----- ------- ...............
F/C Last Name
Branch Code F/C
----- No.
---------
----- ---------
Dealer's Customer Account No.
48
<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--(SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in Merrill
Lynch EuroFund at cost or current offering price. Withdrawals to be made
either (check one) [_] Monthly on the 24th day of each month, or [_] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on or as soon as possible
thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $ of
(check one) [_] Class A, [_] Class B*, [_] Class C* 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.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL
PLAN IS MADE.
49
<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
account for investment in Merrill To...............................Bank
Lynch EuroFund as indicated below: (Investor's Bank)
Bank Address.........................
Amount of each check or ACH debit
$.................................
City...... State...... Zip Code......
Account No. ......................
As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning charge to my account ACH debits
___________ or as soon as possible drawn on my account by and payable
(Month) to Merrill Lynch Financial Data
thereafter. Services, Inc. I agree that your
I agree that you are preparing rights in respect to each such debit
these ACH debits voluntarily at my shall be the same as if it were a
request and that you shall not be check drawn on you and signed
liable for any loss arising from any personally by me. This authority is
delay in preparing or failure to to remain in effect until revoked by
prepare any such debit. If I change me in writing. Until you receive
banks or desire to terminate or such notice, you shall be fully
suspend this program, I agree to protected in honoring any such
notify you promptly in writing. I debit. I further agree that if any
hereby authorize you to take any such debit be dishonored, whether
action to correct erroneous ACH with or without cause and whether
debits of my bank account or intentionally or inadvertently, you
purchases of fund shares including shall be under no liability.
liquidating shares of the Fund and
crediting my bank account. I further ............ .....................
agree that if a debit is not honored Date Signature of
upon presentation, Merrill Lynch Depositor
Financial Data Services, Inc. is
authorized to discontinue immediately ............ .....................
the Automatic Investment Plan and to Bank Signature of Depositor
liquidate sufficient shares held in Account (If joint account,
my account to offset the purchase Number both must sign)
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.
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.................................................. 16
Management of the Fund.................................................... 17
Trustees................................................................. 17
Management and Advisory Arrangements..................................... 17
Code of Ethics........................................................... 18
Transfer Agency Services................................................. 19
Purchase of Shares........................................................ 19
Initial Sales Charge Alternatives--Class A and
Class D Shares.......................................................... 22
Deferred Sales Charge Alternatives--Class B and Class C Shares........... 24
Distribution Plans....................................................... 27
Limitations on the Payment of Deferred Sales Charges..................... 29
Redemption of Shares...................................................... 29
Redemption............................................................... 29
Repurchase............................................................... 30
Reinstatement Privilege--Class A and Class D Shares...................... 31
Shareholder Services...................................................... 31
Investment Account....................................................... 31
Exchange Privilege....................................................... 32
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 33
Systematic Withdrawal Plans.............................................. 33
Automatic Investment Plans............................................... 34
Fee-Based Programs....................................................... 34
Performance Data.......................................................... 34
Additional Information.................................................... 36
Dividends and Distributions.............................................. 36
Taxes.................................................................... 36
Determination of Net Asset Value......................................... 39
Organization of the Fund................................................. 40
Shareholder Reports...................................................... 40
Shareholder Inquiries.................................................... 40
Appendix.................................................................. 41
Options on Securities and Securities Indices............................. 41
Futures.................................................................. 43
Foreign Exchange Transactions............................................ 43
Risk Factors in Options, Futures and Currency Instruments................ 45
Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Strategic Instruments............................................... 45
Additional Limitations on the Use of Strategic Instruments............... 46
Authorization Form........................................................ 47
</TABLE>
Code #10475-0198
[LOGO] MERRILL LYNCH
Merrill Lynch
Euro Fund
[ART]
PROSPECTUS
January 30, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
[C/R/C]
<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 Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated January
30, 1998 (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 January 30, 1998.
<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, 1996 and 1997, the Fund's portfolio turnover rates were 92.34% and 92.65%,
respectively.
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
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, which may expose the Fund to
certain risks. These investment practices and the associated risks are
described in detail in the Appendix attached to the Prospectus.
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
2
<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 statistical 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. High yield securities tend to be more
volatile than higher rated fixed income securities and adverse economic events
may have a greater impact on the
3
<PAGE>
prices of high yield securities than on higher rated fixed income securities.
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.
4
<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. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(l)(F) or (G) (the "funds of funds" provisions) of the
Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
5
<PAGE>
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. 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
6
<PAGE>
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 as required by the Internal Revenue Code of
1986, as amended (the "Code"). European corporations frequently issue
additional capital stock by means of subscription rights offerings to existing
shareholders at a price substantially below the market price of the shares. The
failure to exercise such rights would result in the Fund's interest in the
issuing company being diluted and may cause the Fund to forego a favorable
investment opportunity. The market for such rights is not well developed, and
accordingly, the Fund may not always realize full value on the sale of rights.
Therefore, the exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
have already been exceeded as a result of fluctuations in the market value of
the Fund's portfolio securities with the result that the Fund would otherwise
be forced either to sell securities at a time when it might not otherwise have
done so or to forego exercising the rights.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
Information about the Trustees, executive officers and portfolio manager of
the Fund, including their ages and their principal occupations for at least the
last five years, is set forth below. Unless otherwise noted, the address of the
portfolio manager and of each executive officer and Trustee is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Trustee(1)(2)--Chairman of the Manager
(which term as used herein includes its corporate predecessors) since 1997;
Chairman of Fund Asset Management, L.P. ("FAM," which term as used herein
includes its corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman and Director of Princeton Services, Inc.
("Princeton Services") since 1997; President and Director of Princeton Services
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990.
Donald Cecil (71)--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 (71)--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 (66)--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.
7
<PAGE>
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) and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (63)--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 (57)--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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
Alan J. Albert (50)--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 (36)--Senior 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 (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager since 1990.
Gerald M. Richard (48)--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 thereof since 1984.
Philip Mandel (50)--Secretary(1)(2)--First Vice President of the Manager
since 1997; Assistant General Counsel of Merrill Lynch from 1989 to 1997.
- --------
(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 December 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 $37,937 for the fiscal year ended October 31, 1997.
8
<PAGE>
The following table sets forth for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1997, 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 $269,350
Edward H. Meyer......... $6,000 None $214,600
Charles C. Reilly....... $7,500 None $282,000
Richard R. West......... $7,500 None $273,000
Edward D. Zinbarg....... $7,500 None $133,500
</TABLE>
- --------
(1) In addition to the Fund, the Trustees serve on the boards of MLAM/FAM
Advised Funds as follows: Mr. Cecil (33 registered investment companies
consisting of 33 portfolios); Mr. Meyer (33 registered investment
companies consisting of 33 portfolios); Mr. Reilly (46 registered
investment companies consisting of 59 portfolios); Mr. West (47 registered
investment companies consisting of 69 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, 1995, 1996 and 1997, the total management fees paid by the
Fund to the Manager aggregated $8,514,893, $7,971,953 and $10,128,366,
respectively.
As described in the Prospectus, the Manager has also entered into a sub-
advisory agreement with MLAM U.K. pursuant to which MLAM U.K. provides
investment advisory services to the Manager with respect to the Fund. For the
fiscal years ended October 31, 1995, 1996 and 1997, the sub-advisory fees paid
by the Manager to MLAM U.K. pursuant to such agreement aggregated $1,702,979,
$1,584,850 and $1,761,720, respectively.
9
<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, 1995,
1996 and 1997, the amounts of such reimbursement were $277,433, $161,152 and
$132,782, 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. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Management 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
Pricing SM 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,
10
<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 (except that Class
B shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM 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 Pricing SM
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, 1995, 1996 and 1997, 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, 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. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1997, were $97,591, of which the Distributor received $5,476 and Merrill Lynch
received $92,115.
For the fiscal years ended October 31, 1995, 1996 and 1997 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 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. The gross
sales charges for the sale of Class D shares for the fiscal year ended
October 31, 1997, were $141,405, of which the Distributor received $9,679 and
Merrill Lynch received $131,726.
For the fiscal years ended October 31, 1995, 1996 and 1997, 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 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. For the fiscal years
ended October 31, 1996 and 1997, 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.
11
<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 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 that has not been in existence for at least six months or that 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 Pricing SM 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 pursuant to this option, if such additional Class A
shares will be held in the same account as the existing
12
<PAGE>
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 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
13
<PAGE>
purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to that further reduced percentage
sales charge, but there will be no retroactive reduction of the sales charges
on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. The
Blueprint program is directed to small investors, group IRAs and participants
in certain affinity groups such as credit unions, trade associations and
benefit plans. Investors placing orders to purchase Class A or Class D shares
of the Fund through Blueprint will acquire the Class A or Class D shares at
net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 to
$5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class A or Class D shares of
the Fund are being offered at net asset value plus a sales charge of .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.
14
<PAGE>
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. 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 that might
result from an acquisition of assets having net unrealized appreciation which
is
15
<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 that (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, that 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
16
<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.
17
<PAGE>
The following table sets forth comparative information as of October 31,
1997, 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, 1997
------------------------------------------------------------------------------
(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, 1997:
Under NASD Rule as
Adopted................ $1,902,601 $118,913 $62,270 $181,183 $69,669 $111,514 $6,089
Under Distributor's
Voluntary Waiver....... $1,902,601 $118,913 $ 9,513 $128,426 $69,669 $ 58,757 $6,089
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1997:
Under NASD Rule as
Adopted................ $ 20,451 $ 1,278 $ 153 $ 1,431 $ 285 $ 1,146 $ 167
</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. This figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC period and
invested the proceeds, without the imposition of a sales charge, in Class
A shares in conjunction with the shareholder's participation in the
Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFA SM) Program (the
"MFA Program"). The CDSC is booked as a contingent obligation that may be
payable if the shareholder terminates participation in the MFA Program.
See "Purchase of Shares--Distribution Plans" in the Prospectus.
(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
18
<PAGE>
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.
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 certain instances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawals 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, 1995 and 1996 with
respect to redemptions of Class B shares, the Distributor received CDSCs of
$2,352,273 and $1,494,280, respectively, all of which were paid to Merrill
Lynch. For the fiscal year ended October 31, 1997, with respect to redemptions
of Class B shares, the Distributor received CDSCs of $1,421,145, $847,913 of
which were paid to Merrill Lynch. Additional CDSCs payable to the Distributor
with respect to the fiscal year ended October 31, 1997, may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. For the fiscal years ended October
31, 1995, 1996 and 1997, with respect to redemptions of Class C shares, the
Distributor received CDSCs of $2,495, $5,421 and $8,568, respectively, all of
which were paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may
differ from those available to other investors in Class B shares. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase order is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of the Blueprint automatic investment
plan. Additional information concerning these Blueprint programs, including any
annual fees or transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The Blueprint SM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
19
<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, 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. For the fiscal year ended October 31, 1997,
the Fund paid total brokerage commissions of $3,369,078, of which $75,758 or
2.3% was paid to Merrill Lynch for effecting 2.8% 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 NASD 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 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.
20
<PAGE>
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 that they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement 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, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. The Fund also will determine its net
asset value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be affected materially, but only if
on any such day the Fund is required to sell or redeem shares. Any assets or
liabilities expressed in terms of foreign currencies are translated into U.S.
dollars at the prevailing market rates quoted by one or more banks or dealers
on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including
21
<PAGE>
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, including ADRs, EDRs or GDRs, that are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest
and most representative market. 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 Blueprint SM 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.
22
<PAGE>
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 or she 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) or CBA(R) Automated Investment Program.
23
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
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 Merrill Lynch in writing if the
shareholder's account is maintained by Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent 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. The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make withdrawals from an Investment Account of
Class A, Class B, Class C or Class D shares on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for shareholders
who have acquired shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more and monthly withdrawals are available
for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. 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 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 shares in the Investment Account are
reinvested automatically in shares of the Fund. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Transfer Agent or the Distributor.
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
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for shares of the Fund from investors 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.
24
<PAGE>
Alternatively, a 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 $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her 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. Under the Merrill Lynch
Select Pricing SM System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his 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
25
<PAGE>
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 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
26
<PAGE>
"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 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 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. As long as 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
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<PAGE>
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 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).
Recent legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends as well as the amounts of capital gain dividends in the different
categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January 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 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. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the
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<PAGE>
case of foreign taxes passed through by a RIC, the holding period requirements
referred to above must be met by both the shareholder and the RIC. No
deductions for foreign taxes, moreover, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to 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 and other information needed to claim the foreign tax credit.
For this purpose, the Fund will allocate foreign taxes and foreign source
income among the Class A, Class B, Class C and Class D shareholders according
to a method (which it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to 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.
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
29
<PAGE>
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.
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,
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<PAGE>
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.
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<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,
1997........... 25.19% $1,251.90 26.84% $1,268.40 29.81% $1,298.10 24.92% $1,249.20
Five Years Ended
October 31,
1997........... 19.09% $2,395.10 19.13% $2,399.60
Inception
(October 26,
1988) to
October 31,
1997........... 13.24% $3,067.80
Ten Years Ended
October 31,
1997........... 11.98% $3,101.40
Inception
(October 21,
1994) to
October 31,
1997........... 17.67% $1,636.60 16.52% $1,588.70
</TABLE>
(Table continues on following page)
32
<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,
1997........... 32.13% $1,321.30 30.84% $1,308.40 30.81% $1,308.10 31.84% $1,318.40
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,
1997........... 206.78% $3,067.80
Inception
(January 30,
1987) to
October 31,
1997........... 188.12% $2,881.20
Inception
(October 21,
1994) to
October 31,
1997........... 63.66% $1,636.60 58.87% $1,588.70
</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.
33
<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.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
34
<PAGE>
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, 1997, 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.................. $563,098,234 $811,858,940 $22,260,147 $150,474,003
============ ============ =========== ============
Number of Shares
Outstanding................ 30,481,633 47,987,420 1,323,824 8,198,804
============ ============ =========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............... $ 18.47 $ 16.92 $ 16.82 $ 18.35
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price (5.54% of
net asset value per
share))*................... 1.02 ** ** 1.02
------------ ------------ ----------- ------------
Offering Price.............. $ 19.49 $ 16.92 $ 16.82 $ 19.37
============ ============ =========== ============
</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.
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.
35
<PAGE>
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, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co., under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
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 December 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.
36
<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, 1997,
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, 1997 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, 1997, 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 12, 1997
37
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Croatia
Banking 90,000 Zagrebacka Banka D.D. (GDR)* $ 1,234,184 $ 2,868,750 0.2%
Pharmaceuticals 237,492 Pliva D.D. (GDR)* 2,053,449 3,681,126 0.2
Total Investments in Croatia 3,287,633 6,549,876 0.4
Denmark
Textiles 113,877 Carli Gry International A/S 3,257,298 5,633,951 0.4
Total Investments in Denmark 3,257,298 5,633,951 0.4
Finland
Food 73,092 Huhtamaki 'I' Group 3,284,993 3,049,627 0.2
Metals & Mining 596,782 Outokumpu OY 9,260,443 8,896,847 0.6
Paper & Forest 818,335 Enso-Gutzeit OY 'R' (Ordinary)
Products (Registered) 6,528,605 7,779,332 0.5
1,959,500 Metsa Serla OY (Class B) 14,945,500 17,261,810 1.1
459,820 UPM-Kymmene Corp. 9,614,022 10,166,785 0.7
31,088,127 35,207,927 2.3
Total Investments in Finland 43,633,563 47,154,401 3.1
France
Automobiles & 55,443 Peugeot S.A. 6,129,524 6,280,014 0.4
Equipment 96,600 Sommer Allibert S.A. 2,862,214 3,267,476 0.2
-------------- -------------- ------
8,991,738 9,547,490 0.6
Banking 215,431 Banque Nationale de Paris 9,524,245 9,529,038 0.6
106,156 Societe Generale de France S.A. 11,426,920 14,546,963 1.0
-------------- -------------- ------
20,951,165 24,076,001 1.6
Communication 202,514 Alcatel Alsthom Cie Generale
Equipment d'Electricite S.A. 19,117,289 24,449,218 1.6
Construction 228,561 Bouygues S.A. 21,707,086 21,409,010 1.4
Consumer Products 17,715 Christian Dior S.A. 1,807,346 1,966,626 0.1
Electronics 81,312 ++SGS-Thomson Microelectronics N.V. 3,745,574 5,789,866 0.4
Energy 68,730 Elf Aquitaine S.A. 7,731,656 8,512,267 0.5
Financial Services 150,200 Compagnie Financiere de Paribas S.A. 8,164,002 10,913,925 0.7
49,472 EuraFrance S.A. 14,476,089 20,157,802 1.3
-------------- -------------- ------
22,640,091 31,071,727 2.0
Hotels 50,674 Accor S.A. 7,100,272 9,440,395 0.6
Insurance 527,517 Assurances Generales de France (AGF) 16,893,934 27,771,277 1.8
337,791 Axa-UAP 21,157,910 23,144,396 1.5
-------------- -------------- ------
38,051,844 50,915,673 3.3
</TABLE>
38
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
France (concluded)
Machinery 177,431 ++Compagnie de Fives-Lille S.A. $ 9,488,305 $ 10,618,160 0.7%
Metals & Steel 1,359,879 Usinor-Sacilor 21,707,350 22,527,050 1.4
Retail 59,647 Castorama Dubois Investisse 7,987,461 6,218,187 0.4
Telecommunications 59,344 ++France Telecom S.A. 1,872,587 2,247,146 0.1
Utilities 7,942 Compagnie Generale des Eaux 865,437 924,385 0.1
Total Investments in France 193,765,201 229,713,201 14.8
Germany
Automobiles 197,781 Daimler-Benz AG 13,452,925 13,280,452 0.9
39,203 Volkswagen AG 17,089,369 23,224,148 1.5
-------------- -------------- ------
30,542,294 36,504,600 2.4
Chemicals 234,870 BASF AG 8,019,324 7,987,847 0.5
445,345 Bayer AG 16,266,592 15,663,841 1.0
77,016 Henkel KGaA 3,295,326 3,761,028 0.3
387,409 Henkel KGaA (Preferred) 16,360,407 20,157,610 1.3
-------------- -------------- ------
43,941,649 47,570,326 3.1
Construction 33,402 ++Philipp Holzmann AG 12,511,136 9,418,040 0.6
Diversified Holdings 188,558 VEBA AG 9,549,932 10,534,518 0.7
Engineering 321,783 ++Kloeckner Werke AG 14,985,368 24,693,539 1.6
Insurance 11,791 Muenchener Rueckversicherungs-
Gesellschaft AG 3,429,608 3,441,127 0.2
Manufacturing 18,901 Plettac AG 4,353,643 3,439,342 0.2
Mining 181,069 Thyssen AG 39,083,719 40,053,924 2.6
Retail Trade 31,732 Karstadt AG 11,171,623 11,068,659 0.7
55,190 Moebel Walther AG (Preferred) 2,067,520 2,181,803 0.1
-------------- -------------- ------
13,239,143 13,250,462 0.8
Total Investments in Germany 171,636,492 188,905,878 12.2
Hungary
Financial Services 75,000 ++Euronet Services, Inc. 1,038,281 731,250 0.0
Pharmaceuticals 98,064 Gedeon Richter (GDR)* 1,475,761 9,119,952 0.6
Total Investments in Hungary 2,514,042 9,851,202 0.6
Ireland
Building & 686,394 CRH PLC 7,454,519 8,279,246 0.5
Construction
Food 693,901 Greencore Group PLC 3,481,856 3,294,370 0.2
Total Investments in Ireland 10,936,375 11,573,616 0.7
</TABLE>
39
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Italy
Business Services 7,347,051 ++Seat S.p.A. $ 2,044,683 $ 1,926,112 0.1%
Construction/ 771,200 Italcementi S.p.A 5,174,183 5,294,070 0.3
Building Materials
Diversified Holdings 13,030,335 ++Compagnie Industriali Riunite
S.p.A. (CIR) 12,170,577 10,410,079 0.7
49,714,126 MontEdison S.p.A. 41,768,591 40,423,251 2.6
-------------- -------------- ------
53,939,168 50,833,330 3.3
Insurance 680,382 Assicurazioni Generali 12,407,667 15,239,945 1.0
10,608,185 Istituto Nazionale delle
Assicurazioni (INA) 15,357,042 17,106,938 1.1
-------------- -------------- ------
27,764,709 32,346,883 2.1
Telecommunications 10,228,454 ++Telecom Italia S.p.A. 30,385,307 41,402,903 2.7
Total Investments in Italy 119,308,050 131,803,298 8.5
Netherlands
Banking 372,959 ABN Amro Holding N.V. 7,069,323 7,516,079 0.5
Chemicals 133,140 Akzo Nobel 16,709,629 23,475,515 1.5
310,870 European Vinyls Corporation
International N.V. 11,599,987 7,722,881 0.5
-------------- -------------- ------
28,309,616 31,198,396 2.0
Construction 160,201 NBM-Amstelland N.V. 4,257,207 4,475,257 0.3
112,725 Volker Wessels Stevin N.V. 2,455,437 3,427,881 0.2
-------------- -------------- ------
6,712,644 7,903,138 0.5
Diversified Holdings 169,026 Internatio-Mueller N.V. 3,606,779 5,375,170 0.3
Electrical Equipment 315,668 Philips Electronics N.V. 11,394,953 24,730,201 1.6
113,948 Twentsche Kabel Holding N.V. 4,695,441 5,919,987 0.4
-------------- -------------- ------
16,090,394 30,650,188 2.0
Financial Services 376,515 ING Groep N.V. 15,464,692 15,815,881 1.0
Paper & Forest 858,015 Koninklijke KNP BT N.V. 18,144,476 19,546,568 1.3
Products
Steel 174,270 ++Ispat International N.V. 4,720,005 4,446,122 0.3
Telecommunications 754,082 Royal PTT Nederland N.V. 27,032,181 28,838,720 1.9
Transport Services 117,568 Koninklijke Pakhoed N.V. 4,561,548 3,853,894 0.2
Total Investments in the Netherlands 131,711,658 155,144,156 10.0
Norway
Computer Software 260,905 Merkantildata ASA 6,111,120 8,712,967 0.6
Oil & Gas Producers 311,424 Saga Petroleum A.S. (Class B) 3,816,498 5,511,143 0.3
Publishing 262,196 Schibsted ASA 5,407,096 4,901,909 0.3
Total Investments in Norway 15,334,714 19,126,019 1.2
</TABLE>
40
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Poland
Chemicals 387,805 ++Polifarb Wroclaw S.A. $ 991,199 $ 1,872,162 0.1%
Electrical Equipment 598,719 ++Bydgoska Fabryka Kabli S.A. 1,787,466 4,903,302 0.3
Plastics 70,000 ++Zaklady Lentex S.A. 684,961 903,161 0.1
Total Investments in Poland 3,463,626 7,678,625 0.5
Portugal
Construction/ 225,000 Cimpor-Cimentos de Portugal S.A. 4,581,513 5,698,634 0.4
Building Materials
Total Investments in Portugal 4,581,513 5,698,634 0.4
Romania
Investments 135,000 Romanian Growth Fund 1,390,500 996,300 0.1
Total Investments in Romania 1,390,500 996,300 0.1
Slovakia
Banking 17,853 SKB Banka (GDR)* 601,707 332,066 0.0
Metals & Mining 121,700 ++Zavod SNP 1,835,272 1,115,641 0.1
Pharmaceuticals 29,167 Slovakofarma 2,128,863 4,470,912 0.3
Total Investments in Slovakia 4,565,842 5,918,619 0.4
Spain
Oil--Related 146,440 Repsol S.A. 5,535,387 6,149,976 0.4
Utilities--Electric 1,229,684 Endesa S.A. 20,903,532 23,196,793 1.5
Total Investments in Spain 26,438,919 29,346,769 1.9
Sweden
Appliances 237,683 Electrolux AB 10,316,447 19,696,521 1.3
Engineering 127,619 SKF AB (Class A) 2,229,577 2,848,600 0.2
189,250 Svedala Industry AB 2,485,262 3,718,373 0.2
-------------- -------------- ------
4,714,839 6,566,973 0.4
Insurance 329,277 Skandia Forsakrings AB 9,019,387 15,403,845 1.0
Metals & Steel 934,351 Avesta-Sheffield AB 8,667,983 6,993,552 0.4
Paper & Forest 321,435 Mo och Domsjo AB (Class B) 7,608,913 8,721,454 0.6
Products 6,095,550 Rottneros Bruks AB 8,904,861 5,540,150 0.4
680,554 Stora Kopparbergs AB 8,542,903 9,414,617 0.6
-------------- -------------- ------
25,056,677 23,676,221 1.6
Total Investments in Sweden 57,775,333 72,337,112 4.7
</TABLE>
41
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Switzerland
Banking 37,333 Credit Suisse Group (Registered) $ 3,752,564 $ 5,276,914 0.3%
Consumer Products 44,461 Societe Suisse pour la Microelectronique
et l'Horlogerie AG (Registered) 6,244,014 5,846,359 0.4
Diversified Holdings 239,817 Oerlikon-Buehrle Holding AG 25,353,554 30,761,192 2.0
Machinery 12,184 Saurer AG (Registered) 5,893,521 8,084,833 0.5
Pharmaceuticals 26,443 Novartis AG (Registered) 37,832,701 41,554,639 2.7
Retail 10,859 Fotolabo S.A. 4,516,446 2,645,690 0.2
Total Investments in Switzerland 83,592,800 94,169,627 6.1
Turkey
Appliances 17,564,000 Ardem Pisirici Ve Isitici Cihazlar
Sanayii A.S. 2,067,213 2,035,531 0.2
Oil & Gas Producers 5,354,040 ++Tupras-Turkiye Petrol Rafinerileri A.S. 430,567 481,793 0.0
Total Investments in Turkey 2,497,780 2,517,324 0.2
United Kingdom
Automobiles & 5,259,274 LucasVarity PLC 16,920,886 18,042,949 1.2
Equipment
Banking 944,393 National Westminster Bank PLC 10,334,000 13,577,568 0.9
Beverages 1,594,814 Allied Domecq PLC 11,063,834 13,016,113 0.8
854,926 Bass PLC 11,136,382 11,875,374 0.8
617,140 Matthew Clark PLC 6,049,421 2,536,519 0.2
-------------- -------------- ------
28,249,637 27,428,006 1.8
Chemicals 792,811 Imperial Chemical Industries PLC 12,323,872 11,704,174 0.7
1,495,500 Inspec Group PLC 6,707,529 6,008,698 0.4
-------------- -------------- ------
19,031,401 17,712,872 1.1
Computer/Commercial/ 466,415 Misys PLC 6,652,871 11,756,428 0.7
Office
Diversified Holdings 7,897,742 BTR PLC 29,374,368 26,664,120 1.7
Electronics 402,917 Fairey Group PLC 3,425,946 4,156,991 0.3
2,162,162 General Electric Company PLC 14,158,564 13,810,728 0.9
-------------- -------------- ------
17,584,510 17,967,719 1.2
Financial Services 932,381 HSBC Holdings PLC 28,260,928 23,227,811 1.5
Food & Beverage 1,240,800 Cadbury Schweppes PLC 10,423,624 12,489,396 0.8
4,745,196 Unilever PLC 24,760,963 35,344,801 2.3
-------------- -------------- ------
35,184,587 47,834,197 3.1
Glass 3,832,491 Pilkington PLC 7,721,763 9,708,374 0.6
</TABLE>
42
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Investments Cost (Note 1a) Net Assets
United Kingdom (concluded)
<S> <C> <S> <C> <C> <C>
Metals 580,189 Johnson Matthey PLC $ 5,297,007 $ 5,703,685 0.4%
Metals & Mining 858,187 Rio Tinto PLC (Registered) 13,701,314 11,056,854 0.7
Oil--Related 445,270 Expro International Group PLC 3,473,861 4,444,560 0.3
Retail 8,763,493 Asda Group PLC 15,993,806 22,787,536 1.5
2,840,701 Tesco PLC 15,074,678 22,743,635 1.5
1,082,901 W.H. Smith Group PLC 6,617,463 6,867,030 0.4
-------------- -------------- ------
37,685,947 52,398,201 3.4
Telecommunications 2,227,050 British Telecommunications PLC 14,650,163 16,924,511 1.1
1,730,855 Cable & Wireless PLC 12,596,679 13,821,528 0.9
-------------- -------------- ------
27,246,842 30,746,039 2.0
Tobacco 2,976,639 B.A.T. Industries PLC 25,342,446 26,041,674 1.7
445,007 Gallaher Group PLC 1,850,855 2,138,848 0.1
-------------- -------------- ------
27,193,301 28,180,522 1.8
Utilities--Electric, 458,350 Anglian Water PLC 4,170,424 6,159,113 0.4
Gas & Water 752,544 Energy Group PLC 7,984,002 7,669,492 0.5
491,316 Severn Trent PLC 5,031,070 7,121,362 0.4
755,446 South West Water PLC 5,932,852 10,810,378 0.7
609,500 United Utilities PLC 5,559,936 7,448,892 0.5
-------------- -------------- ------
28,678,284 39,209,237 2.5
Total Investments in the United Kingdom 342,591,507 385,659,142 24.9
Face
Amount Short-Term Securities
Repurchase US$ 6,537,000 UBS Securities, Inc., purchased on
Agreements** 10/31/1997 to yield 5.67% to 11/03/1997 6,537,000 6,537,000 0.4
Total Investments in Short-Term
Securities 6,537,000 6,537,000 0.4
Total Investments $1,228,819,846 1,416,314,750 91.5
==============
Foreign Time Deposits++++ 386,683,350 25.0
Liabilities in Excess of Other Assets (255,306,776) (16.5)
-------------- ------
Net Assets $1,547,691,324 100.0%
============== ======
<FN>
*Global Depositary Receipts (GDR).
**Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
++Non-income producing security.
++++Foreign time deposits bear interest at 3.875% and 3.25% with
each maturing on 11/03/1997 and 11/04/1997, respectively.
See Notes to Financial Statements.
</TABLE>
43
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of October 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,228,819,846) (Note 1a) $1,416,314,750
Cash 1,366
Foreign cash (Note 1b) 42,007,426
Foreign time deposits (Note 1b) 386,683,350
Receivables:
Securities sold $ 43,943,569
Beneficial interest sold 10,323,450
Dividends 2,851,526
Interest 21,837 57,140,382
--------------
Prepaid registration fees (Note 1f) 85,938
--------------
Total assets 1,902,233,212
--------------
Liabilities: Payables:
Securities purchased 345,284,397
Beneficial interest redeemed 6,476,611
Investment adviser (Note 2) 1,009,815
Distributor (Note 2) 766,080 353,536,903
--------------
Accrued expenses and other liabilities 1,004,985
--------------
Total liabilities 354,541,888
--------------
Net Assets: Net assets $1,547,691,324
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 3,048,163
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 4,798,742
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 132,382
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 819,880
Paid-in capital in excess of par 1,105,668,173
Accumulated distributions in excess of investment
income--net (Note 1h) (10,162,843)
Undistributed realized capital gains on investments and foreign
currency transactions--net 255,804,723
Unrealized appreciation on investments and foreign currency
transactions--net 187,582,104
--------------
Net assets $1,547,691,324
==============
Net Asset Value: Class A--Based on net assets of $563,098,234 and 30,481,633 shares
of beneficial interest outstanding $ 18.47
==============
Class B--Based on net assets of $811,858,940 and 47,987,420 shares
of beneficial interest outstanding $ 16.92
==============
Class C--Based on net assets of $22,260,147 and 1,323,824 shares
of beneficial interest outstanding $ 16.82
==============
Class D--Based on net assets of $150,474,003 and 8,198,804 shares
of beneficial interest outstanding $ 18.35
==============
See Notes to Financial Statements.
</TABLE>
44
<PAGE>
Merrill Lynch EuroFund October 31, 1997
<TABLE>
FINANCIAL INFORMATION (continued)
<CAPTION>
Statement of Operations for the Year Ended October 31, 1997
<S> <S> <C> <C>
Investment Dividends (net of $3,912,309 foreign withholding tax) $ 27,358,290
Income Interest 6,709,083
(Notes 1d & 1e): --------------
Total income 34,067,373
--------------
Expenses: Investment advisory fees (Note 2) $ 10,128,366
Account maintenance and distribution fees--Class B (Note 2) 7,960,479
Transfer agent fees--Class B (Note 2) 1,449,803
Custodian fees 1,125,649
Transfer agent fees--Class A (Note 2) 606,012
Account maintenance fees--Class D (Note 2) 328,429
Account maintenance and distribution fees--Class C (Note 2) 208,327
Transfer agent fees--Class D (Note 2) 201,296
Printing and shareholder reports 158,290
Accounting services (Note 2) 132,782
Registration fees (Note 1f) 112,195
Professional fees 82,743
Transfer agent fees--Class C (Note 2) 41,650
Trustees' fees and expenses 37,937
Pricing fees 31,652
Other 32,030
--------------
Total expenses 22,637,640
--------------
Investment income--net 11,429,733
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 259,640,424
(Loss) on Foreign currency transactions--net (10,193,843) 249,446,581
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 99,342,520
(Notes 1b, 1c, Foreign currency transactions--net 108,436 99,450,956
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 348,897,537
--------------
Net Increase in Net Assets Resulting from Operations $ 360,327,270
==============
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 11,429,733 $ 13,683,433
Realized gain on investments and foreign currency
transactions--net 249,446,581 174,762,791
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 99,450,956 (13,107,489)
-------------- --------------
Net increase in net assets resulting from operations 360,327,270 175,338,735
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (6,021,879) --
Shareholders Class B (15,309,051) --
(Note 1h): Class C (416,944) --
Class D (2,740,402) --
In excess of investment income--net:
Class A (2,089,129) --
Class B (5,311,063) --
Class C (144,648) --
Class D (950,709) --
Realized gain on investments--net:
Class A (29,824,108) (13,622,154)
Class B (104,006,961) (56,048,905)
Class C (2,515,859) (685,313)
Class D (14,571,787) (6,991,081)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (183,902,540) (77,347,453)
-------------- --------------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial
Transactions interest transactions 286,738,788 (127,806,154)
(Note 4): -------------- --------------
Net Assets: Total increase (decrease) in net assets 463,163,518 (29,814,872)
Beginning of year 1,084,527,806 1,114,342,678
-------------- --------------
End of year* $1,547,691,324 $1,084,527,806
============== ==============
<FN>
*Undistributed (accumulated distributions in excess of)
investment income--net (Note 1i) $ (10,162,843) $ 13,058,543
============== ==============
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 16.67 $ 15.07 $ 15.96 $ 13.87 $ 10.53
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .26 .32 .19 .18 .26
Realized and unrealized
gain on investments
and foreign currency
transactions--net 4.31 2.32 .56 1.91 3.08
---------- ---------- ---------- ---------- ----------
Total from investment
operations 4.57 2.64 .75 2.09 3.34
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.44) -- -- -- --
In excess of investment
income--net (.15) -- -- -- --
Realized gain on
investments--net (2.18) (1.04) (1.64) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (2.77) (1.04) (1.64) -- --
---------- ---------- ---------- ---------- ----------
Net asset value,
end of year $ 18.47 $ 16.67 $ 15.07 $ 15.96 $ 13.87
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 32.13% 18.86% 6.19% 15.07% 31.72%
========== ========== ========== ========== ==========
Ratios to Average Expenses 1.03% 1.10% 1.12% 1.03% 1.04%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 1.53% 2.04% 1.32% 1.17% 1.50%
========== ========== ========== ========== ==========
Supplemental Net assets,
Data: end of year (in thousands) $ 563,098 $ 216,056 $ 204,713 $ 236,288 $ 182,612
========== ========== ========== ========== ==========
Portfolio turnover 92.65% 92.34% 72.16% 82.47% 115.10%
========== ========== ========== ========== ==========
Average commission rate
paid+++ $ .0029 $ .0046 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
+++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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 15.47 $ 14.20 $ 15.28 $ 13.43 $ 10.30
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .07 .14 .04 .02 .16
Realized and unrealized gain
on investments and foreign
currency transactions--net 3.99 2.17 .52 1.83 2.97
---------- ---------- ---------- ---------- ----------
Total from investment
operations 4.06 2.31 .56 1.85 3.13
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.32) -- -- -- --
In excess of investment
income--net (.11) -- -- -- --
Realized gain on
investments--net (2.18) (1.04) (1.64) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (2.61) (1.04) (1.64) -- --
---------- ---------- ---------- ---------- ----------
Net asset value,
end of year $ 16.92 $ 15.47 $ 14.20 $ 15.28 $ 13.43
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 30.84% 17.61% 5.12% 13.78% 30.39%
========== ========== ========== ========== ==========
Ratios to Average Expenses 2.06% 2.13% 2.15% 2.06% 2.08%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .45% 1.00% .27% .14% .51%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 811,859 $ 738,535 $ 795,469 $1,086,480 $ 765,279
========== ========== ========== ========== ==========
Portfolio turnover 92.65% 92.34% 72.16% 82.47% 115.10%
========== ========== ========== ========== ==========
Average commission
rate paid+++ $ .0029 $ .0046 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
+++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 inforeign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C++++
For the
For the Period
The following per share data and ratios have been derived Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.45 $ 14.19 $ 15.28 $ 15.08
Operating ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net .07 .15 .01 (.01)
Realized and unrealized gain on investments
and foreign currency transactions--net 3.97 2.15 .54 .21
---------- ---------- ---------- ----------
Total from investment operations 4.04 2.30 .55 .20
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.36) -- -- --
In excess of investment income--net (.13) -- -- --
Realized gain on investments--net (2.18) (1.04) (1.64) --
---------- ---------- ---------- ----------
Total dividends and distributions (2.67) (1.04) (1.64) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 16.82 $ 15.45 $ 14.19 $ 15.28
========== ========== ========== ==========
Total Investment Based on net asset value per share 30.81% 17.55% 5.04% 1.33%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 2.08% 2.15% 2.18% 2.86%*
Net Assets: ========== ========== ========== ==========
Investment income (loss)--net .43% 1.04% .11% (2.47%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 22,260 $ 15,917 $ 9,668 $ 462
Data: ========== ========== ========== ==========
Portfolio turnover 92.65% 92.34% 72.16% 82.47%
========== ========== ========== ==========
Average commission paid+++++ $ .0029 $ .0046 -- --
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects 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 inforeign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
++Commencement of operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
Merrill Lynch EuroFund October 31, 1997
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D++++
For the
For the Period
The following per share data and ratios have been derived Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.57 $ 15.02 $ 15.96 $ 15.75
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .20 .28 .20 --++++++
Realized and unrealized gain on investments
and foreign currency transactions--net 4.31 2.31 .50 .21
---------- ---------- ---------- ----------
Total from investment operations 4.51 2.59 .70 .21
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.41) -- -- --
In excess of investment income--net (.14) -- -- --
Realized gain on investments--net (2.18) (1.04) (1.64) --
---------- ---------- ---------- ----------
Total dividends and distributions (2.73) (1.04) (1.64) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 18.35 $ 16.57 $ 15.02 $ 15.96
========== ========== ========== ==========
Total Investment Based on net asset value per share 31.84% 18.57% 5.85% 1.33%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.28% 1.34% 1.38% 2.11%*
Net Assets: ========== ========== ========== ==========
Investment income (loss)--net 1.21% 1.83% 1.37% (1.70%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 150,474 $ 114,020 $ 104,493 $ 340
Data: ========== ========== ========== ==========
Portfolio turnover 92.65% 92.34% 72.16% 82.47%
========== ========== ========== ==========
Average commission paid+++++ $ .0029 $ .0046 -- --
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects 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 significantly affect the rate shown.
++Commencement of operations.
++++Based on average shares outstanding during the period.
++++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
Merrill Lynch EuroFund October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch EuroFund (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund offers four classes of shares under the
Merrill Lynch Select Pricing SM System. Shares of Class A and Class
D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on 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. Securities 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 movements 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.
* 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
put options and purchase put and call options. When the Fund writes
an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current
market value of the option written. When a security is 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.
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.
51
<PAGE>
Merrill Lynch EuroFund October 31, 1997
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
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additional
securities daily to ensure that the contract is fully
collateralized.
(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of net investment income are due primarily to differing tax
treatments for foreign currency transactions.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,667,294 have been reclassified between undistributed net realized
capital gains and accumulated distributions in excess of 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 subsidiary 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, facilities, 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, 1997, MLAM paid MLAM U.K. a fee of $1,761,720
pursuant to such Agreement.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee 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 maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for
52
<PAGE>
providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
Merrill Lynch EuroFund October 31, 1997
For the year ended October 31, 1997, 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 $5,476 $ 92,115
Class D $9,679 $131,726
For the year ended October 31, 1997, MLPF&S received contingent
deferred sales charges of $1,421,145 and $8,568 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $75,758 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
October 31, 1997.
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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1997 were $1,075,578,750 and
$1,080,244,807, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 257,086,513 $ 187,494,904
Financial futures contracts 2,553,911 --
Foreign currency transactions (10,459,785) 87,200
Forward foreign exchange
contracts 265,942 --
------------- -------------
Total $ 249,446,581 $ 187,582,104
============= =============
As of October 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $176,480,644, of which $222,194,190
related to appreciated securities and $45,713,546 related to
depreciated securities. The aggregate cost of investments at October
31, 1997 for Federal income tax purposes was $1,239,834,106.
4. Shares of Beneficial Interest:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $286,738,788 and $(127,806,154) for the
years ended October 31, 1997 and October 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares
For the Year Ended Dollar
October 31, 1997 Shares Amount
Shares sold 26,338,718 $ 430,396,173
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,393,410 34,465,523
----------- -------------
Total issued 28,732,128 464,861,696
Shares redeemed (11,210,660) (185,967,493)
----------- -------------
Net increase 17,521,468 $ 278,894,203
=========== =============
Class A Shares
For the Year Ended Dollar
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 B Shares
For the Year Ended Dollar
October 31, 1997 Shares Amount
Shares sold 12,478,198 $ 191,822,144
Shares issued to shareholders in
reinvestment of dividends
and distributions 8,168,942 108,729,884
----------- -------------
Total issued 20,647,140 300,552,028
Shares redeemed (19,835,758) (306,830,535)
Automatic conversion of
shares (554,263) (8,320,978)
----------- -------------
Net increase (decrease) 257,119 $ (14,599,485)
=========== =============
53
<PAGE>
Merrill Lynch EuroFund October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
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 C Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 5,368,818 $ 83,195,165
Shares issued to shareholders
in reinvestment of dividends
and distributions 210,334 2,782,759
----------- -------------
Total issued 5,579,152 85,977,924
Shares redeemed (5,285,585) (82,227,446)
----------- -------------
Net increase 293,567 $ 3,750,478
=========== =============
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
=========== =============
Class D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 9,883,349 $ 166,073,878
Automatic conversion of
shares 513,600 8,320,978
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,058,039 15,172,446
----------- -------------
Total issued 11,454,988 189,567,302
Shares redeemed (10,135,898) (170,873,710)
----------- -------------
Net increase 1,319,090 $ 18,693,592
=========== =============
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)
=========== =============
5. Commitments:
At October 31, 1997, the Fund had outstanding foreign exchange
contracts under which it had agreed to purchase and sell foreign
currency aggregating approximately $137,249,000 and $137,455,000,
respectively.
54
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Other Investment Policies and Practices.................................. 2
Investment Restrictions.................................................. 4
Management of the Fund.................................................... 7
Trustees and Officers.................................................... 7
Compensation of Trustees................................................. 8
Management and Advisory Arrangements..................................... 9
Purchase of Shares........................................................ 10
Initial Sales Charge Alternatives--Class A and
Class D Shares.......................................................... 11
Reduced Initial Sales Charges--Class A and Class D Shares................ 13
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 16
Distribution Plans....................................................... 16
Limitations on the Payment of Deferred Sales Charges..................... 17
Redemption of Shares...................................................... 18
Deferred Sales Charges--Class B and Class C Shares....................... 19
Portfolio Transactions and Brokerage...................................... 20
Determination of Net Asset Value.......................................... 21
Shareholder Services...................................................... 22
Investment Account....................................................... 23
Automatic Investment Plans............................................... 23
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 24
Exchange Privilege....................................................... 25
Taxes..................................................................... 27
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 30
Special Rules for Certain Foreign Currency Transactions.................. 30
Performance Data.......................................................... 32
General Information....................................................... 34
Description of Shares.................................................... 34
Computation of Offering Price Per Share.................................. 35
Independent Auditors..................................................... 35
Custodian................................................................ 35
Transfer Agent........................................................... 35
Legal Counsel............................................................ 35
Reports to Shareholders.................................................. 36
Additional Information................................................... 36
Security Ownership of Certain Beneficial Owners.......................... 36
Independent Auditors' Report.............................................. 37
Financial Statements...................................................... 38
</TABLE>
Code # 10476-0198
[LOGO] MERRILL LYNCH
Merrill Lynch
Euro Fund
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
January 30, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
[C/R/C]
