<PAGE>
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------
Merrill Lynch International Equity Fund (the "Fund") is a diversified,
open-end management investment
company seeking capital appreciation and, secondarily, income by investing in a
diversified portfolio of equity securities of issuers located in countries other
than the United States. The Fund is designed for investors seeking to complement
their U.S. holdings through foreign equity investments. The Fund should be
considered as a vehicle for diversification and not as a balanced investment
program. Investments may be shifted among the various equity markets of the
world outside of the U.S. depending upon management's outlook with respect to
prevailing trends and developments. It is anticipated that a substantial portion
of the Fund's assets will be invested in the developed countries of Europe and
the Far East and that a significant portion of its assets also may be invested
in developing countries. The Fund may employ a variety of investments and
techniques to hedge against market and currency risk. There can be no assurance
that the Fund's investment objective will be achieved. INVESTMENTS ON AN
INTERNATIONAL BASIS IN FOREIGN SECURITIES MARKETS INVOLVE CERTAIN RISK FACTORS.
SEE "RISKS AND SPECIAL CONSIDERATIONS" BELOW.
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. As a
result of the implementation of the Merrill Lynch Select Pricing-SM- System,
Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered. See "Merrill Lynch Select Pricing-SM- System"
on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment
in the Fund. This Prospectus should be retained for future reference. A
statement containing additional information about the Fund, dated October 21,
1994 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission and is available, without charge, by calling
or by writing the Fund at the above telephone number or address. The Statement
of Additional Information is hereby incorporated by reference into this
Prospectus.
---------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
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(C) CLASS D(D)
--------------- -------------------- --------------- ---------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price).................... 5.25%(e) None None 5.25%(e)
Sales Charge Imposed on Dividend
Reinvestments...................... None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................ None(f) 4.0% during the 1% for one year None(f)
first year,
decreasing 1.0%
annually thereafter
to 0.0% after the
fourth year
Exchange Fee........................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)(G)
Investment Advisory Fees(h)......... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(i):
Account Maintenance Fees........ None 0.25% 0.25% 0.25%
Distribution Fees............... None 0.75% 0.75% None
(CLASS B SHARES
CONVERT TO CLASS D
SHARES AUTOMATICALLY
AFTER APPROXIMATELY
EIGHT YEARS AND
CEASE BEING SUBJECT
TO DISTRIBUTION
FEES)
Other Expenses:
Custodial Fees.................. 0.07% 0.08 % 0.08% 0.07%
Shareholder Servicing
Costs(j)....................... 0.10% 0.10 % 0.10% 0.10%
Other........................... 0.14% 0.14 % 0.14% 0.14%
----- ----- ----- -----
Total Other Expenses.... 0.31% 0.32 % 0.32% 0.31%
----- ----- ----- -----
Total Fund Operating Expenses........... 1.06% 2.07 % 2.07% 1.31%
----- ----- ----- -----
----- ----- ----- -----
<FN>
- ------------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and investment programs. The Class A shares offered by
this Prospectus differ from the Class A shares offered prior to October 21,
1994. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class
A and Class D Shares" -- page 21.
(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 23.
(c) Prior to the date of this Prospectus, the Fund has not offered Class C
shares to the public.
(d) Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares.
(e) Reduced for purchases of $25,000 and over. Class A and Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 21.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
(f) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which are not
subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year after purchase.
(g) Information for Class B and Class D shares is stated for the fiscal year
ended May 31, 1994. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending May 31, 1995.
(h) See "Management of the Fund -- Advisory and Management Arrangements" --
page 17.
(i) See "Purchase of Shares -- Distribution Plans" -- page 26.
(j) See "Management of the Fund -- Transfer Agency Services" -- page 19.
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $52.50 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for each
class set forth above; (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period:
Class A................................................................. $ 63 $ 84 $ 108 $ 175
Class B................................................................. $ 61 $ 85 $ 111 $ 221*
Class C................................................................. $ 31 $ 65 $ 111 $ 240
Class D................................................................. $ 65 $ 92 $ 121 $ 202
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A................................................................. $ 63 $ 84 $ 108 $ 175
Class B................................................................. $ 21 $ 65 $ 111 $ 221*
Class C................................................................. $ 21 $ 65 $ 111 $ 240
Class D................................................................. $ 65 $ 92 $ 121 $ 202
<FN>
- ------------
*Assumes conversion to Class D shares approximately eight years after purchase.
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD") Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
3
<PAGE>
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 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM", or the
"Investment Adviser") or its affiliate, Fund Asset Management, L.P. ("FAM").
Funds advised by MLAM or FAM 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
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select 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 particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<C> <S> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2),(3)
B CDSC for a period of 4 years, at a 0.25% 0.75% B shares convert to D shares
rate of 4.0% during the first automatically after
year, decreasing 1.0% annually to approximately eight years(4)
0.0%
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales 0.25% No No
charge(3)
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
</TABLE>
<TABLE>
<S> <C>
CLASS A: Class A shares incur an initial sales charge when they are purchased and bear no
ongoing distribution or account maintenance fees. Class A shares are offered to a
limited group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Eligible investors include certain retirement plans
and participants in certain investment programs. In addition, Class A shares will
be offered to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the
term "subsidiaries", when used herein with respect to Merrill Lynch & Co., Inc.,
includes MLAM, FAM and certain other entities directly or indirectly wholly-owned
and controlled by ML & Co.) and their directors and employees and to members of
the Boards of MLAM-advised mutual funds. The maximum initial sales charge is
5.25%, which is reduced for purchases of $25,000 and over. Purchases of $1,000,000
or more may not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases will be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. Sales charges also are reduced under
a right of accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares".
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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%, an ongoing distribution
fee of 0.75% of the Fund's average net assets attributable to the Class B shares
and a CDSC if they are redeemed within four years of purchase. Approximately eight
years after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares automatically after
approximately ten years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable to
the Class B shares acquired in the exchange will apply, and the holding period for
the shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will occur at
least once a month on the basis of the relative net asset values of the shares of
the two classes on the conversion date, without the imposition of any sales load,
fee or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend reinvestment
shares and for certain retirement plans is modified as described under "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares".
CLASS C: Class C shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing account maintenance fee of 0.25% and an ongoing distribution
fee of 0.75% of the Fund's average net assets attributable to Class C shares.
Class C shares are also subject to a CDSC if they are redeemed within one year of
purchase. Although Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion feature
and, accordingly, an investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for an indefinite period
subject to annual approval by the Fund's Board of Directors and regulatory
limitations.
CLASS D: Class D shares incur an initial sales charge when they are purchased and are
subject to an ongoing account maintenance fee of 0.25% of the Fund's average net
assets attributable to Class D shares. Class D shares are not subject to an
ongoing distribution fee or any CDSC when they are redeemed. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases will be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. The schedule of initial
sales charges and reductions for the Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares".
</TABLE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing-SM- System that the investor believes is most beneficial under his
particular circumstances.
INITIAL SALES CHARGE ALTERNATIVES. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D
6
<PAGE>
shares because of the account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Class A, Class B, Class C and Class D share holdings will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class A
shares.
DEFERRED SALES CHARGE ALTERNATIVES. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo 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 National
Association of Securities Dealers, Inc., 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 audit of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal period July 30, 1993 (commencement of
operations) to May 31, 1994, are included in the Statement of Additional
Information. Class A shares of the Fund outstanding as of October 21, 1994, were
redesignated Class D shares on such date, and the Fund has commenced offering
shares of a new Class A having different characteristics. Financial information
is not presented for the new Class A or for Class C shares because no shares of
those classes are publicly issued before the date of this Prospectus. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 30, 1993+
TO MAY 31, 1994
-----------------------
CLASS
A(1) CLASS B #
--------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of period......................................... $10.00 $ 10.00
--------- -----------
PER SHARE OPERATING PERFORMANCE:
Investment income (loss) -- net.............................................. .04 (.02)
Realized and unrealized gain on investments and foreign currency transactions
-- net..................................................................... 1.47 1.46
--------- -----------
TOTAL FROM INVESTMENT OPERATIONS............................................. 1.51 1.44
--------- -----------
Net Asset Value, end of period............................................... $11.51 $ 11.44
--------- -----------
--------- -----------
TOTAL INVESTMENT RETURN**
Based on net asset value per share........................................... 15.10%++ 14.40%++
------- -------
------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding, account maintenance and distribution fees............... 1.06%* 1.07%*
------ ------
------ ------
Expenses..................................................................... 1.31%* 2.07%*
------ ------
------ ------
Investment income (loss) -- net.............................................. .55%* (.19)%*
------ -----
------ -----
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................................... $208,007 $844,295
Portfolio Turnover........................................................... 50.63% 50.63%
------- -------
------- -------
<FN>
- ---------
+ Commencement of Operations.
# Based on average shares outstanding during the period.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
(1) As of October 21, 1994, the Class A shares for which information is
presented here were redesignated Class D shares.
</TABLE>
8
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS
INTERNATIONAL INVESTING. Investments on an international basis involve
certain risks not involved in domestic investment, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities in
the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets. These
forces are, in turn, affected by international balance of payments and other
economic and financial conditions, government intervention, speculation and
other factors. With respect to certain countries, there may be the possibility
of expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments which could affect
investment in those countries. In addition, certain foreign investments may be
subject to foreign withholding taxes. As a result, management of the Fund may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country.
Most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission nor will the issuers thereof be subject to
the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject.
Foreign financial markets, while often growing in trading volume, have, for
the most part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices may be more volatile
than securities of comparable domestic companies. Such markets have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. 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 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 either could result in losses to the Fund
due to subsequent declines in value of the 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 U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the U.S.
9
<PAGE>
It is anticipated that a significant portion of the Fund's assets may be
invested in the developing countries of the world, including, but not limited
to, countries located in Eastern Europe, Latin America and the Far East. The
risks noted above as well as in "Restrictions on Foreign Investment" below are
often heightened for investments in developing countries.
RESTRICTIONS ON FOREIGN INVESTMENT. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific class of securities which may have less advantageous terms than
securities of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act, the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for the
Fund to invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including investment advisory fees)
and, indirectly, the expenses of such closed-end investment companies. The Fund
also may seek, at its own cost, to create its own investment entities under the
laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. Also, the Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities", as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
HEDGING STRATEGIES. The Fund may engage in various portfolio strategies to
seek to hedge its portfolio against movements in the equity markets and exchange
rates between currencies by the use of options, futures and options on futures.
Utilization of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
Options and futures transactions in foreign markets are also subject to the risk
factors associated with foreign investments generally, as discussed above. There
can be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time.
BORROWING. The Fund may borrow up to 20% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
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FEES AND EXPENSES. The investment advisory fee (at the annual rate of 0.75%
of the Fund's average daily net assets) and other operating expenses of the Fund
may be higher than the investment advisory fees and operating expenses of other
mutual funds managed by the Investment Adviser and other investment advisers.
OTHER SPECIAL CONSIDERATIONS. Other special considerations are that the Fund
may invest up to 15% of its assets in illiquid or otherwise not readily
marketable securities (however, under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net assets)
and that the Fund may invest more than 5% of its assets in securities issued or
guaranteed by certain foreign governments.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. There can be no assurance that the Fund's investment
objective will be achieved. The investment objective of the Fund is a
fundamental policy and may not be changed without the approval of the holders of
a majority of the Fund's outstanding voting securities. The Fund may employ a
variety of investments and techniques to hedge against market and currency risk.
The Fund is designed for investors seeking to complement their U.S. holdings
through foreign equity investments. The Fund should be considered as a vehicle
for diversification and not as a balanced investment program.
The Fund, utilizing the combined purchasing power of its shareholders'
funds, provides the investor with the opportunity to participate with a minimum
investment of $1,000 ($100 for retirement plans) in a diversified portfolio of
equity securities in foreign markets which typically would require substantially
larger commitments. Other advantages include worldwide professional management
and administrative convenience. Unlike many intermediary investment vehicles,
such as closed-end investment companies that invest in a single country, the
Fund intends to diversify investment risk among the capital markets of a number
of countries.
The Fund will invest in an international portfolio of securities of foreign
companies located throughout the world. While there are no prescribed limits on
the geographic allocation of the Fund's investments, management of the Fund
anticipates that a substantial portion of its assets will be invested in the
developed countries of Europe and the Far East. However, for the reasons stated
below, management of the Fund will give special attention to investment
opportunities in the developing countries of the world, including, but not
limited to, Eastern Europe, Latin America and the Far East. It is anticipated
that a significant portion of the Fund's assets may be invested in such
developing countries, and the Fund may invest without limit in such securities.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser and by the Fund's
sub-adviser, Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), based
primarily on an assessment of the relative condition and growth potential of the
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<PAGE>
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. Within
such allocations, the Investment Adviser and MLAM U.K. will seek to identify
equity investments in each market which are expected to provide a total return
which equals or exceeds the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called "emerging" countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks, convertible debt securities and other
equity or equity-linked instruments. The Fund reserves the right, as a temporary
defensive measure and to provide for redemptions, to hold cash or cash
equivalents in U.S. dollars or foreign currencies and short-term securities
including money market securities. Under certain adverse investment conditions,
the Fund may restrict the markets in which its assets will be invested and may
increase the proportion of assets invested in temporary defensive obligations of
U.S. issuers. Under normal conditions, at least 65% of the Fund's total assets
will be invested in the securities of issuers from at least three different
foreign countries. Investments made for defensive purposes will be maintained
only during periods in which the Investment Adviser or MLAM U.K. determines that
economic or financial conditions are adverse for holding or being fully invested
in equity securities of foreign issuers. A portion of the portfolio normally
will be held in U.S. dollars or short-term interest bearing U.S. dollar-
denominated securities to provide for possible redemptions.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs
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<PAGE>
are receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and GDRs are not
obligated to disclose material information in the United States, and therefore,
there may not be a correlation between such information and the market value of
such securities.
The Fund may invest in securities whose potential return is based on the
change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in an equity index, an interest rate index
or an index based on the values of one or more precious or industrial metals.
Interest and principal payable on a security may also be based on relative
changes among particular indices. In addition, the Fund may invest in securities
whose potential investment return is inversely based on the change in particular
indices. For example, the Fund may invest in securities that pay a higher rate
of interest and principal when a particular index decreases and pay a lower rate
of interest and principal when the value of the index increases. To the extent
that the Fund invests in such types of securities, it will be subject to the
risks associated with changes in the particular indices, which may include
reduced or eliminated interest payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended, but can be offered
and sold to "qualified institutional buyers" under Rule 144A under that Act.
However, the Fund will not invest more than 15% of its assets in illiquid
investments, which includes securities for which there is no readily available
market, securities subject to contractual restrictions on resale, and otherwise
restricted securities, unless the Fund's Board of Trustees continuously
determines, based on the trading markets for the specific restricted security,
that it is liquid. (However, under the law of certain states, the Fund presently
is limited with respect to such investments to 10% of its net assets.) The Board
of Trustees has determined to treat as liquid Rule 144A securities which are
freely tradeable in their primary markets offshore. The Board of Trustees may
adopt guidelines and delegate to the Investment Adviser and MLAM U.K. the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Trustees will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
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OTHER INVESTMENT PRACTICES
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE
TRANSACTIONS. The Fund is authorized to engage in various portfolio strategies
to hedge its portfolio against adverse movements in the equity markets and
exchange rates between currencies.
The Fund has authority to write (I.E., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and engage
in transactions in futures and related options on such futures. The Fund may
also deal in forward foreign exchange transactions and foreign currency options
and futures, and related options on such futures. Each of these portfolio
strategies is described in more detail in Appendix A attached to this
prospectus. Although certain risks are involved in options and futures
transactions (as discussed in "Risk Factors in Options, Futures and Currency
Transactions" in Appendix A to this Prospectus), the Investment Adviser and MLAM
U.K. believe that, because the Fund will engage in such transactions only for
hedging purposes, the options, futures and currency portfolio strategies of the
Fund will not subject the Fund to the risks frequently associated with the
speculative use of options, futures and currency transactions. While the Fund's
use of hedging strategies is intended to reduce the volatility of the net asset
value of Fund shares, the net asset value of the shares of the Fund will
fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in the equity markets or currency exchange rates occur. Reference is
made to Appendix A to this Prospectus and to the Statement of Additional
Information for further information concerning these strategies.
PORTFOLIO TRANSACTIONS. In executing portfolio transactions, the Investment
Adviser and MLAM U.K. seek 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 Investment Adviser and MLAM U.K. generally seek
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. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis and may receive brokerage commissions
from the Fund. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., the Fund 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. Brokerage commissions and
other transaction costs on foreign stock exchange transactions are generally
higher than in the U.S., although the Fund will endeavor to achieve the best net
results in effecting its portfolio transactions.
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
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<PAGE>
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of such a loan,
the Fund receives the income on both the loaned securities and the collateral
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 the value of the collateral falls below the
market value of the borrowed securities.
PORTFOLIO TURNOVER. The Investment Adviser and MLAM U.K. will effect
portfolio transactions without regard to holding period, if, in their judgment,
such transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio transactions.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 100% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of 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.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract with the Fund, 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. The prices at which the trades are conducted
do not reflect accrued interest on the underlying obligation. Such agreements
usually cover short periods, such as under one week. In the event of default by
the seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with disposition of the underlying
securities. Repurchase agreements maturing in more than seven days are deemed
illiquid by the Securities and Exchange Commission and are therefore subject to
the Fund's investment restriction limiting investments in securities that are
not readily marketable to 15% of the Fund's total assets. (However, under the
law of certain states, the Fund presently is limited with respect to such
investments to 10% of its net assets.)
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"). Among the more significant
restrictions, the Fund may not:
-- Invest in the securities of any one issuer if, immediately after and
as a result of such investment, the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the Fund's total assets, taken at
market value, except that such restriction shall not apply to securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities or, with respect to 25% of the Fund's total assets, to
securities issued or guaranteed by the government of any country which is a
member of the Organization for Economic Co-operation and Development (OECD).
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-- Invest in the securities of any single issuer if, immediately after
and as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer.
-- Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
Nothing in the foregoing investment restrictions shall be deemed to prohibit
the Fund from purchasing the securities of any issuer pursuant to the exercise
of subscription rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or fail
to meet the diversification requirements of the Internal Revenue Code of 1986,
as amended.
The Board of Trustees of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The investment
objective and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies -- Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Trustees of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Trustees of the Fund are:
ARTHUR ZEIKEL* -- President and Chief Investment Officer of the Investment
Adviser; President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co."); Executive Vice President of
Merrill Lynch; Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
- ---------
*Interested person, as defined in the Investment Company Act, of the Fund.
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EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia
University Graduate School of Business.
RICHARD R. WEST -- Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.
ADVISORY AND MANAGEMENT ARRANGEMENTS
The Fund's investment adviser is Merrill Lynch Asset Management, L.P., which
does business as Merrill Lynch Asset Management. The Investment Adviser is owned
and controlled by ML & Co., a financial services holding company and the parent
of Merrill Lynch. The Investment Adviser, or its affiliate, FAM, acts as the
investment adviser to more than 100 other registered investment companies and
provides investment advisory services to individual and institutional accounts.
As of August 31, 1994, the Investment Adviser and FAM had a total of
approximately $165.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Trustees of the Fund, the Investment Adviser 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 Investment Adviser and MLAM U.K., subject to
review by the Board of Trustees. The Investment Adviser is also obligated to
perform certain administrative and management services for the Fund and is
obligated to provide all of the office space, facilities, equipment and
personnel necessary to perform its duties under the Investment Advisory
Agreement.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary
of ML & Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
MLAM U.K. has offices at Ropemaker Place, 25 Ropemaker Street, 1st Floor, London
EC24 9LY, England. For the fiscal period July 30, 1993 (commencement of
operations) to May 31, 1994, the fee paid by the Investment Adviser to MLAM U.K.
was $401,250.
The Fund pays the Investment Adviser a monthly fee 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, including most other mutual funds managed by the
Investment Adviser and other investment advisers, but management of the Fund
believes this fee is justified by the additional investment research and
analysis required in connection with investing in equities on an international
basis. For the fiscal period July 30, 1993 (commencement of operations) to May
31, 1994, the fee paid by the Fund to the Investment Adviser was $4,054,791
(based upon average net
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<PAGE>
assets of approximately $644.9 million). At July 31, 1994, the net assets of the
Fund aggregated approximately $1.1 billion. At this asset level, the annual
management fee would aggregate approximately $8,490,100.
The Fund pays certain expenses incurred in its operations, including, among
other things, the investment advisory fees; legal and audit fees; unaffiliated
Trustees' fees and expenses; registration fees; custodian and transfer agency
fees; accounting and pricing costs; and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Also, accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its costs
in connection with such services on a semi-annual basis. For the fiscal period
July 30, 1993 (commencement of operations) to May 31, 1994, the Fund reimbursed
the Investment Adviser $142,452 for accounting services. For the fiscal period
July 30, 1993 (commencement of operations) to May 31, 1994, for the former Class
A shares (now redesignated Class D shares), the ratio of total expenses
excluding account maintenance fees to average net assets was 1.06% (annualized),
and the ratio of total expenses including account maintenance fees to average
net assets was 1.31% (annualized); for the Class B shares the ratio of total
expenses excluding account maintenance and distribution fees to average net
assets was 1.07% (annualized), and the ratio of total expenses including account
maintenance and distribution fees to average net assets was 2.07% (annualized);
none of the new Class A or Class C shares had been issued during these periods.
Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (I.E., Europe, Latin America and the
Pacific Basin) will be centralized in London, with country
and individual security decisions made in both London and Princeton, New Jersey.
The names of the persons associated with the Investment Adviser and MLAM U.K.
who are primarily responsible for the day-to-day management of the Fund's
portfolio, the length of time that such persons have been so responsible, and
their business experience during the past five years are as follows:
ANDREW JOHN BASCAND -- VICE PRESIDENT OF THE FUND -- Director of MLAM U.K.
and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM)
since 1993, joined the team in October 1993 as Senior Portfolio Manager/Asset
Allocator. Previously, Mr. Bascand was with A.M.P. Asset Management plc in
London and had served as Chief Economist with A.M.P. Investments (NZ) in New
Zealand. He has served as Economic Adviser to the Chief Economist of the Reserve
Bank of New Zealand and as Research Officer of the Bank of England's
International Department. Mr. Bascand is the Asset Allocator for the Fund and,
as such, is primarily responsible for determining the allocation of the Fund's
assets among the three prime regions outside the United States.
ADRIAN HOLMES -- VICE PRESIDENT OF THE FUND -- Managing Director of MLAM
U.K. since 1993, Vice President from 1990 to 1993 and an employee thereof since
1987, and Director of MLGAM since 1993, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio since it
commenced operations. Mr. Holmes is primarily responsible for European
investments.
STEPHEN I. SILVERMAN -- VICE PRESIDENT OF THE FUND -- Vice President of the
Investment Adviser since 1983, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio since it
commenced operations. Mr. Silverman is primarily responsible for Pacific Basin
investments.
GRACE PINEDA -- VICE PRESIDENT OF THE FUND -- Vice President of the
Investment Adviser since 1989, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio
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<PAGE>
since it commenced operations. Prior to joining the Investment Adviser, Ms.
Pineda was a portfolio manager with Clemente Capital, Inc. Ms. Pineda is
primarily responsible for investments in emerging markets in Europe, Asia and
Latin America.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C shareholder account, nominal
miscellaneous fees (E.G., account closing fees) and is entitled to reimbursement
for out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
For the fiscal period July 30, 1993 (commencement of operations) to May 31,
1994, the Fund paid the Transfer Agent $454,630 pursuant to the Transfer Agency
Agreement. At July 31, 1994, the Fund had 11,968 of the former Class A
shareholder accounts (now redesignated Class D shareholder accounts), 84,150
Class B shareholder accounts, no Class C shareholder accounts and no Class D
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate approximately $1,309,748 plus miscellaneous and
out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Investment Adviser and of Merrill Lynch, acts as the distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000, and the minimum subsequent purchase is $50, except that for retirement
plans, the minimum initial purchase is $100, and the minimum subsequent purchase
is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing-SM- System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which includes
orders received after the determination of the net asset value on the previous
day, the applicable offering price will be based on the net asset value as of
4:15 p.m., New York time, on the day the orders are placed with the Distributor,
provided the orders are received by the Distributor prior to 4:30 p.m., New York
time, on that day. If the purchase orders are not received prior to 4:30 p.m.,
New York time, such orders shall be deemed received on the next business day.
The fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Fund. Neither the
19
<PAGE>
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
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
their relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution fees. A discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing System is set forth under "Merrill Lynch Select Pricing-SM- System" on
page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charge with respect to Class A and Class D shares are the same as those of
the deferred sales charge with respect to Class B and Class C shares in that the
sales charge applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
20
<PAGE>
The following table sets forth a summary if 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
<C> <S> <C> <C> <C>
A Maximum 5.25% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.75% B shares convert
of 4.0% during the first year, to D shares
decreasing 1.0% annually to 0.0% automatically
after
approximately
eight years(4)
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales charge(3) 0.25% No No
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge Alternatives
-- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
</TABLE>
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>
DISCOUNT TO
SELECTED
SALES CHARGE AS DEALERS
SALES CHARGE AS PERCENTAGE* AS PERCENTAGE
PERCENTAGE OF OF THE NET OF THE
THE OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED 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
<FN>
- ---------
* Rounded to the nearest one-hundredth percent.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge
is waived, such purchases will be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. Class A purchases made prior
to October 21, 1994, may be subject to a CDSC if the shares are redeemed
within one year of purchase at the following rates: 1.00% on purchases of
$1,000,000 to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000;
0.40% on purchases of $3,500,001 to 5,000,000; and 0.25% on purchases of
more than $5,000,000 in lieu of paying an initial sales charge. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. A sales charge of
0.75% will be charged on purchases of $1,000,000 or more of Class A or
Class D shares by certain 401(k) plans.
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A 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 of 1933.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing-SM- System, Class A shares of the Fund offering prior to October
21, 1994, have been redesignated Class D shares. The Class A shares offered by
this Prospectus differ from the Class A shares offered prior to October 21,
1994, in many respects, including sales charges, exchange privilege and the
classes of persons to whom such shares are offered. During the fiscal period
July 30, 1993 (commencement of operations) to May 31, 1994, the Fund sold
22,000,407 of its former Class A shares for aggregate net proceeds to the Fund
of $236,735,011. The gross sales charges for the sale of its former Class A
shares for that period were $4,502,084, of which $228,535 and $4,273,549 were
received by the Distributor and Merrill Lynch, respectively. For the fiscal
period July 30, 1993 (commencement of operations) to May 31, 1994, the
Distributor received CDSCs of $37,665 with respect to the redemption of the
former Class A shares, all of which was paid to Merrill Lynch.
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. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA-SM- Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares will be
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 who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. For example, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
REDUCED INITIAL SALES CHARGES. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
22
<PAGE>
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value 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 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 also are
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 (i)
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, or (ii)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has not served as a selected dealer, if certain conditions set
forth in the Statement of Additional Information are not.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
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" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares
23
<PAGE>
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. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ---------------------------------------------------------------- ------------------
<S> <C>
0-1............................................................. 4.00%
1-2............................................................. 3.00
2-3............................................................. 2.00
3-4............................................................. 1.00
4 and thereafter................................................ 0.00
</TABLE>
For the fiscal period July 30, 1993 (commencement of operations) to May 31,
1994, the Distributor received CDSCs of $428,332 with respect to the redemption
of Class B shares, all of which was paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of
24
<PAGE>
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).
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 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. The
CDSC is also waived for any Class B shares which are purchased by eligible
401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group, and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
25
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (I.E., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rates 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
26
<PAGE>
shares. In this regard, the purpose and function of the ongoing distribution
fees and the CDSC are the same as those of the initial sales charge with respect
to the Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class C
shares.
For the fiscal period July 30, 1993 (commencement of operations) to May 31,
1994, the Fund paid the Distributor $4,246,574 pursuant to Class B Distribution
Plan (based on average net assets subject to the Class B Distribution Plan of
approximately $506.5 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 period July 30, 1993
(commencement of operations) to May 31, 1994, the Fund paid the Distributor
$289,933 pursuant to the Class A Distribution Plan relating to the former Class
A shares (now redesignated Class D shares) (based on average net assets subject
to the Class A Distribution Plan of approximately $138.3 million), all of which
was paid to Merrill Lynch for providing account maintenance services in
connection with the former Class A shares. The Fund did not begin to offer Class
C shares publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C Distribution Plan prior to the date of
this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the Distributor on-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, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation. As of May 31,
1994, direct cash expenses for the period since commencement of the offering of
Class B shares exceeded direct cash revenues by $5,300,782 (0.63% of Class B net
assets at that date). At December 31, 1993, the fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch with respect to Class B shares for
the period since commencement of operations exceeded fully allocated accrual
revenues for such period by approximately $10,851,000 (2.21% of Class B 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 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
27
<PAGE>
Class B shares will terminate upon conversion of those Class B shares into Class
D shares as set forth under "Deferred Sales Charge Alternatives -- Class B and
Class C Shares -- Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be delivered
to Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption
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request must be guaranteed by an "eligible guarantor institution" (including,
for example, Merrill Lynch branches and certain other financial institutions) as
such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (E.G., 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 also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 4:30 p.m., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or to change options
with respect thereto, can be obtained from the Fund by calling the telephone
number on the cover page hereof or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors.
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 quarterly statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. Shareholders considering transferring a tax-deferred
retirement account such as an 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.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or through
automatic payment by direct deposit to his bank account on either a monthly or
quarterly basis. A Class A or Class D shareholder whose shares are held within a
CMA-R-, CBA-R- or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program, subject to certain conditions.
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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 regular bank account. Investors who maintain CMA-R- accounts may arrange to
have periodic investments made in the Fund in their CMA-R- account or in certain
related accounts in amounts of $100 or more through the CMA-R- Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested
in full and fractional shares of the Fund, without sales charge, at the net
asset value per share next determined after the close of the New York Stock
Exchange on the ex-dividend date of such dividend or distribution. A shareholder
may at any time, by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch or by written notification or telephone
call (1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested, in
which event payment will be mailed on or about the payment date. Cash payments
can also be directly deposited to the shareholder's bank account. No CDSC will
be imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
EXCHANGE PRIVILEGE. Shareholders of each class of shares of the Fund have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing-SM- System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge 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 will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be 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
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shares of the Fund. For purposes of computing the CDSC that may be payable upon
a disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period of the
newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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 a
formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any
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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 may also 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 directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B shares (such as investors in certain retirement
plans) or to reduced sales charges in the case of Class A and Class D shares,
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 the effect of 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 Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., MONEY MAGAZINE, U.S. NEWS & WORLD REPORT, BUSINESS WEEK, CDA
Investment Technology, Inc., FORBES MAGAZINE, FORTUNE MAGAZINE or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered representative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized long-or short-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually. See "Additional
Information -- Determination of Net Asset Value". Dividends and distributions
may be reinvested automatically in shares of the Fund at net asset value without
a sales charge. Shareholders may elect in writing to receive any such dividends
or distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below
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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 a Federal income tax requirement that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class.
Certain gains or losses attributable to foreign currency gains or losses
from certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Fund would not be able to make any
ordinary income dividend distributions and (b) distributions made before the
losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary income dividend, reducing each
shareholder's tax basis in Fund shares for Federal income tax purposes. See
"Additional Information -- Taxes".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
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Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under proposed regulations the Fund
would be able to elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares.
Unrealized losses, however, would not be recognized. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
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
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distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary income dividend distributions,
and any distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
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 foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares of all classes of the Fund is determined once
daily at 4:15 p.m., New York time, on each day during which the New York Stock
Exchange is open for trading. Any assets or liabilities initially expressed in
terms of non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the day of
valuation. The net asset value is computed by dividing the 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
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total number of shares outstanding at such time. Expenses, including the
management fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily.
The per share net asset value of the Class A shares will generally be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance and higher transfer agency
fees applicable with respect to the Class B, Class C and Class D shares;
moreover, the per share net asset value of the Class D shares generally will be
higher than the per share net asset value of the Class B and Class C shares,
reflecting the daily expense accruals of the distribution fees applicable with
respect to Class B and Class C shares. It is expected, however, that the per
share net asset value of the classes will tend to converge immediately after the
payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Board of Trustees of
the Fund.
ORGANIZATION OF THE FUND
The Fund was organized on January 3, 1992, under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust". The Fund is authorized to issue an unlimited
number of shares of beneficial interest of $.10 par value of different classes.
At the date of this Prospectus, the shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Shares of Class A, Class B, Class C and
Class D represent interests in the assets of the Fund and are identical in all
respects except that Class B, Class C and Class D shares bear certain expenses
related to the account maintenance fee relating to such shares and Class B and
Class C shares bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to
account maintenance and distribution expenditures, as applicable. See "Purchase
of Shares". The Fund has received an order from the Securities and Exchange
Commission permitting the issuance and sale of multiple classes of shares.
Shares issued are fully paid, non-assessable and have no preemptive rights.
Shares have the conversion rights described in this Prospectus.
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
investment advisory and management 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
37
<PAGE>
holding office have been elected by shareholders. The Declaration provides that
a shareholders' meeting may be called for any reason at the request of 10% of
the outstanding shares of the Fund or by a majority of the Trustees.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
-------------------
The Declaration, dated January 3, 1992, 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 International Equity Fund"
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.
38
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND - AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
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 International Equity Fund and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ . payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000). I understand that this purchase
will be executed at the applicable offering price next to be determined
after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a separate
sheet of paper if necessary.)
<TABLE>
<S> <C>
1. ......................................................... 4. .........................................................
2. ......................................................... 5. .........................................................
3. ......................................................... 6. .........................................................
</TABLE>
<TABLE>
<S> <C>
Name ...................................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ..............................................................................................
First Name Initial Last Name
</TABLE>
<TABLE>
<S> <C>
Address .................................................... Date .......................................................
........................................................... Name and Address of Employer ...............................
(Zip Code)
Occupation ................................................. ............................................................
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
(in the case of co-owner, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
ORDINARY INCOME DIVIDENDS LONG-TERM CAPITAL GAINS
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch International Equity Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) / / checking / / savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ........................ Account Number ........................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS
SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ........................ Date .......................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
39
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND - AUTHORIZATION FORM (PART 1) -
(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
------------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam:
..................................... , 19 ....................................
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch International Equity Fund 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 International Equity
Fund Prospectus.
I agree to the terms and conditions of the 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 International Equity Fund held as security.
<TABLE>
<S> <C>
By.......................................................... ............................................................
Signature of Owner Signature of Co-Owner
(if registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name.................................................... (2) Name....................................................
Account Number.............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
<TABLE>
<S> <C>
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 made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
This form, when completed, should be mailed to: ............................................................
Merrill Lynch International Equity Fund Dealer Name and Address
c/o Financial Data Services, Inc. By: .......................................................
Transfer Agency Mutual Fund Operations Authorized Signature of Dealer
P.O. Box 45289 ------------ ----------------
Jacksonville, Florida 32232-5289 ------------ ----------------
............................................................
Branch Code F/C No. F/C Last Name
------------ --------------------
------------ --------------------
Dealer's Customer A/C No.
</TABLE>
40
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND - AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
Name ...............................................................................
First Name Initial Last Name
Name of Co-Owner (if any) .......................................................... Social Security Number
First Name Initial Last Name or Taxpayer Identification Number
Address ............................................................................ Account Number ..............................
................................................................................... (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch International
Equity Fund at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on
the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ________________________________(month) or as soon as
possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $
- ------------or / /
- ------------% of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of .........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) .....................................................
Address ........................................................................
........................................
Signature of Owner .......................... Date .........................
Signature of Co-Owner (if any) .................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO 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.
41
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND - AUTHORIZATION FORM (PART 2) -
(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch International Equity Fund subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch International Equity Fund as indicated below:
Amount of each ACH debit $ .................................................
Account number ............................................................
Please date and invest ACH debits on the 20th of each month
beginning .................................. or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a check or debit is not
honored upon presentation, Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................................... ..................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To ........................................................................ Bank
(Investor's Bank)
Bank Address ...................................................................
City ................... State ................... Zip Code ..................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc. I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked personally by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................................... ..................................
Date Signature of Depositor
................................... ..................................
Bank Account Number 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.
42
<PAGE>
APPENDIX A
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, futures on securities indices, options on such
futures, currency options and futures, and forward foreign exchange
transactions. The Fund may enter into such transactions only in connection with
its hedging strategies. While the Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of Fund shares, the net asset
value of the Fund's shares will fluctuate. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund will only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser and MLAM U.K. believe that, because the
Fund will only engage in these transactions for hedging purposes, the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies discussed below. See "Additional Information
- -- Taxes".
Set forth below is a description of the hedging instruments the Fund may
utilize with respect to investment and currency risks.
WRITING COVERED OPTIONS. The Fund is authorized to write (I.E., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at or by a specified
future date and at a price set at the time of the contract. The principal reason
for writing call options is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the securities alone. By
writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial hedge against the
price of the underlying security declining.
The Fund may not write covered call options on underlying securities in an
amount exceeding 15% of the market value of its assets.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained
A-1
<PAGE>
cash, cash equivalents, U.S. Government securities or other high grade liquid
debt or equity securities denominated in U.S. dollars or non-U.S. currencies
with a securities depository with a value equal to or greater than the exercise
price of the underlying securities. By writing a put, the Fund will be obligated
to purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the option
is outstanding. The Fund may engage in closing transactions in order to
terminate put options that it has written.
PURCHASING OPTIONS. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets. The Fund will engage in options transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange traded contracts are
third-party contracts (I.E., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See "Restrictions on OTC Options"
below for information as to restrictions on the use of OTC options.
HEDGING FOREIGN CURRENCY RISKS. The Fund is authorized to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund, or the payment of dividends and distributions by the
Fund. Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Fund will not speculate in forward foreign exchange. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the Fund is
not able to contract to sell the currency at a price above the devaluation level
it anticipates.
A-2
<PAGE>
The Fund is also authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund. As
an illustration, the Fund may use such techniques to hedge the stated value in
U.S. dollars of an investment in a pound sterling denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of pounds for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the pound relative to the dollar will tend to be offset by an increase
in the value of the put option. To offset, in whole or in part, the cost of
acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. Listed options are
third-party contracts (I.E., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. The Fund will engage in OTC options only
with member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade or futures exchanges. The Fund
will not speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities which it has committed or anticipates to purchase
which are denominated in such currency and, in the case of securities which have
been sold by the Fund but not yet delivered, the proceeds thereof in its
denominated currency. Further, the Fund will segregate at its custodian cash,
liquid equity or debt securities having a market value substantially
representing any subsequent decrease in the market value of such hedged
security, less any initial or variation margin held in the account of its
broker. The Fund may not incur potential net liabilities of more than 33 1/3% of
its total assets from foreign currency options, futures or related options.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool" as under such regulations if the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) for bona fide hedging purposes and (ii) for
non-hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
A-3
<PAGE>
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
RESTRICTIONS ON OTC OPTIONS. 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 which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on foreign currency futures contracts) if, as a result of such
transactions, 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. (Under the law of certain states, the Fund presently is
limited with respect to such investments to 10% of its net assets.) However, if
an OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (I.E., the current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Trustees of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to change or modification by the Securities
and Exchange Commission staff of its position.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. Utilization of
options and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies which are the subject of the hedge. If the price of the
options or futures moves more or less than the price of the hedged securities or
currencies, the Fund will experience a gain or loss which will not be completely
offset by movements in the price of the securities or currencies which are the
subject of the hedge. Transactions in options and options on futures contracts
involve similar risks.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Investment Adviser or MLAM U.K. believes the Fund can receive on each business
day at least two independent bids or offers. However, there can be no assurance
that a liquid secondary market will
A-4
<PAGE>
exist at any specific time. Thus, it may not be possible to close an options or
futures position. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an open
position in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Investment
Adviser and MLAM U.K. do not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
A-5
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INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0057
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Fee Table........................................ 2
Merrill Lynch Select Pricing-SM- System.......... 4
Financial Highlights............................. 8
Risks and Special Considerations................. 9
Investment Objective and Policies................ 11
Management of the Fund........................... 16
Board of Trustees.............................. 16
Advisory and Management Arrangements........... 17
Transfer Agency Services....................... 19
Purchase of Shares............................... 19
Initial Sales Charge Alternatives -- Class A
and Class D Shares........................... 21
Deferred Sales Charge Alternatives -- Class B
and Class C Shares........................... 23
Distribution Plans............................. 26
Limitations on the Payment of Deferred Sales
Charges....................................... 28
Redemption of Shares............................. 28
Shareholder Services............................. 30
Performance Data................................. 32
Additional Information........................... 33
Dividends and Distributions.................... 33
Taxes.......................................... 34
Determination of Net Asset Value............... 36
Organization of the Fund....................... 37
Shareholder Reports............................ 38
Shareholder Inquiries.......................... 38
Authorization Form............................... 39
Appendix A....................................... A-1
</TABLE>
Code #16747 -- 1094
[LOGO]
Merrill Lynch
International
Equity Fund
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
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Merrill Lynch International Equity Fund (the "Fund") is a diversified,
open-end management investment company seeking capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. The Fund is
designed for investors seeking to complement their U.S. holdings through foreign
equity investments. The Fund should be considered as a vehicle for
diversification and not as a balanced investment program. Investments may be
shifted among the various equity markets of the world outside of the U.S.
depending upon management's outlook with respect to prevailing trends and
developments. It is anticipated that a substantial portion of the Fund's assets
will be invested in the developed countries of Europe and the Far East and that
a significant portion of its assets also may be invested in developing
countries. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. There can be no assurance that the Fund's
investment objective will be achieved.
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 October 21,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or 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--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
-------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Investment Adviser"), and Merrill Lynch
Asset Management U.K. Limited, the Fund's sub-adviser ("MLAM U.K."), will effect
portfolio transactions without regard to holding period if, in their judgment,
such transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or in general market,
economic or financial conditions. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. Accordingly, while the Fund anticipates
that its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. For
the fiscal period July 30, 1993 (commencement of operations) to May 31, 1994,
the Fund's portfolio turnover rate was 50.63%. The Fund is subject to the
Federal income tax requirement that less than 30% of the Fund's gross income
must be derived from gains from the sale or other disposition of securities held
for less than three months.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and GDRs are not
obligated to disclose material information in the United States, and therefore,
there may not be a correlation between such information and the market value of
such securities.
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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. Under present conditions, the Investment Adviser does not believe
that these considerations will have any significant effect on its portfolio
strategy, although there can be no assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies -- Other Investment Practices --
Portfolio Strategies Involving Options, Futures and Forward Foreign Exchange
Transactions" and to Appendix A in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, and options on
such futures and forward foreign currency transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
WRITING COVERED OPTIONS. The Fund is authorized to write (I.E., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A
3
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closing purchase transaction cancels out the Fund's position as the writer of an
option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a partial
hedge against a decline in the price of the underlying security.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
PURCHASING OPTIONS. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund will not
purchase options on securities if as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the prices of
the options and futures contract move more or less than the prices of the hedged
securities and currencies, the Fund will experience a gain or loss which will
not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such option or future.
However, there can be no assurance
4
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that a liquid secondary market will exist for any particular call or put option
or futures contract at any specific time. Thus, it may not be possible to close
an option or futures position. The Fund will acquire only over-the-counter
options for which management believes the Fund can receive on each business day
at least two independent bids or offers (one of which will be from an entity
other than a party to the option) unless there is only one dealer, in which case
such dealer's price will be used. In the case of a futures position or an option
on a futures position written by the Fund, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin requirements at
a time when it may be disadvantageous to do so. In addition, the Fund may be
required to take or make delivery of the security or currency underlying the
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Investment Adviser and
MLAM U.K. do not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, I.E., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange between currencies of the different countries in
whose securities it will invest as a hedge against possible variations in the
foreign exchange rates between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Fund enters into a position
hedging transaction, its custodian will place cash or liquid securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. If the value of
the securities placed in the separate account declines, additional cash or
securities will be placed in
5
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the account so that the value of the account will equal the amount of the Fund's
commitment with respect to such contracts. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 15% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. Repurchase
agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. As a purchaser,
the Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening 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 investment restriction (7)
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
6
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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.
CURRENT INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a 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). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets, taken
at market value, would be invested in any one such company, or (iii) 10% of
the Fund's total assets, taken at market value, would be invested in all
such securities.
3. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and that the Fund may purchase or
sell stock index and currency options, stock index futures, financial
futures and currency futures contracts and related options on such futures.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities, or make short sales of securities or
maintain a short position. The payment by the Fund of initial or variation
margin in connection with futures or related options transactions, if
applicable, shall not be considered the purchase of a security on margin.
Also, engaging in futures transactions and related options will not be
deemed a short sale or maintenance of a short position in securities.
6. Make loans to other persons (except as provided in (7) below);
provided that for purposes of this restriction the acquisition of bonds,
debentures, or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements shall not be deemed to be the making
of a loan.
7. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans shall be made in
accordance with the guidelines set forth below.
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8. 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. Utilization of
borrowings may exaggerate increases or decreases in an investment company's
net asset value. However, the Fund will not purchase securities while
borrowings exceed 5% of its total assets, except to honor prior commitments
and to exercise subscription rights when outstanding borrowings have been
obtained exclusively for settlements of other securities transactions. (See
restriction (9) below regarding the exclusion from this restriction of
arrangements with respect to options, futures contracts and options on
futures contracts.)
9. Mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (7) above), as security for indebtedness, any securities owned
or held by the Fund except as may be necessary in connection with borrowings
mentioned in (8) above, and then such mortgaging, pledging or hypothecating
may not exceed 10% of the Fund's total assets, taken at market value. (For
the purpose of this restriction and restriction (8) above, collateral
arrangements with respect to the writing of options, futures contracts,
options on futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets, and
neither such arrangements nor the purchase and sale of options, futures or
related options are deemed to be the issuance of a senior security.)
10. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable
if, regarding all such securities, more than 15% of its total assets, taken
at market value, would be invested in such securities.
11. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
12. Purchase or sell interests in oil, gas or other mineral exploration
or development programs.
The Board of Trustees has established the policy that the Fund will not
purchase or retain the securities of any issuer if those individual officers and
Trustees of the Fund, the officers and general partner of the Investment
Adviser, the directors of such general partner or the directors and officers of
the Distributor each owning beneficially more than one-half of 1% of the
securities of such issuer own in the aggregate more than 5% of the securities of
such issuer. Portfolio securities of the Fund may not be purchased from, sold or
loaned to the Investment Adviser or its affiliates or any of their directors,
general partners, officers or employees, acting as principal. The Board of
Trustees has also established the policy that the Fund will not invest in
securities of issuers having a record, together with predecessors, of less than
three years of continuous operation if more than 5% of its total assets, taken
at market value, would be invested in such securities. The Fund has adopted a
policy pursuant to which it will not invest in warrants if, at the time of
acquisition, its investment in warrants, valued at the lower of cost or market
value, would exceed 5% of the Fund's net assets; included within such
limitation, but not to exceed 2% of the Fund's net assets, are warrants which
are not listed on the New York or American Stock Exchanges. For purposes of this
policy, warrants acquired by the Fund in units or attached to securities may be
deemed to be without value. The Fund also has adopted a policy pursuant to which
it will not invest in real estate limited partnerships or in oil, gas or mineral
leases. In order to comply with certain state statutes, the Fund will not, as a
matter of operating policy, mortgage, pledge or hypothecate its portfolio
securities to the extent that at any time the percentage of the value of pledged
securities plus the maximum sales charge will exceed 10% of the value of the
Fund's shares
8
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at the maximum offering price. Under the law of certain states, the Fund
presently is limited with respect to the investments described in investment
restriction (10) above to 10% of its net assets. The policies set forth in this
paragraph may be amended without the approval of the Fund's shareholders.
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter ("OTC") options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options if,
as a result of any such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
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. (Under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net assets.)
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 securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Trustees of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Securities and Exchange Commission staff of its position.
Because of the affiliation of the Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage". Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Investment Adviser
or its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933, as amended,
in which such firms or any of their affiliates participate as an underwriter or
dealer.
The investment restrictions set forth in the Prospectus 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. Japanese and
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. 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 in the
Prospectus 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.
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PROPOSED UNIFORM INVESTMENT RESTRICTIONS
As discussed in the Prospectus under "Investment Objective and Policies --
Investment Restrictions", the board of Trustees of the Fund has approved the
replacement of the Fund's existing investment restrictions with the fundamental
and non-fundamental investment restrictions set forth below. These uniform
investment restrictions have been proposed for adoption by all of the non-money
market mutual funds advised by the Investment Adviser or its affiliate, Fund
Asset Management, L.P. ("FAM"). The investment objective and policies of the
Fund will be unaffected by the adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S. Government
and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except further that the Fund
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the guidelines
set forth in the Fund's Prospectus and Statement of Additional Information, as
they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as defined
in the Investment Company Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund 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.
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<PAGE>
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.
Under the proposed non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend to
engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal or
contractual restrictions or which cannot otherwise be marketed, redeemed or put
to the issuer or a third party, if at the time of acquisition more than 15% of
its total assets would be invested in such securities. This restriction shall
not apply to securities which mature within seven days or securities which the
Board of Directors of the Fund has otherwise determined to be liquid pursuant to
applicable law. Notwithstanding the 15% limitation herein, to the extent the
laws of any state in which the Fund's shares are registered or qualified for
sale require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its total
assets in securities which are subject to this investment restriction (c).
Securities purchased in accordance with Rule 144A under the Securities Act (a
"Rule 144A security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction (c). Notwithstanding the fact that the Board may determine that a
Rule 144A security is liquid and not subject to limitations set forth in this
investment restriction (c), the State of Ohio does not recognize Rule 144A
securities as securities that are free of restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 5% of its total
assets in securities of issuers that are restricted as to disposition, including
Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Fund's net assets; included within such limitation, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New York Stock
Exchange or American Stock Exchange or a major foreign exchange. For purposes of
this restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than 5%
of the Fund's total assets would be invested in such securities. This
restrictions shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
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<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-half
of one percent of the securities of such issuer own in the aggregate more than
5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or development programs, except that
the Fund may invest in securities issued by companies that engage in oil, gas or
other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Fund's Prospectus and Statement
of Additional Information, as they may be amended from time to time.
i. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets, taken at market value, and then
only from banks as a temporary measure for extraordinary or emergency purposes
such as the redemption of Fund shares. In addition, the Fund will not purchase
securities while borrowings are outstanding.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Trustee is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL -- PRESIDENT AND TRUSTEE(1)(2) -- President of the Investment
Adviser (which term as used herein includes its predecessor) since 1977 and
Chief Investment Officer since 1976; President of FAM (which term as used herein
includes its corporate predecessor) since 1977 and Chief Investment Officer
since 1976; President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; Executive Vice President of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") since 1990 and a Senior Vice President
thereof from 1985 to 1990; Executive Vice President of Merrill Lynch & Co., Inc.
since 1990; Director of the Distributor.
DONALD CECIL -- 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 -- 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 -- TRUSTEE(2) -- 9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from
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<PAGE>
1979 to 1990; former Senior Vice President of Arnhold and S. Bleichroeder, Inc.
from 1973 to 1990; Adjunct Professor, Columbia University Graduate School of
Business since 1990; Adjunct Professor, Wharton School, University of
Pennsylvania, 1990; Director, Harvard Business School Alumni Association.
RICHARD R. WEST -- TRUSTEE(2) -- 482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Director of Re
Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), SmithCorona Corporation
(manufacturer of typewriters and word processors) and Alexander's, Inc. (real
estate company).
TERRY K. GLENN -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice President
of the Investment Adviser and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice President of
the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
ANDREW JOHN BASCAND -- VICE PRESIDENT(1)(2) -- Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset Management
plc in London from 1992 to 1993 and Chief Economist of A.M.P. Investments (NZ)
in New Zealand from 1989 to 1991; Economic Adviser to the Chief Economist of the
Reserve Bank of New Zealand from 1987 to 1989.
ADRIAN HOLMES -- VICE PRESIDENT(1)(2) -- Vice President of the Investment
Adviser and its predecessors since 1990 and associated therewith since 1987.
STEPHEN I. SILVERMAN -- VICE PRESIDENT(1)(2) -- Vice President of the
Investment Adviser since 1983.
GRACE PINEDA -- VICE PRESIDENT(1)(2) -- Vice President and Senior Portfolio
Manager of the Investment Adviser since 1989; analyst and portfolio manager at
Clemente Capital, Inc. from 1982 to 1989.
DONALD C. BURKE -- VICE PRESIDENT(1)(2) -- Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche LLP
from 1982 to 1990.
GERALD M. RICHARD -- TREASURER(1)(2) -- Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
MICHAEL J. HENNEWINKEL -- SECRETARY(1)(2) -- Vice President of the
Investment Adviser since 1985; attorney associated with the Investment Adviser
and FAM since 1982.
ROBERT E. PUTNEY, III -- ASSISTANT SECRETARY(1)(2) -- Attorney associated
with the Investment Adviser since 1991; attorney in private practice prior
thereto.
- ---------
(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 Investment Adviser or FAM acts
as investment adviser or manager.
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<PAGE>
At September 30, 1994, the officers and Trustees of the Fund as a group (15
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee of the Fund, and the other officers of
the Fund, owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Trustee not affiliated with the Investment Adviser a fee
of $3,500 per year plus $500 per Board 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 committee, which consists of all of
the non-affiliated Trustees, at a rate of $500 per meeting attended. The
Chairman of the audit committee receives an additional fee of $250 per meeting
attended. For the fiscal period July 30, 1993 (commencement of operations) to
May 31, 1994, fees and expenses paid to unaffiliated Trustees aggregated
$26,827.
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Fund -- Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser 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 Investment Adviser or MLAM U.K. for the Fund or other
funds for which they act as investment adviser or for 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 Investment Adviser 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 an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser. As described in the
Prospectus, the Investment Adviser receives for its services to the Fund monthly
compensation at the rate of 0.75% of the average daily net assets of the Fund.
For the fiscal period July 30, 1993 (commencement of operations) to May 31,
1994, the investment advisory fees paid by the Fund to the Investment Adviser
aggregated $4,054,791.
The Investment Adviser has also entered into a sub-advisory agreement with
MLAM U.K., a wholly-owned, indirect subsidiary of Merrill Lynch & Co., Inc. and
an affiliate of the Investment Adviser, pursuant to which the Investment Adviser
pays MLAM U.K. a fee in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount that
the Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. For the fiscal period July 30,
1993 (commencement of operations) to May 31, 1994, the sub-advisory fees paid by
the Investment Advisor to MLAM U.K. aggregated $401,250.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
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<PAGE>
assets. The Investment Adviser's obligation to reimburse the Fund is limited to
the amount of the investment advisory fee. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
The Fund has received an order from the State of California partially
waiving expense limitations described above. Pursuant to the terms of such
order, the expense limitations that would otherwise apply are waived to the
extent the Fund's expense for custodial services, management and auditing fees
exceeds the average of such fees of a group of funds managed by the Investment
Adviser or its subsidiary which primarily invest domestically. For the period
July 30, 1993 (commencement of operations) to May 31, 1994, no reimbursement of
expenses was required pursuant to the applicable expense limitations discussed
above.
The Investment Advisory Agreement obligates the Investment Adviser 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
Investment Adviser. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Securities and Exchange 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 Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services on a
semi-annual basis. For the fiscal period July 30, 1993 (commencement of
operations) to May 31, 1994, the amount of such reimbursement was $142,452. The
Distributor will pay certain promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses 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".
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. are "controlling persons" of the Investment Adviser as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K. for the same reasons: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of Merrill Lynch &
Co., Inc.
DURATION AND TERMINATION. Unless earlier terminated as described herein, the
Investment Advisory Agreement and sub-advisory agreement will continue in effect
for a period of two years from the date of execution and will remain in effect
from year to year thereafter if approved annually (a) by the Board of Trustees
of the Fund 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 contracts 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 a
majority of the shareholders of the Fund.
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<PAGE>
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 arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select Pricing-SM- System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM are referred to herein as "MLAM-advised mutual
funds."
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (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 Investment Advisory Agreement described under "Management of
the Fund -- Advisory and Management Arrangements".
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing-SM-
System, Class A shares of the Fund outstanding prior to October 21, 1994, have
been redesignated Class D shares. The Class A shares currently being offered
differ from the Class A shares offered prior to October 21, 1994 in many
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered. For the fiscal period July 30, 1993
(commencement of operations) to May 31, 1994, the Fund sold its shares through
the Distributor and Merrill Lynch, as a dealer. During the fiscal period July
30, 1993 (commencement of operations) to May 31, 1994, the Fund sold 22,000,407
of its former Class A shares (now redesignated Class D shares) for aggregate net
proceeds to the Fund of $236,735,011. The gross sales charges for the sale of
its former Class A shares of the Fund for that period were $4,502,084, of which
$228,535 and $4,273,549 were received by the Distributor and Merrill Lynch,
respectively.
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
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<PAGE>
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
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 Investment
Adviser or FAM who purchased such closed-end fund shares prior to October 21,
1994 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. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
REDUCED INITIAL SALES CHARGES
RIGHT OF ACCUMULATION. The 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
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<PAGE>
qualification, and 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 thirteen-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 record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds, presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares 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 thirteen-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A shares then being purchased under such Letter, 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 Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch
U.S. Treasury Money Fund or Merrill Lynch U.S.A. Government Reserves into the
Fund that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
EMPLOYER SPONSORED RETIREMENT AND SAVINGS PLANS. Class A or Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred
compensation plans within the meaning of Section 403(b) and 457 of the Code,
other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as "Employer Sponsored Retirement or Savings Plans", provided the
plan has accumulated $20 million or more in MLAM-advised mutual funds (in the
case of Class A shares) or $5 million or
18
<PAGE>
more in MLAM-advised mutual funds (in the case of Class D shares). Class D
shares may be offered at net asset value to new Employer Sponsored Retirement or
Savings Plans, provided the plan has $3 million or more initially invested in
MLAM-advised mutual funds. Assets of Employer Sponsored Retirement or Savings
Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares) or
between 500 and 999 employees eligible to participate in the plan (in the case
of Class D shares). Employees eligible to participate in Employer Sponsored
Retirement or Savings Plans of the same sponsoring employer or its affiliates
may be aggregated. Tax qualified retirement plans within the meaning of Section
401(a) of the Code meeting any of the foregoing requirements and which are
provided specialized services (E.G., plans whose participants may direct on a
daily basis their plan allocations among a wide range of investments including
individual corporate equities and other securities in addition to mutual fund
shares) by the Merrill Lynch Blueprint-SM- Program, are offered Class A shares
at a price equal to net asset value per share plus a reduced sales charge of
0.50%. Any Employer Sponsored Retirement or Savings Plan which does not meet the
above described qualifications to purchase Class A shares at net asset value has
the option of (i) purchasing Class A shares at the initial sales charge schedule
and possible CDSC schedule disclosed in the Prospectus, if it is otherwise
eligible to purchase Class A shares, (ii) purchasing Class D shares at the
initial sales charge and possible CDSC schedule disclosed in the Prospectus,
(iii) if the Employer Sponsored Retirement or Savings Plan meets the specified
requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption, or, if the Employer Sponsored Retirement or Savings Plan does not
qualify to purchase Class B shares with a waiver of the CDSC upon redemption,
purchasing Class C shares at the CDSC schedule disclosed in the Prospectus. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above referenced Employer Sponsored Retirement or Savings Plans.
PURCHASE PRIVILEGE OF CERTAIN PERSONS. Trustees of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and controlled by
Merrill Lynch & Co., Inc.), and 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 will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
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
19
<PAGE>
from a redemption of shares of such other mutual fund and such fund was subject
to a sales charge either at the time of purchase or on a deferred basis; second,
such purchase of Class D shares must be made within 90 days after such notice of
termination.
Class D shares of the Fund will be offered at net asset value, without a
sale charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
TMA-SM- MANAGED TRUST. Class A shares are offered to TMA-SM- Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan" with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Trustees shall review quarterly reports of the disbursement of the
20
<PAGE>
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 shareholder. 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 Directors"), 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 a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Trustees or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholder, and all material amendments are required to be
approved by the vote of the Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestment and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of May 31, 1994,
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the fiscal period July 30, 1993
21
<PAGE>
(commencement of operations) to May 31, 1994. Since Class C shares of the Fund
had not been publicly issued prior to the date of this Statement of Additional
Information, information concerning Class C shares is not yet provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MAY 31, 1994
----------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As Adopted.... $698,234 $43,640 $1,536 $45,176 $3,613 $41,563 $6,332
Under Distributor's Voluntary
Waiver....................... $698,234 $43,640 $3,491 $47,131 $3,613 $43,518 $6,332
<FN>
- ---------
(1) Purchase price of all eligible Class B shares sold since July 30, 1993
(commencement of operations) 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%, as permitted under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. 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 voluntary maximum or the NASD maximum.
</TABLE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or such Exchange is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Securities and Exchange Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
DEFERRED SALES CHARGES--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B Shares", while Class B shares redeemed within
four years of purchase are subject to a CDSC under most circumstances, the
charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan, or
22
<PAGE>
following the death or disability of a Class B shareholder. Redemptions for
which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal period July 30, 1993 (commencement of operations) to
May 31, 1994, the Distributor received CDSCs of $428,332, all of which was paid
to Merrill Lynch.
RETIREMENT PLANS. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements, then
it may purchase Class B shares with a waiver of the CDSC upon redemption. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares. "Eligible
401(k) Plan" is defined as a retirement plan qualified under Section 401(k) of
the Code with a salary reduction feature offering a menu of investments to plan
participants. The CDSC is also waived for redemptions from a 401(a) plan
qualified under the Code, provided, however, that each such plan has the same or
an affiliated sponsoring employer as an Eligible 401(k) Plan purchasing Class B
shares of MLAM-advised mutual funds ("Eligible 401(a) Plan"). Other tax
qualified retirement plans within the meaning of Section 401(a) of the Code
which are provided specialized services (E.G., plans whose participants may
direct on a daily basis their plan allocations among a menu of investments) by
independent administration firms contracted through Merrill Lynch also may
purchase Class B shares with a waiver of the CDSC. The CDSC also is waived for
any Class B or Class C shares which are purchased by an Eligible 401(k) Plan or
Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of redemption.
The Class B CDSC also is waived for any Class B shares which are purchased by a
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group, and held in such
account at the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above referenced Retirement
Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser and MLAM U.K. are primarily responsible for the execution of
the Fund's portfolio transactions and the allocation of brokerage. In executing
such transactions, the Investment Adviser and MLAM U.K. seek 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 Investment Adviser and MLAM U.K.
generally seek 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 execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the
Investment Adviser and MLAM U.K. 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 Investment Adviser and MLAM U.K. under
the Investment
23
<PAGE>
Advisory Agreement and sub-advisory agreement, respectively, and the expenses of
the Investment Adviser and MLAM U.K. will not necessarily be reduced as a result
of the receipt of such supplemental information. It is possible that certain
supplementary investment research so received will primarily benefit one or more
other investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other accounts or investment companies. In addition, consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
policies established by the Board of Trustees of the Fund, the Investment
Adviser and MLAM U.K. may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the United States, as well as GDRs traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the over-the-counter markets and
intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Securities and Exchange Commission. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. See "Investment Objective
and Policies -- Investment Restrictions". For the fiscal period July 30, 1993
(commencement of operations) to May 31, 1994, the Fund paid total brokerage
commissions of $2,692,776, of which $122,601 or 4.6% was paid to Merrill Lynch
for effecting 4.7% of the aggregate amount of transactions on which the Fund
paid brokerage commissions.
The Board of Trustees has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Trustees made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
24
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Securities and Exchange 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
The net asset value of the shares of the Fund is determined once daily
Monday through Friday at 4:15 p.m., New York time, on each day during which the
New York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund also will determine
its net asset value on any day in which there is sufficient trading in its
portfolio securities that the net asset value might be affected materially, but
only if on any such day the Fund is required to sell or redeem shares. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the
management fees and any account maintenance and/or distribution fees, are
accrued daily. The per share net asset value of the Class B, Class C and Class D
shares generally will be lower than the per share net asset value of the Class A
shares, reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares, and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares. It is expected,
however, that the per share net asset value of the four classes will tend to
converge immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differential between
the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. When the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last asked price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last asked price as obtained from
one or
25
<PAGE>
more dealers. Options purchased by the Fund are valued at their last bid price
in the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last bid price as obtained from two
or more dealers unless there is only one dealer, in which case that dealer's
price is used.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Trustees of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. Occasionally,
events affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New York
Stock Exchange which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by the Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. 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, 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 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. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders 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 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
26
<PAGE>
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the transfer agent. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if (s)he 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. An
investor whose shares of the Fund are held within a CMA-R- account may arrange
to have periodic investments made in the Fund in amounts of $100 ($1 for
retirement accounts) or more through the CMA-R- Automated Investment Program.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of the shares of the Fund as of
the close of business on the ex-dividend date of the dividend or distribution.
Shareholders may elect to receive either their dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed or direct
deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the close
of business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A or Class D shares
will be
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redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed or the direct deposit of the withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
Class A or Class D shares in the Investment Account are automatically reinvested
in Class A or Class D shares of the Fund, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Fund's transfer agent or the
Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept
purchase orders for Class A 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.
A Class A or Class D shareholder whose shares are held within a CMA-R-,
CBA-R- or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month;
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month; and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing-SM- System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the
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other Fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value of at
least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for 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.
Exchange 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 and 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 and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares") of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C shares, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2.0% sales charge that generally would apply to a
redemption would not apply to the exchange. Three years later the investor may
decide to redeem the Class B shares of Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of Fund Class B shares to the three year holding period
for the Special Value Fund Class B shares, the investor will be deemed to have
held the new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that the Class B or Class C shares are held in a
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<PAGE>
money market fund will not count towards satisfaction of the holding period
requirement for purposes of reducing the CDSC or with respect to Class B shares,
towards satisfaction of the conversion period. However, shares of a money market
fund which were acquired as a result of an exchange for Class B or Class C
shares of the Fund may, in turn, be exchanged back into Class B or Class C
shares, respectively, of any fund offering such shares, in which event the
holding period for Class B or Class C shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2.0%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continued to hold for an additional two
and a half years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
<TABLE>
<S> <C>
FUNDS ISSUING CLASS A, CLASS B, CLASS C AND
CLASS D SHARES:
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC.................................. High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
MERRILL LYNCH AMERICAS INCOME FUND, INC...... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (I.E., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ASSET GROWTH FUND, INC......... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND, INC......... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND FOR INVESTMENT
AND RETIREMENT............................. As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
MERRILL LYNCH BASIC VALUE FUND, INC.......... Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and
therefore represent basic investment value.
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL
BOND FUND.................................. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio consisting primarily of insured
California Municipal Bonds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade California Municipal
Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL FUND, INC.............. The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND FUND, INC....... Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.................................. Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital
markets.
MERRILL LYNCH DRAGON FUND, INC............... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin,
other than Japan, Australia and New
Zealand.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH EUROFUND....................... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES TRUST....... High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
MERRILL LYNCH FLORIDA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to
own securities exempt from Florida intangi-
ble personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC......... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND,
INC........................................ Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited
an above-average growth rate in earnings.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.... High total return consistent with prudent
risk, through a fully managed investment
policy utilizing U.S. and foreign equity,
debt and money market securities, the
combination of which will be varied from
time to time both with respect to the types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT
AND RETIREMENT............................. High total investment return from investment
in a global portfolio of debt investments
denominated in various currencies and
multinational currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND,
INC........................................ High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS
(residents of Arizona must meet investor
suitability standards)..................... The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST......... Long-term growth and protection of capital
from investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC...... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market
capitalizations located in various foreign
countries and in the United States.
MERRILL LYNCH GLOBAL UTILITY FUND, INC....... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GROWTH FUND FOR INVESTMENT AND
RETIREMENT................................. Growth of capital and, secondarily, income
from investment in a diversified portfolio of
equity securities placing principal
emphasis on those securities which
management of the fund believes to be un-
dervalued.
</TABLE>
<TABLE>
<S> <C>
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards)..................... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH LATIN AMERICA
FUND, INC.................................. Capital appreciation by investing primarily
in Latin American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as
is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and
Massachusetts income taxes as is con-
sistent with prudent investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MUNICIPAL BOND FUND, INC....... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND....................................... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective to provide is as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND FUND....... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH OREGON MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND, INC.............. Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a port-
folio of intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PHOENIX FUND, INC.............. Long-term growth of capital by investing in
equity and fixed income securities of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND,
INC........................................ As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality
debt securities denominated in various
currencies and multinational currency units
and having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC........ Long-term growth of capital from investments
in securities, primarily equities, of
relatively small companies believed to have
special investment value and emerging
growth companies regardless of size.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH STRATEGIC DIVIDEND FUND........ Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC........... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND FUND...... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND, INC....... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in
the ownership or operation of facilities
used to generate, transmit or distribute
electricity, telecommunications, gas or
water.
MERRILL LYNCH WORLD INCOME FUND, INC......... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies,
including multinational currencies.
CLASS A SHARE MONEY MARKET FUNDS:
MERRILL LYNCH READY ASSETS TRUST............. Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only for exchanges
within certain retirement plans)........... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation
of capital and liquidity available from
investing in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES................................... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH U.S. TREASURY MONEY FUND....... Preservation of capital, liquidity and
current income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
CLASS B, CLASS C AND CLASS D SHARE MONEY
MARKET FUNDS:
MERRILL LYNCH GOVERNMENT FUND................ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities is-
sued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND....................................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
MERRILL LYNCH TREASURY FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obliga-
tions of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements
secured by such obligations.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above,
with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an
40
<PAGE>
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C or Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such
41
<PAGE>
taxes. Shareholders may be able to claim U.S. foreign tax credits with respect
to such taxes, subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim foreign tax credits
on investments in foreign securities held in the Fund. If more than 50% in value
of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission's exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to Class A, Class B, Class C and Class D shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
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 the RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
42
<PAGE>
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under proposed regulations the Fund
would be able to elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares.
Unrealized losses, however, would not be recognized. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, I.E., each such 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 in connection with the contract treated as ordinary
gain or loss under Code Section 988 (as described below), gain or loss from
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. The mark-to-market rules outlined above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts and its short sales of securities. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses incurred
in certain closing transactions in options, futures and forward foreign exchange
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
43
<PAGE>
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (I.E., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from certain
forward contracts, from futures contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). 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 or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
-------------------
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
44
<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 figures 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 shares, Class
B, Class C and Class D shares in accordance with a formula specified by the
Securities and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer periods of time.
Set forth below is total return information for the Class B and Class D
shares of the Fund for the period indicated. As a result of the implementation
of the Merrill Lynch Select Pricing-SM- System, Class A shares of the Fund
outstanding prior to October 21, 1994, have been redesignated Class D shares,
and historical performance data pertaining to such shares is provided below
under the caption "Class D Shares". Since the new Class A and Class C shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning the new Class A and Class C
shares is not yet provided.
45
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED ON INVESTMENT AT PERCENTAGE BASED ON INVESTMENT AT
A HYPOTHETICAL THE END OF THE A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- ---------------------------------------- ------------------- ---------------- ------------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
July 30, 1993 (commencement of
operations) to May 31, 1994............ 12.57% $ 1,104.00 10.93% $ 1,090.60
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to May 31, 1994............ 14.40% $ 1,144.00 15.10% $ 1,151.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to May 31, 1994............ 10.40% $ 1,104.00 9.06% $ 1,090.60
</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 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 reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.10 per share, of different classes and to divide or combine the shares of
each class into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into shares of
Class A, Class B, Class C and Class D shares. 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 expenses related to the distribution and/or account maintenance of the
shares of a class may be borne solely by such class, and a class may have
exclusive voting rights with respect to matters relating to the expenses being
borne only by such class. The Fund has received an order from the Securities and
Exchange Commission (the "Commission") permitting the issuance and sale of
multiple classes of shares. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any expenses which may be attributable
only to one class. Shares have no preemptive rights. The rights of redemption,
exchange and conversion are described elsewhere herein and in the Prospectus.
Shares are fully paid and nonassessable 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 distribution and/or
account maintenance expenses as provided above shall have exclusive voting
rights with respect to matters relating to such distribution
46
<PAGE>
and/or account maintenance expenditures. Voting rights are not cumulative, so
that the holders of more than 50% of the shares voting in the election of
Trustees can, if they choose to do so, elect all the Trustees of the Fund, in
which event the holders of the remaining shares are unable to elect any person
as a Trustee. No material amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the outstanding shares of the
Fund.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund were paid by the Fund and are being amortized over a period
not exceeding five years. The proceeds realized by the Investment Adviser upon
the redemption of any of the shares initially purchased by it will be reduced by
the proportional amount of the unamortized organizational expenses which the
number of such initial shares being redeemed bears to the number of shares
initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class B and
Class D (formerly Class A) shares of the Fund based on the value of the Fund's
net assets on May 31, 1994, and its shares outstanding on that date is as
follows:
<TABLE>
<CAPTION>
CLASS B CLASS D
-------------- --------------
<S> <C> <C>
Net Assets............................................................. $ 844,294,881 $ 208,006,811
-------------- --------------
-------------- --------------
Number of Shares Outstanding........................................... 73,799,056 18,068,449
-------------- --------------
-------------- --------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding).......................................................... $ 11.44 $ 11.51
Sales Charge (for Class D shares: 5.25% of offering price (5.54% of net
amount invested*)).................................................... ** 0.64
-------------- --------------
Offering Price......................................................... $ 11.44 $ 12.15
-------------- --------------
-------------- --------------
<FN>
- ---------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares" in the
Prospectus and "Redemption of Shares -- Deferred Sales Charges -- Class B
Shares" herein. As of May 31, 1994, no new Class A or Class C shares of the
Fund had been publicly offered.
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be
47
<PAGE>
held in its offices outside the U.S. and with certain foreign banks and
securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts. See "Management of the Fund -- Transfer
Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on May 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 Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933, as amended, and
the Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on September 30, 1994.
The Fund was organized as an unincorporated business trust under the laws of
Massachusetts on January 3, 1992. Its executive offices are located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
-------------------
The Declaration of Trust establishing the Fund, dated January 3, 1992, 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 International Equity Fund" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of said Fund
but the "Trust Property" only shall be liable.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH INTERNATIONAL EQUITY FUND:
We have audited the accompanying statement of assets and liabilities including
the schedule of investments, of Merrill Lynch International Equity Fund, as of
May 31, 1994, the related statements of operations and changes in net assets,
and the financial highlights for the period from July 30, 1993 (commencement of
operations) to May 31, 1994. 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 audit.
We conducted our audit 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 May 31, 1994, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides 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
International Equity Fund as of May 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the period from July
30, 1993 to May 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 13, 1994
49
<PAGE>
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Shares Value Percent of
AFRICA Industries Held Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
South Mining 330,000 De Beers Consolidated Mines Ltd.
Africa (ADR)(a) $ 7,820,253 $ 6,930,000 0.7%
Total Investments in Africa 7,820,253 6,930,000 0.7
LATIN
AMERICA
Argentina Banking 109,425 Banco de Galicia y Buenos Aires S.A.
(ADR)(a) 2,983,033 4,130,794 0.4
Energy 161,600 Yacimientos Petroliferos Fiscales S.A.
Sponsored)(ADR)(a) 4,030,726 4,262,200 0.4
Utilities 31,000 ++Transportadora de Gas Del Sur(TGS)(c) 426,061 434,000 0.0
Total Investments in Argentina 7,439,820 8,826,994 0.8
Brazil Banking 219,915,138 Banco Bradesco PN 1,792,139 1,524,566 0.1
Mining 19,900,000 Companhia Vale do Rio Doce S.A. 2,156,632 2,016,297 0.2
Telecommunications 75,100 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)(a)(c) 2,825,087 2,816,250 0.3
16,605,580 Telecomunicacoes Brasileiras S.A.--
Telebras PN 626,531 487,128 0.0
91,069,200 Telecomunicacoes Brasileiras S.A.--
Telebras (Preferred) 3,396,481 3,496,647 0.3
3,510,000 Telecomunicacoes de Sao Paulo S.A.
(Preferred) 1,036,415 1,020,120 0.1
------------- ------------- ------
7,884,514 7,820,145 0.7
Utilities--Electric 200,300 Companhia Energetica de Minas Gerais
S.A.(CEMIG)(ADR)(a) 4,545,774 3,054,575 0.3
Total Investments in Brazil 16,379,059 14,415,583 1.3
</TABLE>
50
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<TABLE>
<CAPTION>
LATIN AMERICA Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Chile Building & 55,000 Maderas y Sinteticos S.A.(MASISA)
Construction (Sponsored)(ADR)(a) $ 977,412 $ 1,512,500 0.1%
Telecommunications 20,000 Compania de Telefonos de Chile S.A.
(ADR)(a) 2,406,988 1,820,000 0.2
Total Investments in Chile 3,384,400 3,332,500 0.3
Mexico Beverages 278,000 Fomento Economico Mexicano, S.A. de C.V.
(Femsa)(ADR)(a)(c) 1,742,736 1,310,075 0.1
356,000 Fomento Economico Mexicano, S.A. de C.V.
(Femsa)(Class B) 1,965,085 1,746,779 0.2
215,000 Panamerican Beverages, Inc.(Class A) 6,826,250 6,423,125 0.6
------------- ------------- ------
10,534,071 9,479,979 0.9
Building & 89,437 Cementos Mexicanos, S.A. de C.V. (Cemex)
Construction (Class B)(ADR)(a) 1,607,856 1,274,477 0.1
953,437 Cementos Mexicanos, S.A. de C.V. Nom 'B'
(Cemex) 6,646,928 7,046,020 0.7
181,821 Grupo Tribasa, S.A. de C.V. (ADR)(a) 4,762,433 5,045,533 0.5
------------- ------------- ------
13,017,217 13,366,030 1.3
Diversified 210,000 ++Grupo Carso, S.A. de C.V.(ADR)(a) 4,070,394 4,200,000 0.4
735,000 Grupo Carso, S.A. de C.V. Series A 5,890,684 7,323,450 0.7
------------- ------------- ------
9,961,078 11,523,450 1.1
Financial Services 119,700 Servicios Financieros Quadrum,
S.A. de C.V. (ADR)(a)(c) 2,451,561 2,154,600 0.2
Leisure 75,000 Grupo Situr, S.A.(ADR)(a)(c) 1,875,000 2,165,625 0.2
542,000 Grupo Situr, S.A.(Ordinary) 1,640,868 1,517,339 0.1
------------- ------------- ------
3,515,868 3,682,964 0.3
Retail Stores 921,000 Cifra, S.A. de C.V. (Class C) 2,498,768 2,423,101 0.2
Telecommunications 215,600 Telefonos de Mexico, S.A. de C.V.(Telmex)
(ADR)(a) 12,419,026 13,394,150 1.3
Total Investments in Mexico 54,397,589 56,024,274 5.3
Peru Mining 227,266 Southern Peru Copper Corp. 728,471 873,300 0.1
Total Investments in Peru 728,471 873,300 0.1
Venezuela Foods 140,000 Mavesa S.A.(ADR)(a)(c) 1,004,375 910,000 0.1
400,000 Mavesa S.A.(Ordinary) 137,354 134,211 0.0
------------- ------------- ------
1,141,729 1,044,211 0.1
Utilities--Electric 141,960 C.A. La Electricidad de Caracas
S.A.I.C.A.-S.A.C.A. 332,605 357,702 0.0
Total Investments in Venezuela 1,474,334 1,401,913 0.1
Total Investments in Latin America 83,803,673 84,874,564 7.9
NORTH
AMERICA
Canada Foreign Government Canadian Government Bonds:
Obligations C$ 12,750,000 6.50% due 8/01/1996 10,008,529 8,979,314 0.9
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
NORTH Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
25,800,000 5.75% due 3/01/1999 $ 18,644,485 $ 16,763,480 1.6%
-------------- ------------- ------
28,653,014 25,742,794 2.5
Total Investments in North America 28,653,014 25,742,794 2.5
PACIFIC
BASIN
Australia Diversified 2,067,000 BTR NYLEX 5,250,110 4,714,906 0.4
Engineering & 2,160,000 Australia National Industries, Ltd.
Construction (Ordinary) 2,844,419 3,268,750 0.3
Food & Beverage 768,836 Coca-Cola Amatil, Ltd.(Ordinary) 3,798,092 4,858,268 0.5
3,900,000 Goodman Fielder Wattie, Ltd.(Ordinary) 4,500,227 4,001,782 0.4
-------------- ------------- ------
8,298,319 8,860,050 0.9
Food & Household 1,762,200 Burns Philp & Co., Ltd.(Ordinary) 5,417,082 5,099,356 0.5
Products
Media 704,074 The News Corp. Ltd. 5,132,939 4,690,015 0.4
Natural Gas 372,000 Broken Hill Proprietary Co. 5,154,321 5,030,862 0.5
Real Estate 494,221 Lend Lease Corp. 5,964,856 6,019,760 0.6
Total Investments in Australia 38,062,046 37,683,699 3.6
Hong Kong Banking 3,158,000 Winton Holdings 1,200,321 970,843 0.1
Property 2,588,000 Hang Lung Development Co., Ltd.(Ordinary) 4,128,204 4,689,923 0.4
Telecommunications 2,638,000 Hong Kong Telecommunications Ltd.
(Ordinary) 4,492,512 5,224,439 0.5
Utilities 2,196,000 The Hong Kong & China Gas Co.(Ordinary) 3,963,130 4,633,331 0.4
183,000 ++The Hong Kong & China Gas Co.
(Warrants)(b) 0 104,819 0.0
-------------- ------------- ------
3,963,130 4,738,150 0.4
Utilities--Electric 1,551,600 China Light & Power Co., Ltd. (Ordinary) 7,552,276 8,636,179 0.8
Total Investments in Hong Kong 21,336,443 24,259,534 2.2
Japan Automobiles 1,239,000 Suzuki Motor Co. (Ordinary) 14,003,522 16,464,723 1.6
407,000 Toyota Motor Corp. 7,430,442 8,210,038 0.8
-------------- ------------- ------
21,433,964 24,674,761 2.4
Beverages 99,000 Chukyo Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,398,440 1,372,371 0.1
106,000 Hokkaido Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,754,547 1,773,423 0.2
102,000 Kinki Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,893,379 1,901,530 0.2
111,000 Mikuni Coca-Cola Bottling Co., Ltd. 2,093,307 1,899,522 0.2
111,000 Sanyo Coca-Cola Bottling Co., Ltd. 1,874,646 1,941,969 0.2
-------------- ------------- -------
9,014,319 8,888,815 0.9
Capital Goods 2,800,000 Mitsubishi Heavy Industries, Ltd. 18,078,701 20,531,549 1.9
Chemicals 116,000 Shimachu Co. (Ordinary) 4,860,372 4,934,990 0.5
250,000 Shin-Etsu Chemical Co., Ltd. (Ordinary) 5,053,884 5,282,027 0.5
-------------- ------------- ------
9,914,256 10,217,017 1.0
</TABLE>
52
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
PACIFIC BASIN Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
JAPAN Construction 446,000 Sanki Engineering Co., Ltd. $ 6,307,262 $ 5,585,660 0.5%
(concluded) 371,000 Taihei Dengyo Kaisha, Ltd. 9,667,248 10,534,130 1.0
-------------- ------------- ------
15,974,510 16,119,790 1.5
Consumer 535,000 Matsushita Electric Industrial Co., Ltd. 8,511,279 9,359,943 0.9
Electronics 267,000 Rohm Co. 9,371,978 10,925,048 1.0
-------------- ------------- ------
17,883,257 20,284,991 1.9
Diversified 238,000 Sony Corp.(Ordinary) 13,375,906 14,152,581 1.3
Electric Construction 214,000 Chudenko Corp.(Ordinary) 8,045,860 8,285,851 0.8
Electrical Equipment 569,000 The Nippon Signal Co., Ltd. 7,950,113 7,180,497 0.7
1,415,000 Sumitomo Electric Industries, Ltd. 19,791,497 21,509,082 2.0
-------------- ------------- ------
27,741,610 28,689,579 2.7
Electronics 872,000 Hitachi Ltd. 7,650,968 9,003,442 0.9
390,000 Murata Manufacturing Co., Ltd. 15,255,815 17,449,331 1.7
-------------- ------------ ------
22,906,783 26,452,773 2.6
Iron & Steel 330,000 Maruichi Steel Tube, Ltd.(Ordinary) 5,881,382 6,025,813 0.6
Office Equipment 1,154,000 Canon, Inc.(Ordinary) 17,439,277 19,196,558 1.8
Packaging 609,000 Toyo Seikan Kaisha, Ltd.(Ordinary) 17,864,689 17,466,539 1.7
Pharmaceuticals 699,000 Sankyo Co., Ltd.(Ordinary) 17,050,198 15,637,285 1.5
763,000 Taisho Pharmaceutical Co., Ltd.(Ordinary) 15,232,435 14,588,910 1.4
-------------- ------------- ------
32,282,633 30,226,195 2.9
Photography 743,000 Fuji Photo Film Co., Ltd. 17,555,576 16,124,379 1.5
Property & Casualty 1,475,000 Dai-Tokyo Fire & Marine Insurance
Insurance Co., Ltd. 11,241,300 11,577,199 1.1
851,000 Fuji Fire & Marine Insurance Co., Ltd. 5,819,056 5,613,671 0.5
1,268,000 Koa Fire & Marine Insurance Co., Ltd. 8,833,667 8,849,331 0.8
363,000 Mitsui Marine & Fire Insurance Co., Ltd. 2,929,014 3,036,568 0.3
1,566,000 Nichido Fire & Marine Insurance Co., Ltd. 11,986,774 12,725,621 1.2
351,000 Nippon Fire & Marine Insurance Co., Ltd. 2,500,899 2,647,600 0.3
1,217,000 Sumitomo Marine & Fire Insurance Co.,
Ltd. 10,299,475 11,634,799 1.1
1,352,000 Tokio Marine & Fire Insurance Co., Ltd. 16,730,311 17,707,839 1.7
1,257,000 Yasuda Fire & Marine Insurance Co., Ltd. 9,408,702 10,010,335 0.9
-------------- ------------- ------
79,749,198 83,802,963 7.9
Retail Sales 372,000 Ito-Yokado Co., Ltd.(Ordinary) 18,707,735 19,133,461 1.8
Retail Stores 33,000 Sangetsu Co.(Ordinary) 1,170,180 1,119,981 0.1
Telecommunications 278 Nippon Telephone & Telegraph Corp.
(Ordinary) 2,565,202 2,298,948 0.2
112,000 Nisshinbo Industries 1,045,613 1,263,480 0.1
-------------- ------------ -----
3,610,815 3,562,428 0.3
Transportation 878,000 Nippon Express Co., Ltd. 8,878,536 9,149,331 0.9
-------------- ------------ ------
Total Investments in Japan 367,509,187 384,105,355 36.5
Malaysia Leisure 157,000 Genting BHD 1,450,561 1,886,946 0.2
Steel 1,032,000 Maruichi Malaysia Steel Tube BHD 2,616,958 2,880,782 0.3
</TABLE>
53
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
PACIFIC BASIN Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Telecommunications 118,000 Uniphone Telecommunications BHD $ 462,197 $ 594,735 0.1%
Total Investments in Malaysia 4,529,716 5,362,463 0.6
New Paper & Forest Product 2,967,800 Carter Holt Harvey, Ltd. 6,873,959 6,861,040 0.7
Zealand
Telecommunication 60,000 Telecom Corp. of New Zealand
(Class C)(ADR)(a) 2,698,682 2,797,500 0.3
Total Investments in New Zealand 9,572,641 9,658,540 1.0
South Financial Services 170,590 Hanyang Securities Co. 3,913,001 3,027,348 0.3
Korea
Foods 1,400 ++Lotte Confectionary Co.(Ordinary) 188,438 167,607 0.0
Utilities 130,000 ++Korea Electric Power Corp. 4,919,521 4,968,975 0.5
Total Investments in South Korea 9,020,960 8,163,930 0.8
Thailand Banking 369,100 Bangkok Bank Co., Ltd.(Foreign Registered) 2,591,948 3,106,360 0.3
Total Investments in Thailand 2,591,948 3,106,360 0.3
Total Investments in the Pacific Basin 452,622,941 472,339,881 45.0
SOUTHEAST
ASIA
India Publishing & Broadcasting 380,000 ++Videocon International Ltd.(ADR)(a) 4,045,504 3,040,000 0.3
Total Investments in Southeast Asia 4,045,504 3,040,000 0.3
WESTERN
EUROPE
Austria Utilities 46,355 Verbund Oesterreichische Elekrizitats AG 2,625,340 2,361,859 0.2
Total Investments in Austria 2,625,340 2,361,859 0.2
Belgium Banking 15,000 Generale de Banque S.A.(Ordinary) 3,677,777 3,649,128 0.3
Chemicals 3,200 Solvay Group(Ordinary) 1,240,133 1,489,802 0.1
Retail Trade 70,000 Delhaize 'le Lion' Group(Ordinary) 2,882,324 2,830,624 0.3
Total Investments in Belgium 7,800,234 7,969,554 0.7
Finland Banking 800,000 Kansallis-Osake-Pankki 2,025,866 1,765,777 0.2
Commodity Linked US$36,000,000 Finnish Export Credit, 0.00%
Notes due 3/10/1997(d) 36,000,000 35,737,200 3.4
Diversified 235,000 Outokumpu OY 3,395,069 3,976,677 0.4
Paper & Forest 306,500 Enso-Gutzeit OY 1,987,636 2,226,856 0.2
Products 86,150 Metsa Serla OY 3,366,405 3,533,660 0.3
165,300 Repola OY S(c) 2,629,547 2,736,403 0.3
-------------- ------------- ------
7,983,588 8,496,919 0.8
Total Investments in Finland 49,404,523 49,976,573 4.8
</TABLE>
54
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(continued)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
France Automobiles 33,050 Peugeot S.A. $ 4,338,149 $ 4,750,791 0.5%
Banking 26,092 Compagnie Financiere de Paribas 2,018,937 1,812,717 0.2
2,900 Compagnie Financiere de Paribas(Ordinary)
(New Shares) 184,249 191,169 0.0
35,300 Compagnie Financiere de Suez(Ordinary) 2,018,337 1,908,006 0.2
19,000 Societe Generale de Surveillance S.A.
(Class A)(Ordinary) 2,052,425 2,062,722 0.2
-------------- ------------- ------
6,273,948 5,974,614 0.6
Chemicals 155,900 Rhone-Poulenc S.A. 3,910,519 3,900,270 0.4
Insurance 35,400 Societe Centrale du Groupe des Assurances
Nationales S.A. 3,149,239 2,686,450 0.3
Total Investments in France 17,671,855 17,312,125 1.8
Germany Automobile Parts 13,500 Continental AG 2,068,760 2,237,682 0.2
21,000 ++Continental AG(Warrants)(b) 1,195,162 1,194,343 0.1
-------------- ------------- ------
3,263,922 3,432,025 0.3
Automobiles 10,520 Daimler-Benz AG 4,945,899 5,167,214 0.5
3,815 Volkswagen AG (Preferred) 711,409 880,652 0.1
26,212 ++Volkswagen AG (Preferred)(Warrants)(b) 2,406,624 2,723,242 0.3
-------------- ------------- ------
8,063,932 8,771,108 0.9
Banking 13,867 Deutsche Bank AG(Ordinary) 6,786,387 6,216,532 0.6
Chemicals 15,212 BASF AG(Ordinary) 2,448,022 2,886,949 0.3
23,946 Bayer AG(Ordinary) 4,396,079 5,288,803 0.5
-------------- ------------- ------
6,844,101 8,175,752 0.8
Insurance 3,650 ++Allianz AG Holding(Warrants)(b) 140,309 172,065 0.0
1,350 ++Munich Reinsurance Co.(Ordinary) 2,359,488 2,422,445 0.2
-------------- ------------- ------
2,499,797 2,594,510 0.2
Machinery 68,200 Kloeckner Werke AG 3,365,767 6,160,402 0.6
Metal & Mining 29,860 Thyssen AG(Ordinary) 4,172,755 5,022,074 0.5
Utilities 41,000 ++Vereinigte Elektrizitaets & Bergwerks AG
(Veba)(Warrants)(b) 1,765,109 1,857,968 0.2
Total Investments in Germany 36,761,770 42,230,371 4.1
Greece Beverages 29,810 Hellenic Bottling Co. S.A. 792,760 854,529 0.1
Financial Services 44,800 Etba Leasing S.A.(Ordinary) 1,628,693 1,093,631 0.1
Total Investments in Greece 2,421,453 1,948,160 0.2
Hungary Foods 5,250 Pick Szeged Reszvenytarsasag(ADR)(a) 366,608 348,679 0.0
Total Investments in Hungary 366,608 348,679 0.0
Ireland Building & 610,000 CRH PLC (Ordinary) 2,912,864 3,157,238 0.3
Construction
Closed-End Funds 1,400,000 First Ireland Investment Co. 2,176,323 2,031,725 0.2
</TABLE>
55
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(continued)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Foreign Government IEP3,500,000 Irish Gilts, 9.25% due 7/11/2003 $ 5,950,560 $ 5,419,063 0.5%
Obligations
Forest Products 1,710,300 Jefferson Smurfit Group PLC(Ordinary) 8,331,246 8,093,413 0.8
Total Investments in Ireland 19,370,993 18,701,439 1.8
Italy Diversified 2,220,000 Compagnie Industrial Riunite S.p.A.(CIR) 2,154,516 3,627,907 0.3
Insurance 154,900 Assicurazioni Generali(Ordinary) 4,070,240 4,410,415 0.4
Telecommunications 1,000,000 STET, Di Risp(Non Conv.) 2,016,347 2,809,554 0.3
Total Investments in Italy 8,241,103 10,847,876 1.0
Nether- Banking 89,500 ABN Amro Bank(Ordinary) 3,083,255 2,930,767 0.3
lands
Beverages 8,504 Heineken Holdings(Class A) 705,797 912,872 0.1
9,000 Heineken N.V. 949,291 1,100,298 0.1
-------------- ------------- ------
1,655,088 2,013,170 0.2
Chemicals 41,125 Akzo N.V.(Ordinary) 3,932,413 4,637,571 0.4
Electrical Equipment 218,500 Philips Industries Inc. 5,139,779 6,077,013 0.6
Insurance 79,282 AEGON N.V.(Ordinary) 3,874,041 4,139,255 0.4
94,665 Amev N.V.(Ordinary) 3,772,731 3,746,568 0.4
91,197 Internationale Nederlanden Groep N.V. 3,491,374 3,752,699 0.4
-------------- ------------- ------
11,138,146 11,638,522 1.2
Paper & Forest 130,477 ++Koninklijke KNP 2,479,390 3,388,370 0.3
Products 43,492 ++Koninklijke KNP(Preferred) 176,682 180,617 0.0
-------------- ------------- ------
2,656,072 3,568,987 0.3
Transportation 192,180 KLM Royal Dutch Airlines 3,769,039 5,344,990 0.5
Total Investments in the Netherlands 31,373,792 36,211,020 3.5
Portugal Banking 341,700 Banco Comercial Portugues S.A. 5,019,557 4,734,156 0.4
89,000 Banco Comercial Portugues S.A.(ADR)(a) 1,289,946 1,212,625 0.1
-------------- ------------- ------
6,309,503 5,946,781 0.5
Building & 37,800 Sociedade de Construsoes Soares da Costa
Construction S.A. 976,555 717,469 0.1
Retail Stores 6,300 Estabelecimentes Jeronimo Martins & Filho
S.A. 494,447 479,789 0.0
Total Investments in Portugal 7,780,505 7,144,039 0.6
Spain Banking 16,920 Banco Popular Espanol(Ordinary) 1,907,099 1,906,074 0.2
Oil--Related 112,640 Repsol S.A.(Ordinary) 3,018,225 3,556,615 0.3
Real Estate 3,527 Vallehermoso Espanola S.A.(New) 43,620 69,994 0.0
Telecommunications 328,940 Telefonica Nacional de Espana S.A.
(Ordinary) 3,958,662 4,465,139 0.4
Total Investments in Spain 8,927,606 9,997,822 0.9
Sweden Building Related 158,100 Svedala Industry(c) 3,038,534 3,467,817 0.3
Engineering 183,850 ++SKF AB 3,438,484 3,089,322 0.3
95,800 ++SKF AB'B'Free 1,859,982 1,609,774 0.2
-------------- ------------- ------
5,298,466 4,699,096 0.5
Metals & Mining 204,460 ++Trelleborg AB(Class B) 1,373,199 2,911,116 0.3
Pharmaceutical-- 151,750 Astra 'A' Fria 3,179,941 3,231,208 0.3
Prescription
Total Investments in Sweden 12,890,140 14,309,237 1.4
</TABLE>
56
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Switzer- Banking 14,033 Swiss Bank Corp(Bearer) $ 4,475,325 $ 4,043,746 0.4%
land
Chemicals 5,512 Ciba-Geigy AG(Registered) 2,750,861 3,341,797 0.3
Electrical 10,481 BBC Brown Boveri & Cie 6,662,929 9,419,444 0.9
Equipment
Health & 11,960 Sandoz AG(Registered) 5,509,003 5,877,632 0.6
Personal Care
Total Investments in Switzerland 19,398,118 22,682,619 2.2
Turkey Automobiles & 245,600 ++Turk Otomobil Fabrikasi A.S.(c) 3,927,600 1,719,200 0.2
Equipment
Total Investments in Turkey 3,927,600 1,719,200 0.2
United Aerospace 300,000 Rolls Royce PLC(Ordinary) 808,335 816,318 0.1
Kingdom
Banking 674,000 National Westminster Bank PLC(Ordinary) 5,149,381 4,340,453 0.4
Beverages 1,336,600 Grand Metropolitan PLC(Ordinary) 8,759,700 8,829,752 0.8
Building Materials 500,000 Blue Circle Industries PLC(Ordinary) 2,201,422 2,199,523 0.2
1,907,350 Tarmac PLC(Ordinary) 4,878,546 4,180,844 0.4
-------------- ------------- ------
7,079,968 6,380,367 0.6
Conglomerates 2,380,000 Hanson PLC(Ordinary) 9,968,800 9,089,059 0.9
Consumer--Goods 792,900 Vendome Luxury Group(Units) 4,735,895 5,297,931 0.5
Electrical 1,098,400 General Electric Co., Ltd. PLC(Ordinary) 5,507,919 4,989,656 0.5
Equipment
Food & Beverage 728,000 Tate & Lyle PLC(Ordinary) 4,399,437 4,611,169 0.4
Food & Household 415,000 Cadbury Schweppes PLC(Ordinary) 3,315,705 2,881,914 0.3
Products
Insurance 456,300 Commercial Union Assurance Co. PLC
(Ordinary) 4,365,810 3,580,866 0.3
Leisure & 541,200 Granada Group PLC 4,445,193 3,998,620 0.4
Entertainment 852,350 The Rank Organisation PLC (Ordinary) 5,179,878 4,864,078 0.5
175,600 Thorn EMI (Ordinary) 2,625,146 2,724,891 0.3
-------------- ------------- ------
12,250,217 11,587,589 1.2
Media/Publishing 902,400 Reuters Holdings PLC 6,518,327 6,261,486 0.6
1,270,000 WPP Group PLC 1,865,806 2,265,434 0.2
-------------- ------------- ------
8,384,133 8,526,920 0.8
Oil--Related 716,000 British Petroleum Co., Ltd. 3,681,500 4,157,681 0.4
Pharmaceuticals 1,091,300 Smithkline Beecham Corp. PLC(Class A) 6,606,311 6,334,918 0.6
Retail 1,038,400 Tesco PLC(Ordinary) 3,506,944 3,308,247 0.3
Retail Trade 210,800 Boots Co. PLC(Ordinary) 1,756,467 1,628,385 0.2
2,640,200 Sears Holdings 4,730,391 4,789,428 0.5
-------------- ------------- ------
6,486,858 6,417,813 0.7
Telecommunications 883,800 Cable & Wireless Public Co. Ltd.
(Ordinary) 6,321,413 5,798,416 0.5
Utilities--Electric 836,000 Scottish Power PLC(Ordinary) 4,327,044 4,350,567 0.4
Total Investments in the United Kingdom 105,655,370 101,299,636 9.7
Total Investments in Western Europe 334,617,010 345,060,209 33.1
57
<PAGE>
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
<C> <C> <S> <C> <C> <C>
Commercial Paper* US$ 10,000,000 ANZ (Delaware) Inc., 4.00% due 6/03/1994 $ 9,997,778 $ 9,997,778 0.9%
10,089,000 General Capital Electric Co.,
4.22% due 6/01/1994 10,089,000 10,089,000 1.0
-------------- ------------- ------
20,086,778 20,086,778 1.9
US Government US Treasury Bills:
Obligations* 485,000 3.40% due 6/16/1994 484,313 484,235 0.0
385,000 3.42% due 6/16/1994 384,451 384,393 0.0
725,000 3.43% due 6/16/1994 723,964 723,857 0.0
350,000 3.48% due 6/16/1994 349,492 349,448 0.0
70,000 3.50% due 6/16/1994 69,898 69,890 0.0
450,000 3.51% due 6/16/1994 449,342 449,290 0.0
220,000 3.52% due 6/16/1994 219,677 219,653 0.0
825,000 3.53% due 6/16/1994 823,787 823,699 0.1
250,000 3.65% due 6/16/1994 249,620 249,606 0.0
39,000,000 3.71% due 6/23/1994 38,911,578 38,907,559 3.7
700,000 3.105% due 7/07/1994 697,827 697,194 0.1
-------------- ------------- ------
43,363,949 43,358,824 3.9
Total Investments in Short-Term
Securities 63,450,727 63,445,602 5.8
<CAPTION>
OPTIONS Number of Contracts/ Premiums
PURCHASED Face Amount Paid
<C> <C> <S> <C> <C> <C>
Call Options 194,819 Topix Index, expiring October 1994
Purchased at Yen 2270 278,895 313,181 0.0
188,501 Topix Index, expiring May 1995
at Yen 2330 420,000 370,731 0.0
-------------- ------------- ------
698,895 683,912 0.0
Currency Call 10,000,000 French Franc, expiring September 1994 at
Options Purchased Frf 5.77 145,500 329,800 0.0
8,500,000 German Deutschemark, expiring September
1994 at DM 1.679 133,875 266,475 0.0
5,160,000 Netherlands Guilder, expiring September
1994 at NLG 1.885 83,334 162,024 0.0
-------------- ------------- ------
362,709 758,299 0.0
Currency Put 14,800,000 German Deutschemark, expiring June 1994
Options Purchased at DM 1.70 236,060 19,240 0.0
40,000,000 Japanese Yen, expiring September 1994
at Yen 105 924,000 688,000 0.0
80,000,000 Japanese Yen, expiring September 1994
at Yen 107 1,792,000 752,000 0.1
12,640,000 Netherlands Guilder, expiring June 1994
at NLG 1.915 195,920 12,008 0.0
-------------- ------------- ------
3,147,980 1,471,248 0.1
Total Options Purchased 4,209,584 2,913,459 0.1
Total Investments 979,222,706 1,004,346,509 95.4
</TABLE>
58
<PAGE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
OPTIONS Number of Contracts/ Premiums Value Percent of
WRITTEN Face Amount Issue Received (Note 1a) Net Assets
<C> <C> <S> <C> <C> <C>
Call Options 9,039 Hang Seng Index, expiring July 1994
Written at HKD 12212 $ (664,005) $ (103,933) 0.0%
Currency Call $ 10,000,000 French Franc, expiring September 1994
Options Written at Frf 5.595 (64,500) (156,500) 0.0
8,500,000 German Deutschemark, expiring September
1994 at DM 1.628 (60,350) (127,925) 0.0
5,160,000 Netherlands Guilder, expiring September
1994 at NLG 1.827 (37,926) (77,658) 0.0
-------------- ------------- ------
(162,776) (362,083) 0.0
Put Options Written 194,819 Topix Index, expiring October 1994 at
Yen 2270 (205,795) (158,072) 0.0
Total Options Written (1,032,576) (624,088) 0.0
Total Investments, Net of Options Written $978,190,130 1,003,722,421 95.4
============
Variation Margin on Stock Index Futures Contracts** 309,684 0.0
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (883,161) (0.1)
Other Assets Less Liabilities 49,152,748 4.7
============== ======
Net Assets $1,052,301,692 100.0%
============== ======
<FN>
(a) American Depositary Receipt(ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of shares
are subject to adjustment under certain conditions until the
expiration date.
(c) Restricted securities pursuant to Rule 144A. The value of the Fund's
investment in restricted securities was approximately $17,714,000, representing
1.7% of net assets.
(d) The redemption value including interest, if any, is linked to the Goldman
Sachs Commodity Index. This note is not principal protected.
++ Non-income producing security.
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
** Stock index futures contracts as of May 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1d)
45 FTSE 100 LIFFE June 1994 $ 5,032,260
184 Nikkei 225 CME June 1994 19,283,200
333 Nikkei 225 SIMEX June 1994 33,379,588
433 Nikkei 225 CME September 1994 45,703,150
Total Stock Index Futures Contracts Purchased
(Total Contract Price--$101,425,951) $ 103,398,198
=============
** Stock index features contracts sold as of May 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1d)
150 EOE20 EOE June 1994 $(6,531,689)
Total Stock Index Futures Contracts Sold
(Total Contract Price-$6,779,073) $(6,531,689)
============
*** Forward foreign exchange contracts as of May 31, 1994 were as follows:
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Sold Date (Note 1b)
A$ 23,732,602 September 1994 $ (85,964)
Bf 207,054,996 September 1994 (262,617)
DM 33,651,062 September 1994 (847,398)
Fmk 18,726,095 September 1994 (45,699)
Frf 86,635,768 September 1994 (658,555)
Nlg 27,242,454 September 1994 (603,995)
Pta 1,012,303,596 September 1994 (185,644)
Skr 29,179,296 September 1994 (57,881)
Yen 14,896,716,999 September 1994 1,864,592
Total (US Commitment--$215,822,774) $ (883,161)
============
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts $ (883,161)
============
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of May 31, 1994
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$975,013,122) (Note 1a) $1,001,433,050
Put options purchased, at value (cost--$4,209,584) 2,913,459
Variation margin on stock index futures contracts (Notes 1d & 5) 309,684
Foreign cash (Note 1b) 6,052,023
Cash 972,464
Receivables:
Securities sold $47,458,000
Capital shares sold 12,920,369
Dividends 3,551,811
Forward foreign exchange contracts (Note 1b) 707,316
Interest 651,653 65,289,149
-----------
Deferred organization expenses (Note 1g) 56,896
Prepaid registration fees and other assets (Note 1g) 58,099
--------------
Total assets 1,077,084,824
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1b) 883,161
Call options written, at value (premiums received--$1,032,576) (Notes 1a & 1c) 624,088
Payables:
Securities purchased 18,069,030
Capital shares redeemed 2,975,288
Distributor (Note 2) 759,700
Investment adviser (Note 2) 670,109 22,474,127
-----------
Accrued expenses and other liabilities 801,756
--------------
Total liabilities 24,783,132
--------------
Net Assets: Net assets $1,052,301,692
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number of shares
Consist of: authorized $ 1,806,845
Class B Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized 7,379,906
Paid-in capital in excess of par 979,944,938
Undistributed realized capital gains on investments and foreign currency transactions--
net 36,233,997
Unrealized appreciation on investments and foreign currency transactions--net 26,936,006
--------------
Net assets $1,052,301,692
==============
Net Asset Class A--Based on net assets of $208,006,811 and 18,068,449 shares of beneficial
Value: interest outstanding $ 11.51
==============
Class B--Based on net assets of $844,294,881 and 73,799,056 shares of beneficial
interest outstanding $ 11.44
==============
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
July 30, 1993++
to May 31,1994
<C> <S> <C> <C>
Investment Dividends (net of $1,043,207 foreign withholding tax) $ 7,646,918
Income Interest and discount earned 2,508,301
(Notes 1e & --------------
1f) : Total income 10,155,219
--------------
Expenses: Distribution and maintenance fees--Class B (Note 2) 4,246,574
Investment advisory fees (Note 2) 4,054,791
Custodian fees 564,442
Registration fees (Note 1g) 406,198
Transfer agent fees--Class B (Note 2) 369,783
Maintenance fees--Class A (Note 2) 289,933
Accounting services (Note 2) 142,452
Transfer agent fees--Class A (Note 2) 84,847
Printing and shareholder reports 73,513
Trustees' fees and expenses 26,827
Professional fees 25,401
Amortization of organization expenses (Note 1g) 11,454
Pricing fees 8,558
Other 14,000
--------------
Total expenses 10,318,773
--------------
Investment loss--net (163,554)
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 45,327,087
Gain (Loss) Foreign currency transactions--net (8,929,536) 36,397,551
on Invest- -------------
ments & Unrealized appreciation/depreciation on:
Foreign Investments-net 29,232,371
Currency Foreign currency transactions--net (2,296,365) 26,936,006
Transactions ------------- --------------
- --Net(Notes Net realized and unrealized gain on investments and foreign currency transactions 63,333,557
1b, 1f & 3): --------------
Net Increase in Net Assets Resulting from Operations $ 63,170,003
==============
<FN>
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
July 30, 1993++
to May 31, 1994
Increase (Decrease) in Net Assets:
<C> <S> <C>
Operations: Investment loss--net $ (163,554)
61
<PAGE>
<CAPTION>
For the Period
July 30, 1993++
to May 31, 1994
Increase (Decrease) in Net Assets:
<C> <S> <C>
Operations: Investment loss--net $ (163,554)
Realized gain on investments and foreign currency transactions--net 36,397,551
Unrealized appreciation on investments and foreign currency transactions--net 26,936,006
--------------
Net increase in net assets resulting from operations 63,170,003
--------------
Beneficial Net increase in net assets derived from beneficial interest transactions 989,031,689
Interest ==============
Transactions
(Note 4):
Net Assets: Total increase in net assets 1,052,201,692
Beginning of period 100,000
--------------
End of period $1,052,301,692
==============
<FN>
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. July 30, 1993++ to
May 31, 1994
Increase (Decrease) in Net Asset Value: Class A Class B*
<C> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ----------- -----------
Performance: Investment income (loss)--net .04 (.02)
Realized and unrealized gain on investments and foreign currency
transactions--net 1.47 1.46
----------- -----------
Total from investment operations 1.51 1.44
----------- -----------
Net asset value, end of period $ 11.51 $ 11.44
=========== ===========
Total Based on net asset value per share 15.10%+++ 14.40%+++
Investment =========== ===========
Return:***
Ratios to Expenses, excluding account maintenance and distribution fees 1.06%** 1.07%**
Average =========== ===========
Net Assets: Expenses 1.31%** 2.07%**
=========== ===========
Investment income (loss)--net .55%** (.19)%**
=========== ===========
Supplemental Net assets, end of period (in thousands) $ 208,007 $ 844,295
Data: =========== ===========
Portfolio turnover 50.63% 50.63%
=========== ===========
<FN>
*Based on average outstanding shares during the period.
**Annualized.
***Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
62
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch International Equity Fund (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-
end management investment company. The shares of the Fund are
divided into Class A Shares and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject
to a contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same
terms and conditions, except that Class A Shares bear the expenses
of its ongoing account maintenance fee with respect to the Class A
Shares and Class B Shares bear the expenses of its ongoing account
maintenance fee and distribution fee with respect to the Class B
Shares and have exclusive voting rights with respect to matters relat-
ing to its respective 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 principal
market 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 in the
over-the-counter market prior to the time of valuation. Portfolio
securities which are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. 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. Short-term securities are valued at amortized cost,
which approximates market value.
Options written by the Fund are valued at the last asked price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, at the average of the last asked price
as obtained from one or more dealers. Options purchased by the
Fund are valued at their last bid price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the average of the last bid price as obtained from two
or more dealers, unless there is only one dealer, in which case
that dealer's price is used.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund.
(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 cur-
rency transactions are the result of settling (realized) or valuing
(unrealized) such transactions expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized
over the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter for-
eign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar-denominated
securities owned by the Fund, sold by the Fund but not yet delivered,
or committed or anticipated to be purchased by the Fund.
(c) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is sold through an exercise of an option, the related
premium received (or paid) is deducted from (or added to) the basis
of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(d) Futures contracts--The Fund may purchase or sell futures con-
tracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation
in value of the contract. Such receipts or payments are known as
63
<PAGE>
variation margin and are recorded by the Fund as unrealized gains
or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(e) Income taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provi-
sion is required. Under the applicable foreign tax law, a withholding
tax may be imposed on interest, dividends, and capital gains at
various rates.
(f) Security transactions and investment income--Security transac-
tions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
dates except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amorti-
zation of discount) is recognized on the accrual basis. Realized gains
and losses on security transactions are determined on the identified
cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration fees
are charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(i) Reclassification--Accumulated investment loss--net in the
amount of $163,554 was reclassified to undistributed realized
gains--net.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January
1, 1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the 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, pursu-
ant to which MLAM pays MLAM U.K. a fee in an amount to be
determined from time to time by the Investment Adviser and MLAM
U.K. but in no event in excess of the amount that the Investment
Adviser actually receives. For the period July 30, 1993 to May 31,
1994, MLAM paid MLAM U.K. a fee of $401,250 pursuant to such
Agreement. Certain of the states in which the shares of the Fund
are qualified for sale impose limitations on the expenses of the
Fund. The most restrictive annual expense limitation requires
that the Investment Adviser reimburse the Fund to the extent the
Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed
2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. MLAM's obligation to
reimburse the Fund is limited to the amount of the management
fee. No fee payment will be made to MLAM during any fiscal year
which will cause such expenses to exceed the most restrictive
expense limitation at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distribu-
tion Plan") for Class A and Class B Shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940 pursuant to
which MLFD receives from the Fund at the end of each month
(a) an account maintenance fee, at an annual rate of 0.25% of the
average daily net assets of the Fund's Class A Shares in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-
agreement) in connection with account maintenance activities, and
(b) an account maintenance fee and a distribution fee at the annual
rates of 0.25% and 0.75%, respectively, of the average daily net assets
of the Fund's Class B Shares in order to compensate the Distributor
and Merrill Lynch (pursuant to a sub-agreement) for the services
it provides and the expenses borne by the Distributor under the
Distribution Agreement. As authorized by the Distribution Plans,
the Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLAM,
which provides for the compensation of MLPF&S in connection
with account maintenance activities for Class A Shares and for
providing account maintenance and distribution-related services
to the Fund for Class B Shares. For the period ended May 31, 1994,
MLFD earned $289,933 and $4,246,574 for Class A and Class B
Shares, respectively, under the Distribution Plans, all of which was
paid to MLPF&S pursuant to the agreement.
For the period ended May 31, 1994, MLFD earned underwriting
discounts of $228,535, and MLPF&S earned dealer concessions of
$4,273,549, on sales of the Fund's Class A Shares.
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
MLPF&S also received contingent deferred sales charges of
$428,332 relating to transactions in Class B Shares and $122,975 in
commissions on the execution of portfolio security transactions
for the Fund during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period from July 30, 1993 (commencement of operations) to
May 31, 1994 were $1,167,065,890 and $290,085,723, respectively.
Net realized and unrealized gains (losses) as of May 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Investments:
Long-term $ 34,782,900 $ 26,425,052
Short-term 709 (5,124)
Stock index futures contracts 9,813,375 2,219,631
Options written 730,103 607,795
Options purchased -- (14,983)
------------ ------------
Total Investments 45,327,087 29,232,371
Currency transactions:
Options written (654,392) (199,307)
Options purchased (1,019,600) (1,281,142)
Forward foreign exchange contracts 2,975,734 (883,161)
Foreign currency transactions (10,231,278) 67,245
------------ ------------
Total currency transactions (8,929,536) (2,296,365)
------------ ------------
Total $ 36,397,551 $ 26,936,006
============ ============
</TABLE>
Transactions in call options purchased for the period July 30, 1993
to May 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by
Written Premiums
Options Received
<S> <C> <C>
Outstanding call options written
at beginning of period -- --
Options written $(45,677,012) $ (1,795,687)
Options closed 1,007,973 827,756
Options expired 21,000,000 141,150
------------ ------------
Outstanding call options written
at end of period $(23,669,039) (826,781)
============ ============
</TABLE>
Transactions in put options written for the period July 30, 1993
to May 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by
Written Premiums
Options Received
<S> <C> <C>
Outstanding put options written
at beginning of period -- --
Options written $(101,194,819) $ (1,033,445)
Options expired 33,000,000 389,250
Options exercised 68,000,000 438,400
------------- ------------
Outstanding put options written
at end of period $ (194,819) $ (205,795)
============= ============
</TABLE>
As of May 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $26,304,596, of which $60,379,500 related
to appreciated securities and $34,074,904 related to depreciated
securities. At May 31, 1994, the aggregate cost of investments, for
Federal income tax purposes was $975,550,361.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest trans-
actions was $989,031,689 for the period from July 30, 1993 to
May 31, 1994.
<PAGE>
Transactions in shares of beneficial interest for Class A and Class B
shares were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 22,000,407 $236,735,011
Shares redeemed (3,936,958) (43,370,904)
------------ ------------
Net increase 18,063,449 $193,364,107
============ ============
<FN>
++Prior to July 30, 1993 (commencement of operations), the Fund issued
5,000 shares to MLAM for $50,000.
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 78,960,422 $853,108,016
Shares redeemed (5,166,366) (57,440,434)
------------ ------------
Net increase 73,794,056 $795,667,582
============ ============
<FN>
++Prior to July 30, 1993 (commencement of operations), the Fund issued
5,000 shares to MLAM for $50,000.
</TABLE>
65
<PAGE>
5. Commitments:
At May 31, 1994, the Fund had entered into forward foreign exchange
contracts under which it agreed to purchase and sell various foreign
currency with an approximate value of $1,909,000 and $14,866,000,
respectively.
66
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-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Objective and Policies................. 2
Hedging Techniques.............................. 3
Current Investment Restrictions................. 7
Proposed Uniform Investment Restrictions........ 10
Management of the Fund............................ 12
Trustees and Officers........................... 12
Advisory and Management Arrangements............ 14
Purchase of Shares................................ 16
Redemption of Shares.............................. 22
Portfolio Transactions and Brokerage.............. 23
Determination of Net Asset Value.................. 25
Shareholder Services.............................. 26
Taxes............................................. 41
Performance Data.................................. 45
General Information............................... 46
Description of Shares........................... 46
Computation of Offering Price Per Share......... 47
Independent Auditors............................ 47
Custodian....................................... 47
Transfer Agent.................................. 48
Legal Counsel................................... 48
Reports to Shareholders......................... 48
Additional Information.......................... 48
Independent Auditors' Report...................... 49
Financial Statements.............................. 50
</TABLE>
Code #16748 -- 1094
[LOGO]
Merrill Lynch
International
Equity Fund
STATEMENT OF
ADDITIONAL
INFORMATION
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 306 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- --------------------------------- -----------------------------
Compass plate, circular graph Back cover of Prospectus and
paper and Merrill Lynch Logo back cover of Statement of
including stylized market bull. Additional Information.
