PROSPECTUS
JANUARY 14, 1994
MERRILL LYNCH INTERNATIONAL EQUITY FUND
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.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). The original charges to which the Class B shares are subject shall
consist of a contingent deferred sales charge which may be imposed on
redemptions made within four years of purchase and an ongoing account
maintenance fee and distribution fee. The Fund is presently considering
extending the period of time during which redemptions of Class B shares will be
subject to the contingent deferred
(Continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated January 14, 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.
------------------------
INVESTMENT ADVISER:
MERRILL LYNCH ASSET MANAGEMENT
DISTRIBUTOR:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
<PAGE>
(Continued from Cover Page)
sales charge. If such period is lengthened, the disclosure in the prospectus
would be appropriately revised. Also, any Class B shares purchased prior to such
change would be subject to the Fund's contingent deferred sales charge schedule
as provided in the Fund's prospectus at the time of the purchase of such shares,
instead of any longer period. The ability to purchase either Class A shares or
Class B shares permits an investor to choose the method of purchasing shares
that is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. Class A shares pay
an ongoing account maintenance fee at the annual rate of 0.25% of the Fund's
average daily net assets attributable to Class A shares; Class B shares pay an
ongoing account maintenance fee and an ongoing distribution fee at the annual
rates of 0.25% and 0.75%, respectively, of the Fund's average daily net assets
attributable to the Class B shares. Investors should understand that the purpose
and function of the deferred sales charges and account maintenance fee with
respect to the Class B shares are the same as those of the initial sales charge
and account maintenance fee with respect to the Class A shares. Investors should
also understand that over time the deferred sales charges and account
maintenance fee related to Class B shares may exceed the initial sales charge
and account maintenance fee with respect to Class A shares. See "Alternative
Sales Arrangements" on page 4.
Each Class A share and Class B share represents an identical interest in
the investment portfolio of the Fund and has the same rights, except that Class
B shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares, which also bear the expense of an account
maintenance fee. The two classes also have different exchange privileges.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of the Class A shares and Class B shares. The
Fund has applied for an additional order from the Securities and Exchange
Commission to issue additional classes of shares also representing interests in
the Fund. If such order is received, it is presently expected that the Fund
would issue additional class(es) of shares with different sales arrangements
than those for Class A shares and Class B shares. There can be no assurance that
the additional order will be granted.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), 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 $250, 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".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
-------------------- --------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)............................................. 6.50 (a) None
Sales Charge Imposed on Dividend Reinvestments............. None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower).............. None(f) 4.0% during the
first year,
decreasing 1.0%
annually to 0%
after the
fourth year(b)
Exchange Fee............................................... None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Investment Advisory Fees(c)................................ 0.75% 0.75%
Rule 12b-1 Fees(d)......................................... 0.25% 1.00%(g)
Other Expenses
Shareholder Servicing Costs(e)........................... 0.09% 0.11%
Custodian Fees........................................... 0.25% 0.25%
Other.................................................... 0.10% 0.10%
--- ---
Total Other Expenses..................................... 0.44% 0.46%
----- -----
Total Fund Operating Expenses.............................. 1.44% 2.21%
----- -----
----- -----
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for purchases of $1,000,000 and over. Certain
investors making purchases of $1,000,000 and over may, however, pay a contingent deferred sales charge ranging
from a high of 1.00% to a low of 0.25% of amounts redeemed within the first year after purchase in lieu of the
0.75% initial sales charge. See "Purchase of Shares--Initial Sales Charge Alternative--Class A Shares"--page
20.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares"--page 21.
(c) See "Management of the Fund--Advisory and Management Arrangements"--page 14.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution Plans"--page 18.
(e) See "Management of the Fund--Transfer Agency Services"--page 16.
(f) Certain investors making purchases of $1,000,000 and over may, however, pay a contingent deferred sales charge
ranging from a high of 1.00% to a low of 0.25% of amounts redeemed within the first year after purchase in
lieu of the 0.75% initial sales charge. See "Purchase of Shares--Initial Sales Charge Alternative--Class A
Shares"--page 20.
(g) This amount represents the 0.25% account maintenance fee and the 0.75% distribution fee applicable to Class B
shares of the Fund.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
CUMULATIVE
EXPENSES PAID
FOR THE PERIOD OF:
1 YEAR 3 YEARS
--------- ---------
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment including, for Class A
shares, the maximum $65 front-end sales charge and assuming (1) an operating expense ratio
of 1.44% for Class A shares and 2.21% for Class B shares, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the period:
Class A..................................................................................... $ 78.70 $ 107.59
Class B..................................................................................... $ 62.41 $ 89.12
An investor would pay the following expenses on the same $1,000 investment assuming no redemp-
tion at the end of the period:
Class A..................................................................................... $ 78.70 $ 107.59
Class B..................................................................................... $ 22.41 $ 69.12
</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 expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's first fiscal year on an annualized basis.
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 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.
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 charge. See
"Purchase of Shares" and "Redemption of Shares".
3
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Class A shares incur a 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 the Class A shares. Although Class A
shares incur a sales charge when they are purchased, they enjoy the benefit of
not being subject to the ongoing distribution fee to which Class B shares are
subject or any sales charge when they are redeemed. Certain purchases of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B shares. Class B shares do not incur a sales charge
when they are purchased, but they are subject to ongoing account maintenance and
distribution fees of 0.25% and 0.75%, respectively, of the Fund's average net
assets attributable to the Class B shares and a sales charge if they are
redeemed within four years of purchase. The Fund is presently considering
extending the period of time during which redemptions of Class B shares will be
subject to the contingent deferred sales charge. If such period is lengthened,
the disclosure in the prospectus would be appropriately revised. Also, any Class
B shares purchased prior to such change would be subject to the Fund's
contingent deferred sales charge schedule as provided in the Fund's prospectus
at the time of the purchase of such shares, instead of any longer period. Class
B shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than Class A shares. Both Class A shares and Class B shares pay an
ongoing account maintenance fee. Payment of the distribution fee is subject to
certain limits as set forth under "Purchase of Shares-Deferred Sales Charge
Alternative-Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Shares acquired under the initial sales charge alternative
would be subject to an ongoing account maintenance fee that is lower than the
sum of the ongoing account maintenance fee and distribution fee on Class B
shares. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all of their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees on Class B shares may exceed the
initial sales charge and ongoing account maintenance fee on Class A shares.
Again, however, such investors must weigh this consideration against the fact
that not all of their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
sales charge alternative. However, there can be no assurance as to the return,
if any, which will be realized on such additional funds. Certain other investors
might determine it to be more advantageous to have all their funds invested
initially, although remaining subject to continued account maintenance and
distribution fees and, for a four-year period of time, a contingent deferred
sales charge.
4
<PAGE>
The distribution expenses incurred by the Distributor and dealers
(primarily Merrill Lynch) in connection with the sale of the shares will be
paid, in the case of the Class A shares, from the proceeds of the initial sales
charge and ongoing account maintenance fee, and in the case of the Class B
shares, such distribution expenses will be paid from the proceeds of the ongoing
account maintenance and distribution fees and the contingent deferred sales
charge incurred upon redemption within four years of purchase. Sales personnel
may receive different compensation for selling Class A or Class B shares.
Investors should understand that the purpose and function of the deferred sales
charges and account maintenance fee with respect to the Class B shares are the
same as those of the initial sales charge and account maintenance fee with
respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class, and the
account maintenance fee relating to Class A shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege for
Class A and Class B shares, respectively, of certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund may
also exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch. See "Shareholder Services--Exchange Privilege".
The Trustees of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis, the
Trustees of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and state laws,
will seek to assure that no such conflict arises.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of two classes of shares, namely Class A shares
and Class B shares. The Fund has applied for an additional order from the
Securities and Exchange Commission to issue additional classes of shares also
representing interests in the Fund. If such order is received, it is presently
expected that the Fund would issue additional class(es) of shares with different
sales arrangements than those for Class A shares and Class B shares. There can
be no assurance that the additional order will be granted.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND OTHER
CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR
CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND AN
ACCOUNT MAINTENANCE FEE OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED
IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT
MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST INVESTORS IN MAKING THIS
DETERMINATION, THE FEE TABLE ON PAGE 3 SETS FORTH THE CHARGES APPLICABLE TO
EACH CLASS OF SHARES, AND A DISCUSSION OF RELEVANT FACTORS IN MAKING SUCH
DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES-- ALTERNATIVE SALES
ARRANGEMENTS" ON PAGE 17.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(UNAUDITED)
The financial information in the table below has not been audited.
Unaudited financial statements for the period July 30, 1993 (commencement of
operations) to November 30, 1993, are included in the Statement of Additional
Information. 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 NOVEMBER 30, 1993
------------------------
<S> <C> <C>
INCREASE IN NET ASSET VALUE: CLASS A CLASS B++
----------- -----------
Net Asset Value,
Beginning of Period................................................................ $ 10.00 $ 10.00
----------- -----------
Per Share Operating Performance:
Investment income (loss)--net........................................................ .01 (.01)
Realized and unrealized gain on investments and foreign currency transactions--net... .30 .30
----------- -----------
Total from investment operations..................................................... .31 .29
----------- -----------
Net Asset Value, End of Period....................................................... $ 10.31 $ 10.29
----------- -----------
----------- -----------
Total Investment Return**............................................................ 3.10%+++ 2.90%+++
----------- -----------
----------- -----------
Ratios to Average Net Assets:
Expenses excluding maintenance and distribution fees................................. 1.19%* 1.21%*
----------- -----------
----------- -----------
Expenses............................................................................. 1.44%* 2.21%*
----------- -----------
----------- -----------
Investment income--net............................................................... .26%* (.56)%*
----------- -----------
----------- -----------
Supplemental Data:
Net assets, end of period (in thousands)............................................. $ 111,454 $ 398,519
----------- -----------
----------- -----------
Portfolio Turnover Rate.............................................................. 17.31% 17.31%
----------- -----------
----------- -----------
</TABLE>
+ 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.
6
<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 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.
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.
7
<PAGE>
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.
8
<PAGE>
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 ($250 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
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.
9
<PAGE>
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 and convertible debt securities. 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 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 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 security that pays interest and
returns principal based on the change in an index of interest rates or of the
value of a precious or industrial metal. 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.
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
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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
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 and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities. Purchase and
sale contracts may be entered into only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. Under such agreements, the other party
agrees, upon entering into the contract with 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. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect accrued
interest on the underlying obligation; whereas, in the case of purchase and sale
contracts, the prices take into account accrued interest. Such agreements
usually cover short
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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. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute 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 disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract, instead
of the contractual fixed rate, the rate of return to the Fund would be dependent
upon intervening fluctuations of the market values 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.
Repurchase agreements and purchase and sale contracts 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.
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).
--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.
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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.; Executive Vice President
of Merrill Lynch; Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY--Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior
Vice President of Arnhold and S. Bleichroeder, Inc.; Adjunct
Professor, Columbia University Graduate School of Business.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
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"). The Investment Adviser is owned and controlled by Merrill Lynch &
Co., Inc., a financial services holding company and the parent of Merrill Lynch.
The Investment Adviser, or an affiliate of the Investment Adviser, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser to more than 90 other
registered investment companies and provides investment advisory services to
individual and institutional accounts. As of November 30, 1993, the Investment
Adviser and FAM had a total of approximately $159.4 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.
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The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly-owned 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 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 November 30, 1993, the fee paid by the
Investment Adviser to MLAM U.K. was $86,994.
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
November 30, 1993, the fee paid by the Fund to the Investment Adviser was
$910,109 (based upon average net assets of approximately $357.2 million). At
December 31, 1993, the net assets of the Fund aggregated approximately $624.5
million. At this asset level, the annual management fee would aggregate
approximately $4,684,000.
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 November 30, 1993, the Fund
reimbursed the Investment Adviser $16,960 for accounting services. For the
fiscal period July 30, 1993 (commencement of operations) to November 30, 1993,
for the Class A shares the ratio of total expenses excluding account maintenance
fees to average net assets was 1.19% (annualized), and the ratio of total
expenses including account maintenance fees to average net assets was 1.44%
(annualized); for the Class B shares the ratio of total expenses excluding
account maintenance and distribution fees to average net assets was 1.21%
(annualized), and the ratio of total expenses including account maintenance and
distribution fees to average net assets was 2.21% (annualized).
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, 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 primarily responsible
for geographical asset allocation of the Fund's portfolio. Most recently, Mr.
Bascand was with A.M.P. Asset Management plc in London and had previously served
as Chief Economist with A.M.P. Investments (NZ) in New Zealand. He has served
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<PAGE>
as Economic Adviser to the Chief Economist of the Reserve Bank of New Zealand
and as Senior 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, 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 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 Investment Adviser since 1989, has
been a member of the team primarily responsible for the day-to-day management of
the Fund's portfolio 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 $7.00 per Class A shareholder account and $9.00
per Class B 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 November 30, 1993, the Fund paid the
Transfer Agent $127,524 pursuant to the Transfer Agency Agreement. At November
30, 1993, the Fund had 5,606 Class A shareholder accounts and 32,763 Class B
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate approximately $334,109 plus miscellaneous and
out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Investment Adviser and an affiliate 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 $250, and the
minimum subsequent purchase is $1.
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<PAGE>
The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share plus sales charges which, at the
option of the purchaser, may be imposed either at the time of purchase (the
"initial sales charge alternative") or on a deferred basis (the "deferred sales
charge alternative"), 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
determined as of 4:15 p.m., New York time, on the day the orders are placed with
the Distributor, provided the orders are received by the Distributor prior to
4:30 p.m., New York time, on that day. If the purchase orders are not received
by the Distributor prior to 4:30 p.m., New York time, such orders shall be
deemed received on the next business day. Any order may be rejected by the
Distributor or the Fund. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such sales
arrangements and the expenses paid by the account maintenance fee and (ii) that
Class A shares bear the expenses of the account maintenance fee, and (iii) each
class has exclusive voting rights with respect to the Rule 12b-1 distribution
plan pursuant to which the account maintenance and distribution fees, in the
case of the Class B shares, and the account maintenance fee, in the case of the
Class A shares, is paid. The two classes also have different exchange
privileges. See "Shareholder Services--Exchange Privilege". The net income
attributable to Class B shares and the dividends payable on Class B shares will
be reduced by the amount by which the sum of the account maintenance and
distribution fees and incremental expenses associated with such account
maintenance and distribution fees exceeds the account maintenance fee
attributable to the Class A shares; likewise the net asset value of the Class B
shares will be reduced by such amount to the extent the Fund has undistributed
net income. Sales personnel may receive different compensation for selling Class
A or Class B shares. Investors are advised that only Class A shares may be
available for purchase through securities dealers, other than Merrill Lynch,
which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose
the method of purchasing shares that is most beneficial given the amount of
their purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and an ongoing account maintenance fee, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing account maintenance and distribution fees.
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<PAGE>
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to both an ongoing account
maintenance fee and a distribution fee, as described below, although the shares
are subject to an ongoing account maintenance fee, as discussed below. However,
because initial sales charges are deducted at the time of purchase, such
investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing account maintenance fee related to Class A
shares. Again, however, such investors must weigh this consideration against the
fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and contingent
deferred sales charge is subject to certain limits as set forth below under
"Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold his investment for
more than 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee of Class B shares to exceed the initial sales charge plus the
accumulated account maintenance fee of Class A shares. This example does not
take into account the time value of money which further reduces the impact of
the ongoing 0.25% account maintenance fee and 0.75% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the effect of the
return on the investment over this period of time or the effect of any limits
that may be imposed upon the payment of the distribution fee and the contingent
deferred sales charge.
The Fund is presently considering extending the period of time during which
redemptions of Class B shares will be subject to the contingent deferred sales
charge. If such period is lengthened, the disclosure in the prospectus would be
appropriately revised. Also, any Class B shares purchased prior to such change
would be subject to the Fund's contingent deferred sales charge schedule as
provided in the Fund's prospectus at the time of the purchase of such shares,
instead of any longer period.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan"), the Fund pays the Distributor (a) an account maintenance
fee relating to Class A shares, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to 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 relating to Class B shares,
accrued daily and paid monthly, at the annual rates of 0.25% and 0.75%,
respectively, of the average daily net assets of the Fund attributable to Class
B shares in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing account maintenance and
18
<PAGE>
distribution services to the Fund, with the ongoing account maintenance fee
compensating the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders and with the ongoing distribution fee
compensating the Distributor and Merrill Lynch for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B shares of
the Fund. See "Additional Information-- Organization of the Fund". The
Distribution Plan related to Class B shares is designed to permit an investor to
purchase Class B shares through dealers without the assessment of a front-end
sales charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B shares. In this regard,
the purpose and function of the ongoing account maintenance and distribution
fees and the contingent deferred sales charge are the same as those of the
initial sales charge and account maintenance fee with respect to the Class A
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B shares. For the fiscal period July 30,
1993 (commencement of operations) to November 30, 1993, the Fund paid the
Distributor $71,666 pursuant to the Class A Distribution Plan (based on average
net assets subject to the Class A Distribution Plan of approximately $84.4
million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with the Class A shares. For the same period,
the Fund paid the Distributor $926,816 pursuant to the Class B Distribution Plan
(based on average net assets subject to the Class B Distribution Plan of
approximately $272.8 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. At December 31, 1993, the net assets of the
Fund subject to the Class A Distribution Plan and the Class B Distribution Plan
aggregated approximately $133.4 million for Class A shares and approximately
$491.1 million for Class B shares. At these asset levels, the annual fees paid
pursuant to such Plans would aggregate approximately $333,600 for Class A shares
and $4,911,000 for Class B shares.
The payments under the Class B Distribution Plan are based on a percentage
of average daily net assets attributable to Class B shares regardless of the
amount of expenses incurred, and accordingly, distribution-related revenues may
be more or less than distribution-related expenses. Information with respect to
the distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the continuance
of the Distribution Plan. This information is presented annually as of December
31 of each year on a "fully allocated accrual" basis and quarterly on a "direct
expenses and revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the contingent
deferred sales charges 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 contingent deferred sales charges, and the expenses
consist of financial consultant compensation. As of November 30, 1993, direct
cash expenses for the period since commencement of the offering of Class B
shares exceeded direct cash revenues by $3,980,951 (1.00% of Class B net assets
at that date).
The Fund has no obligation with respect to distribution and account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B and Class A 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
19
<PAGE>
shares separately. The account maintenance fee, the distribution fee and the
contingent deferred sales charges in the case of Class B shares will not be used
to subsidize the sale of Class A shares. Similarly, the initial sales charges
and account maintenance fee in the case of Class A shares will not be used to
subsidize the sale of Class B shares. Payment of the distribution fee on Class B
shares is subject to certain limits as set forth under "Deferred Sales Charge
Alternative--Class B Shares".
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads) as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* AS PERCENTAGE
PERCENTAGE OF OF THE NET AMOUNT OF THE
AMOUNT OF PURCHASE THE OFFERING PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
Less than $10,000............................................. 6.50% 6.95% 6.25%
$10,000 but less than $25,000................................. 6.00 6.38 5.75
$25,000 but less than $50,000................................. 5.00 5.26 4.75
$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........................................... .75 .76 .65
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than a tax qualified retirement plan
under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"),
or a deferred compensation plan under Section 403(b) and Section 457 of the
Code), or a purchase by TMASM Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a contingent deferred sales
charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT SUBJECT TO
AMOUNT OF PURCHASE CHARGE
- --------------------------------------------------------------------------------------------- ---------------------
<S> <C>
$1 million up to $2.5 million................................................................ 1.00%
Over $2.5 million up to $3.5 million......................................................... 0.60
Over $3.5 million up to $5 million........................................................... 0.40
Over $5 million.............................................................................. 0.25
</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 shares of
the Fund will receive a concession equal to most of the sales charge,
20
<PAGE>
they may be deemed to be underwriters under the Securities Act of 1933, as
amended. During the fiscal period July 30, 1993 (commencement of operations) to
November 30, 1993, the Fund sold 12,240,764 Class A shares for aggregate net
proceeds to the Fund of $124,442,649. The gross sales charges for the sale of
Class A shares of the Fund for that period were $2,812,973, of which $119,814
and $2,693,159 were received by the Distributor and Merrill Lynch, respectively.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Trustees of the Fund, to directors of Merrill Lynch & Co.,
Inc., to participants in certain benefit plans, to directors and trustees of
certain other Merrill Lynch sponsored investment companies, 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
and to employees of Merrill Lynch & Co., Inc. and its subsidiaries. Class A
shares are offered at net asset value to certain retirement plans, including
eligible 401(k) plans, provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by the Investment
Adviser or its subsidiary, FAM. Also, Class A shares may be offered at net asset
value in connection with the acquisition of assets of other investment
companies. No initial sales charges are imposed upon Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions. Class A 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 A shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination. Class A shares of the Fund are also offered at net asset value to
shareholders of certain closed-end funds advised by the Investment Adviser or
FAM who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of the Fund, provided certain conditions are
met. For example, Class A shares of the Fund and certain other mutual funds
advised by the Investment Adviser or FAM are offered at net asset value to
shareholders of Senior Floating Rate Fund (formerly known as Merrill Lynch Prime
Fund, Inc.) 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 such
funds.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being 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
shares at the time of purchase from its own funds. The proceeds of the
contingent deferred sales charge and the ongoing distribution fee discussed
below are used to defray Merrill Lynch's expenses, including
21
<PAGE>
compensating its financial consultants. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Proceeds from the contingent deferred sales charge 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 shares, such as the payment of compensation to financial consultants for
selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the Distribution Plan relating to Class B shares also may
be used in whole or in part by the Distributor for this purpose. The combination
of the contingent deferred sales charge and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the Class B shares acquired as a result of the
exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The Fund is presently considering extending the period of time during
which redemptions of Class B shares will be subject to the contingent deferred
sales charge. If such period is lengthened, the disclosure in the prospectus
would be appropriately revised. Also, any Class B shares purchased prior to such
change would be subject to the Fund's contingent deferred sales charge schedule
as provided in the Fund's prospectus at the time of the purchase of such shares,
instead of any longer period. 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 sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
For the fiscal period July 30, 1993 (commencement of operations) to November 30,
1993, the Distributor received contingent deferred sales charges of $42,743 with
respect to the redemption of Class B shares, all of which was paid to Merrill
Lynch.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ---------------------------------------------------------------------------------------------- ---------------------
<S> <C>
0-1.......................................................................................... 4.0%
1-2.......................................................................................... 3.0%
2-3.......................................................................................... 2.0%
3-4.......................................................................................... 1.0%
4 and thereafter............................................................................. None
</TABLE>
In determining whether a contingent deferred sales charge 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
22
<PAGE>
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 purchased 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 first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge 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 contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from Individual Retirement
Accounts ("IRAs") or other retirement plans or following the death or disability
(as defined in the Code) of a shareholder.
The contingent deferred sales charge also is waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The contingent
deferred sales charge is also waived for any Class B shares which are purchased
by an eligible 401(k) or eligible 401(a) plan and 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. Additional information concerning the waiver
of the contingent deferred sales charge is set forth in the Statement of
Additional Information.
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 Fund's distribution fee and the contingent deferred
sales charge but not the account maintenance fees. As applicable to the Fund,
the maximum sales charge rule limits the aggregate of distribution fee payments
and contingent deferred sales charges payable by the Fund to (1) 6 1/4% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance 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 contingent deferred sales charge). 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") 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, and any contingent
deferred sales charges will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fees. 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 payble under the NASD formula will
not be made.
23
<PAGE>
The following table sets forth comparative information as of November 30,
1993, 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 period July 30, 1993 (commencement
of operations) to November 30, 1993:
DATA CALCULATED AS OF NOVEMBER 30, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
------------ ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 349,581 $ 21,849 $ 346 $ 22,195 $ 738 $ 21,457 $ 2,989
Under Distributor's
Voluntary Waiver....... $ 349,581 $ 21,849 $ 1,748 $ 23,597 $ 738 $ 22,859 $ 2,989
</TABLE>
- ---------------
(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 1.0%, as permitted under the NASD
Rule.
(3) Consists of contingent deferred sales charge payments, distribution fee
payments and accruals.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge payments)
is amortizing the unpaid balance. No assurance can be given that payments of
the distribution fee will reach either the voluntary maximum or the NASD
maximum.
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 contingent deferred sales charge
which may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so 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
24
<PAGE>
the case may be. The signature(s) on the redemption 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
contingent deferred sales charge in the case of Class B shares). 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 SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares 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 shareholder only the
first time such shareholder makes a redemption.
25
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
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 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 from the
Transfer Agent showing any reinvestment of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders may
also 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 shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A 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 shares. Shareholders interested in
transferring their Class B 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.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable contingent deferred sales charge) 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 Withdrawals and Automatic Investment Plans. A Class A
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 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. Regular additions of Class A 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 accounts may arrange to have
periodic investments made in the Fund in their CMA account or in certain related
accounts in amounts of $250 or more through the CMA Automatic Investment
Program. The Automatic Investment Program is not available to
26
<PAGE>
shareholders whose shares are held in a brokerage account with Merrill Lynch
(other than a CMA account).
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. No deferred sales charge will be imposed on
redemptions of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. The Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch other than a CMA(R) account.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. 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. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class A shares and the sales charge payable at the time of
the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the program of Class A
shares of a fund for Class A 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 fund and the sales charge payable on the shares of
the Fund being acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share without the payment of any
contingent deferred sales charge that might otherwise be due upon redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the deferred sales charge
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 contingent deferred sales charge schedule if such schedule is higher than
the deferred sales charge schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the contingent
deferred sales charge that may be payable upon a disposition of the new Class B
shares, the holding period for the outstanding Class B shares is "tacked" to the
holding period of the new Class B shares. Class A and Class B shareholders of
the Fund may also exchange their shares for shares of certain money market
funds, but in the case of an exchange from Class B shares, the period of time
that shares are held in a money market fund will not count toward satisfaction
of the holding period requirement for purposes of reducing the contingent
deferred sales charge. Exercise of
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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.
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 and Class B 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 the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by Class B
shares and the account maintenance fee relating to Class A shares will be borne
exclusively by Class A shares. The Fund will include performance data for both
Class A and Class B 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 reduced
sales charges in the case of Class A shares or waiver of the contingent deferred
sales charge in the case of Class B shares (such as investors in certain
retirement plans), performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the contingent deferred
sales charge and therefore may reflect greater total return since, due to the
reduced sales charges or waiver of the contingent deferred sales charge, 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
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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 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 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 Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the affect of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares, as compared with the account
maintenance fee applicable to the Class A shares.
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 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 dividend, reducing each shareholder's tax basis in
his Fund shares for Federal income tax purposes. See "Additional
Information--Taxes".
TAXES
The Fund intends to elect and 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
and Class B shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
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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. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. 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.
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 provisions 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 share of such withholding taxes in their
U.S. income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share 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 reportable dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an
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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 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
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.
If a Class A shareholder exercises the 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 the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
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.
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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 per share 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
and, under certain circumstances, on other days. 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 total number of shares
outstanding at such time. Expenses, including the fees payable to the Investment
Adviser and the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the higher sum of account maintenance, distribution and
transfer agency fees applicable with respect to the Class B shares, as compared
with the account maintenance fee applicable to the Class A shares. It is
expected, however, that the per share net asset value of the two 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. 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
shares and Class B shares. Both Class A shares and Class B shares represent
interests in the assets of the Fund and are identical in all respects except
that the expenses of the account maintenance fee related to the Class A shares
are borne solely by the Class A shares, and the expenses of the account
maintenance fee and distribution fee related to the Class B shares are borne
solely by the Class B shares, and Class A and Class B shareholders have
exclusive voting rights with respect to matters relating to such account
maintenance and distribution expenditures. See "Purchase of Shares". The Fund
has received an order from the Securities and Exchange Commission permitting the
issuance and sale of two classes of shares. The issuance and sale of any
additional classes would require an additional order from the Securities
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<PAGE>
and Exchange Commission. There is no assurance that such exemptive relief would
be granted. Shares issued are fully paid, non-assessable and have no preemptive
or conversion rights.
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 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: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
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.
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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, currency options and futures, options on such
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 cash, cash equivalents, U.S. Government
securities or other high grade
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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.
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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.
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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 exist at any specific time. Thus, it may not
be possible to close an options or
A-4
<PAGE>
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
<PAGE>
[This page is intentionally left blank].
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ............ Class A shares or
............ Class B shares (choose one) of Merrill Lynch International Equity
Fund and establish an Investment Account as described in the Prospectus.
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) (subsequent investments $50
or more). 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:
<TABLE>
<S> <C>
1............................................................. 4.............................................................
2............................................................. 5.............................................................
3............................................................. 6.............................................................
</TABLE>
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect to
dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Distribution Elect / / reinvest dividends Elect / / reinvest capital
Options gains
One / / pay dividends in One / / pay capital gains in
cash cash
</TABLE>
If no election is made, dividends and capital gains will be
automatically reinvested at net asset value without a sales charge.
------------------------
(PLEASE PRINT)
Name ...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ......................................................
First Name Initial Last Name
Address ........................................................................
Social Security No.
or Taxpayer Identification No.
...................................................................... , 19 ...
.........................................................................
Date
(Zip Code)
Occupation .......................... Name and Address of Employer ............
...
...
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am not
subject to backup withholding (as discussed in the Prospectus under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner .......................... Signature of Co-Owner (if
any) ...........................................................................
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
Gentlemen:
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:
<TABLE>
<S> <C> <C> <C> <C> <C>
/ / $10,000 / / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch 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 Co-Owner (If registered in joint names, both must
Signature of Owner sign)
</TABLE>
In making purchases under this letter, the following are the related accounts on
which reduced offering prices are to apply:
<TABLE>
<CAPTION>
<S> <C>
(1) Name...................................................... (2) Name......................................................
</TABLE>
B-1
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch International Equity Fund, at cost or
current offering price. Begin systematic withdrawal on ......... , 19 .. .
[Date]
Withdrawals to be made
either (check one) / /
Monthly / / Quarterly*
*Quarterly withdrawals
are made on the 24th
day of March, June,
September and December.
Specify withdrawal amount (check one): / / $ ...... or / / ...... % of the
current value of Class A shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
- --------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK
Draw checks payable
(check one)
/ / 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..........................................................
Signature of Co-Owner (if any).............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND (IF
NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE IN ERROR
TO MY ACCOUNT.
Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Name on your Account......................................................
Bank..........
Bank # ................................. Account # ......................
Bank Address..............................................................
Signature of Depositor........................................Date .......
Signature of Depositor (if joint account)................................
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- ---------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase .... Class A shares or .... Class B shares (choose one)
of Merrill Lynch International Equity Fund, subject to the terms set forth
below.
- --------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw checks or an ACH debit each month
on my bank account for investment in Merrill Lynch International Equity
Fund as indicated below:
Amount of each check or ACH debit $............................................
Account No.....................................................................
Please date and invest checks or draw ACH debits on the 20th day of each month
beginning...........
(Month)
or as soon thereafter as possible.
I agree that you are preparing these checks or drawing these 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 check or debit. If
I change banks or desire to terminate or suspend this program, I agree to
notify you promptly in writing.
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 returned check or dishonored
debit.
............... ..........................................
Date Signature of Depositor
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR CHECKS
OR 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 checks or ACH debits drawn on my account by and
payable to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, Jacksonville, Florida 32232-5289. I agree that your rights in
respect to each such check or 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
check or debit. I further agree that if any such check or 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.
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch International Equity Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the shareholder's
signature.
................................................
Dealer Name and Address
By ..............................................
Authorized Signature of Dealer
Branch F/C No.
..............
Code F/C Last Name
Dealer's Customer A/C No.
B-2
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
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:
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
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0057
<PAGE>
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.
------------------------
TABLE OF CONTENTS
PAGE
-----------
Fee Table........................................ 3
Alternative Sales Arrangements................... 4
Financial Highlights............................. 6
Risks and Special Considerations................. 7
Investment Objective and Policies................ 9
Management of the Fund........................... 14
Board of Trustees.............................. 14
Advisory and Management
Arrangements................................ 14
Transfer Agency Services....................... 16
Purchase of Shares............................... 16
Alternative Sales Arrangements................. 17
Initial Sales Charge Alternative--
Class A Shares.............................. 20
Deferred Sales Charge Alternative--
Class B Shares.............................. 21
Redemption of Shares............................. 24
Shareholder Services............................. 26
Performance Data................................. 28
Additional Information........................... 29
Dividends and Distributions.................... 29
Taxes.......................................... 29
Determination of Net Asset Value............... 32
Organization of the Fund....................... 32
Shareholder Reports............................ 33
Shareholder Inquiries.......................... 33
Appendix A....................................... A-1
Authorization Form............................... B-1
Code #16747
Prospectus
[ART]
- -----------------------------------------------------
MERRILL LYNCH
INTERNATIONAL
EQUITY FUND
January 14, 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
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.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus, in both cases, a
sales charge which, at the election of the purchaser, may be imposed (i) at the
time of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class
B shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges and ongoing account maintenance fee with respect to the Class B shares
are the same as those of the initial sales charge and ongoing account
maintenance fee with respect to the Class A shares. Each Class A and Class B
share represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B shares bear the expenses of the account
maintenance fee and distribution fee and certain other costs resulting from the
deferred sales charge arrangement and that Class A shares bear the expenses of
the account maintenance fee. The two classes also have different exchange
privileges.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated January
14, 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.
------------------------
INVESTMENT ADVISER:
MERRILL LYNCH ASSET MANAGEMENT
DISTRIBUTOR:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
------------------------
The date of this Statement of Additional Information is January 14, 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 November 30,
1993, the Fund's portfolio turnover rate was 17.31%. 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
2
<PAGE>
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 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 closing purchase transaction cancels out the
Fund's position as the writer of an
3
<PAGE>
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
4
<PAGE>
exchange only if there appears to be a liquid secondary market for such option
or future. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only over-the-counter options for which
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option) unless there is only one dealer, in which case such
dealer's price will be used. In the case of a futures position or an option on a
futures position written by the Fund, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security or currency underlying the futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in 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
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the Fund's total assets committed to the consummation of such forward contract.
If the value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will not enter into a position hedging commitment if, as a
result thereof, the Fund would have more than 15% of the value of its assets
committed to such contracts. The Fund will not enter into a forward contract
with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
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. Under such agreements, the bank or primary dealer 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
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ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk of
failure by the borrower to return the securities involved in such transactions.
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 at the
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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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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 Box 9011,
Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Trustee(1)(2)--President of the Investment
Adviser since 1977 and Chief Investment Officer of the Investment Adviser since
1976; President of Fund Asset Management ("FAM") 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 ("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 (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., 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 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, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Director of Bowne & Co., Inc., Vornado,
Inc. (real estate holding company), SmithCorona Corporation (manufacturer of
typewriters and word processors) and Alexander's, Inc.
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.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche
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 since 1982.
ROBERT E. PUTNEY, III--Assistant Secretary(1)(2)--Attorney associated with
the Investment Adviser since 1991; attorney in private practice prior thereto.
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(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.
At December 31, 1993, the officers and Trustees of the Fund as a group (11
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
November 30, 1993, fees and expenses paid to unaffiliated Trustees aggregated
$7,950.
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 November 30,
1993, the investment advisory fees paid by the Fund to the Investment Adviser
aggregated $910,190.
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 November 30, 1993, the sub-advisory fees
paid by the Investment Advisor to MLAM U.K. aggregated $86,994.
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
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<PAGE>
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 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 November 30, 1993, 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 the operation
of the Fund, 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 November 30, 1993, the amount of such reimbursement was $16,960.
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--Alternative Sales
Arrangements--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 below, 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
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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.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such sales
arrangements and the expenses of the account maintenance fee and (ii) that Class
A shares bear the expenses of the account maintenance fee, and (iii) each class
has exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees, in the case of
the Class B shares, and the account maintenance fee, in the case of the Class A
shares, is paid. The two classes also have different exchange privileges. See
"Shareholder Services--Exchange Privilege".
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of Class A and Class B shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of the Class A and Class B
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".
Distribution Plans. Reference is made to "Purchase of Shares--Alternative
Sales Arrangements--Distribution Plans" in the Prospectus for certain
information with respect to the distribution plans of the Fund (each a
"Distribution Plan").
The payment of the account maintenance fee and distribution fee with
respect to Class B shares and the account maintenance fee with respect to Class
A shares is subject to the provisions of Rule 12b-1 under the Investment Company
Act. See "General Information--Description of Shares". Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the account maintenance
and distribution fees paid to the Distributor. In their consideration of the
Distribution Plans, the Trustees must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plans to the Fund
and its shareholders. Each Distribution Plan further provides that, so long as
such Distribution Plan remains in effect, the selection and nomination of
Trustees who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Trustees"), shall be committed to the
discretion of the Independent Trustees then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is a reasonable likelihood
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that such Distribution Plan will benefit the Fund and its respective
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 Class A or Class B voting
securities of the Fund voting separately by class. Neither Distribution Plan can
be amended to increase materially the amount to be spent by the Fund without
approval by the related class of shareholders, and all material amendments are
required to be approved by the vote of 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 the Distribution Plans
and any reports made pursuant to such plans for a period of not less than six
years from the date of the Distribution Plans or such reports, the first two
years in an easily accessible place.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
For the fiscal period July 30, 1993 (commencement of operations) to
November 30, 1993, 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 November 30, 1993, the Fund sold 12,240,764 Class A shares for
aggregate net proceeds to the Fund of $124,442,649. The gross sales charges for
the sale of Class A shares of the Fund for that year were $2,812,973, of which
$119,814 and $2,693,159 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
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.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount 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 the Class A and Class B shares of the Fund and of any other
investment company with a sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
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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 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 shares of
the Fund and of other investment companies with an initial sales charge or a
deferred sales charge for which the Distributor acts as the distributor
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 $10,000), 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 shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be held in escrow
during the thirteen-month period (while 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
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves 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.
Retirement Plans. Class A shares are offered at net asset value to tax
qualified retirement plans within the meaning of Section 401(a) of the Code and
deferred compensation plans within the meaning of Sections 403(b) and 457 of the
Code ("Retirement Plans"), provided the plan has $5 million or more in existing
plan assets initially invested in portfolios, mutual funds or trusts advised
either directly or through a subsidiary by the Investment Adviser or FAM. Class
A shares may also be offered at net asset value to Retirement Plans, provided
the plan has accumulated $5 million or more in existing plan assets invested in
mutual funds advised by the Investment Adviser or FAM charging a front-end sales
charge or a contingent deferred sales charge. Assets of Retirement Plans with
the same sponsor or an affiliated sponsor may be aggregated. Retirement Plans
that are also qualified under Section 401(k) of the Code with a salary reduction
feature offering a menu of investments to plan participants ("Eligible 401(k)
Plans") are also offered Class A shares at net asset value, provided such a plan
initially has 1,000 or more employees eligible to participate in the plan.
Employees eligible to participate in Retirement Plans of the same sponsoring
employer or its affiliates may be aggregated. Any Retirement Plan which does not
meet the above described qualifications to purchase Class A shares at net asset
value has the option
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of purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Retirement Plan meets the specified requirements, then it
may purchase Class B shares with a waiver of the contingent deferred sales
charge upon redemption. The minimum initial and subsequent purchase requirements
are waived in connection with all the above referenced Retirement Plans.
Purchase Privilege of Certain Persons. Trustees of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries 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 A shares of the Fund are offered at net asset value to shareholders
of Senior Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.)
who wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders must
sell their Senior Floating Rate Fund shares to Senior Floating Rate Fund in
connection with a tender offer conducted by Senior Floating Rate Fund and
reinvest the proceeds immediately in the Fund. This investment option is
available only with respect to the proceeds of Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate
Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only on
the day that the related Senior Floating Rate Fund tender offer terminates and
will be effected at the net asset value of the Fund at such day.
Class A shares of the Fund are offered at net asset value to shareholders
of certain closed-end funds advised by the Investment Advisor or FAM who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund. In order to exercise this investment option,
closed-end fund shareholders must (i) sell their closed-end fund shares through
Merrill Lynch and reinvest the proceeds immediately in the Fund, (ii) have
acquired the shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering, (iii)
have maintained their closed-end fund shares continuously in a Merrill Lynch
account, and (iv) purchase a minimum of $250 worth of Fund shares.
Class A 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 purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales charge
either at the time of purchase or on a deferred basis. Second, such redemption
must have been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A 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.
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.
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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.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative-- Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge 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 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 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
November 30, 1993, the Distributor received contingent deferred sales charges of
$42,743, all of which was paid to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A 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 contingent deferred sales
charge upon redemption. The contingent deferred sales charge is waived for any
Eligible 401(k) Plan redeeming Class B shares. The contingent deferred sales
charge is also waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Investment Adviser or FAM advised
mutual fund Class B shares ("Eligible 401(a) Plan"). The contingent deferred
sales charge is waived for any Class B 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 minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Retirement Plans.
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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 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
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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 November 30, 1993, the Fund
paid total brokerage commissions of $16,148, of which $1,152 or 7.13% was paid
to Merrill Lynch for effecting 9.61% 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.
Section 11(a) of the Securities Exchange Act of 1934 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
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, Washington's Birthday, 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. 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
fee payable to the Investment Adviser and the distribution and account
maintenance fees payable to the Distributor, are accrued daily. The per share
net asset value of the Class B shares generally will be lower than the per share
net asset value of the Class A shares, reflecting the daily expense accruals of
the higher sum of account maintenance, distribution and transfer agency fees
applicable with respect to the Class B shares, as compared with the account
maintenance fee applicable to the Class A shares. It is expected, however, that
the per share net asset value of the two 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.
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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 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 and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements from the transfer agent after
each dividend payment showing any activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions.
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.
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Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
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 shares. Shareholders interested in transferring
their Class B 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. If the new
brokerage firm is willing to accommodate the shareholder in this manner, the
shareholder must request that he be issued certificates for his shares and then
must turn the certificates over to the new firm for re-registration as described
in the preceding sentence.
AUTOMATIC INVESTMENT PLAN
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing 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
$250 or more through the CMA Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
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,
without sales charge, as of the close of business on the ex-dividend date of the
dividend or distribution. Shareholders may elect in writing to receive either
their dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed 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 SHARES
A Class A 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
shares of the Fund having a value, based upon cost or the current offering
price, of $5,000 or more, and monthly withdrawals for shareholders with Class A
shares with such a value of $10,000 or more.
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At the time of each withdrawal payment, sufficient Class A 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 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 shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed or the direct deposit of the withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
Class A shares in the Investment Account are automatically reinvested in Fund
Class A shares. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the transfer
agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A 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 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
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund,
Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc. (shares of which are deemed Class A shares
for purposes of the exchange privilege), Merrill Lynch Colorado Municipal Bond
Fund, Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Federal Securities Trust, Merrill Lynch
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Florida Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal
Bond Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc. (residents of Arizona must meet
investor suitability standards), Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability
standards), Merrill Lynch Latin America Fund, Inc., Merrill Lynch Maryland
Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond
Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan
Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond
Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch
Natural Resources Trust, Merrill Lynch New Jersey Limited Maturity Municipal
Bond Fund, Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York
Limited Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond
Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio
Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund, Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch
Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc. on the basis
described below. In addition, Class A shareholders of the Fund may exchange
their Class A shares for shares of Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Ready Assets Trust (or
Merrill Lynch Retirement Reserves Money Fund if the exchange occurs within
certain retirement plans) (together, the "Class A money market funds"), and
Class B shareholders of the Fund may exchange their Class B shares for shares of
Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch
Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund (together, the
"Class B money market funds") on the basis described below. Shares with a net
asset value of at least $250 are required to qualify for the exchange privilege,
and any shares utilized in an exchange must have been held by the shareholder
for at least 15 days. Certain funds into which exchanges may be made may impose
a redemption fee (not in excess of 2.00% of the amount redeemed) on shares
purchased through the exchange privilege when such shares are subsequently
redeemed, including redemption through subsequent exchanges. Such redemption fee
would be in addition to any contingent deferred sales charge otherwise
applicable to a redemption of Class B shares. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. With respect to outstanding Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A
shares in the initial purchase and any subsequent exchange. Class A shares
issued pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the exchange privilege, Class
A shares acquired through dividend reinvestment shall be deemed to have been
sold
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with a sales charge equal to the sales charge previously paid on the Class A
shares on which the dividend was paid. Based on this formula, Class A shares of
the Fund generally may be exchanged into the Class A shares of the other funds
or into shares of the Class A money market funds with a reduced or without a
sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge 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 contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
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 contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
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 shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Natural Resources Trust 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 Merrill Lynch Natural Resources Trust and
receive cash. There will be no contingent deferred sales charge 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 Merrill Lynch Natural
Resources Trust 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 Class A shares and Class B shares from any
of the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
charge. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch 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 Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 2.0% contingent deferred sales charge that would have been due
had the Class B shares of the Fund been redeemed for cash rather than exchanged
for shares of Merrill Lynch 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 continues to hold for an additional two and a half
years, any subsequent redemption will not incur a contingent deferred sales
charge.
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Below is a description of the investment objectives of the other funds into
which exchanges can be made:
<TABLE>
<S> <C>
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.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND............................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is to provide investors with as high a
level of income exempt from Federal and Arizona income taxes as is
consistent with prudent investment management.
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 shareholders with 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.
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch California Municipal Series Trust, a
series fund, whose objective is to provide investors with as high a
level of income exempt from Federal and California income taxes as
is consistent with prudent investment management.
</TABLE>
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<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
shareholders with as high a level of income exempt from Federal and
California income taxes as is consistent with prudent investment
management through investment in a portfolio primarily of
intermediate-term investment grade California Municipal Bonds.
MERRILL LYNCH 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 as high a level of income exempt
from Federal and Colorado 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.
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 as high a level of
income exempt from Federal income taxes as is consistent with
prudent investment management while serving to offer shareholders
the opportunity to own securities exempt from Florida intangible
personal property taxes through investment in a portfolio primarily
of intermediate-term investment grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is 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.
</TABLE>
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<TABLE>
<S> <C>
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 through investment in a diversified portfolio of
equity securities placing particular emphasis on companies that
have exhibited above-average growth rate in earnings.
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 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 which are primarily engaged in
the ownership or operation of facilities used to generate, transmit
or distribute electricity, telecommunications, gas or water.
MERRILL LYNCH GOVERNMENT
FUND.................................... A portfolio of Merrill Lynch Funds for Institutions Series, a series
fund, whose objective is to provide current income consistent with
liquidity and security of principal from investment in securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and in repurchase agreements secured by such
obligations.
MERRILL LYNCH GROWTH FUND FOR INVESTMENT
AND RETIREMENT............................ Growth of capital and, secondarily, income from investment in a
diversified portfolio of equity securities placing principal
emphasis on those securities which management of the fund believes
to be undervalued.
</TABLE>
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<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 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...................................... 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 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 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 as high a level of
income exempt from Federal and Massachusetts income taxes as is
consistent with prudent investment management through investment in
a portfolio primarily of intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is as high a level of income exempt
from Federal and Massachusetts income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND............................... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, a series fund, whose objective is as high a level of
income exempt from Federal and Michigan income taxes as is
consistent with prudent investment management through investment in
a portfolio primarily of intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is as high a level of income exempt
from Federal and Michigan income taxes as is consistent with
prudent investment management.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH MINNESOTA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is as high a level of income exempt
from Federal and Minnesota income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC. ..................................... Tax-exempt income from three separate diversified portfolios of
municipal bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND...................................... Currently the only portfolio of Merrill Lynch Municipal Series Trust,
a series fund, whose objective is to provide as high a level as
possible of income exempt from Federal income taxes by investing in
investment grade obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NATURAL RESOURCES TRUST..... Long-term growth and protection of capital from investment in
securities of domestic and foreign companies that possess
substantial natural resource assets.
MERRILL LYNCH 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 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.
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective 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 YORK
LIMITED MATURITY MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, a series fund, whose objective is 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 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 as high a level of income exempt
from Federal and North Carolina income taxes as is consistent with
prudent investment management.
</TABLE>
29
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<TABLE>
<S> <C>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is as high a level of income exempt
from Federal and Ohio income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is 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, Singapore and the
Philippines.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND............ A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, a series fund, whose objective is to provide as high
a level of income exempt from Federal and Pennsylvania income taxes
as is consistent with prudent investment management through
investment in a portfolio of intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND
FUND...................................... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is as high a level of income exempt
from Federal and Pennsylvania income taxes as is consistent with
prudent investment management.
MERRILL LYNCH PHOENIX FUND, INC. ......... Long-term growth of capital by investing in equity and fixed income
securities, including tax-exempt securities, of issuers in weak
financial condition or experiencing poor operating results believed
to be undervalued relative to the current or prospective condition
of such issuer.
MERRILL LYNCH 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 if the exchange
occurs 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 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.
</TABLE>
30
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<TABLE>
<S> <C>
MERRILL LYNCH SPECIAL VALUE FUND, INC. ... Long-term growth of capital from investments in securities, primarily
common stocks, of relatively small companies believed to have
special investment value and emerging growth companies regardless
of size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND..... Long-term total return from investment in dividend paying common
stocks which yield more than Standard & Poor's 500 Composite Stock
Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC. ...... Capital appreciation through worldwide investment in equity
securities of companies that derive or are expected to derive a
substantial portion of their sales from products and services in
technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a
series fund, whose objective is 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 TREASURY FUND............... A portfolio of Merrill Lynch Funds for Institutions Series, a series
fund, whose objective is to provide current income consistent with
liquidity and security of principal from investment in direct
obligations of the U.S. Treasury and up to 10% of its total assets
in repurchase agreements secured by such obligations.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES..................... Preservation of capital, current income and liquidity available from
investing in direct obligations of the U.S. Government and
repurchase agreements relating to such securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND.... Preservation of capital, liquidity and current income through
investment exclusively in a diversified portfolio of short-term
marketable securities which are direct obligations of the U.S.
Treasury.
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.
</TABLE>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short-or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the
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funds may be subject to a backup withholding tax unless such shareholder
certifies under penalty of perjury that the taxpayer identification number on
file with any such fund is correct and that such shareholder is not otherwise
subject to backup withholding. See "Taxes" below.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange, or
if the exchange does not involve a money market fund, the shareholder may write
to the transfer agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures 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. Shareholders of the Fund, and shareholders of the other
funds described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
The Fund reserves the right to require a properly completed exchange
application. This exchange privilege may be modified or terminated in accordance
with the rules of the Securities and Exchange Commission. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public 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 elect and 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
and Class B 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). 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.
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. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the
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Fund will allocate dividends eligible for the dividends received deduction
between the Class A and Class B shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of two classes of stock) that is based on
the gross income allocable to Class A and Class B shareholders during the
taxable year, or such other method as the Internal Revenue Service may
prescribe. 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 reportable dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain provisions 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 share of such withholding taxes in their
U.S. income tax returns as gross income, treat such proportionate share as taxes
paid by them and deduct such proportionate share 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 between the Class A and Class B shareholders according to
a method similar to that described above for the allocation of dividends
eligible for the dividends received deduction.
If a Class A shareholder exercises the 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 the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
33
<PAGE>
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.
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 non-equity option or a regulated futures contract for a
non-U.S. currency and 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
market 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 and futures contracts. Under
Section 1092, the Fund may be required to
34
<PAGE>
postpone recognition for tax purposes of losses incurred in certain closing
transactions in options and futures contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may 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 options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or all
of these issues.
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
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. 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.
35
<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 and
Class B 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 shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B 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 A and Class B
shares of the Fund for the period indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT 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 November 30, 1993... -10.31% $ 964.00 -3.23% $ 989.00
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to November 30, 1993... 3.10% $ 1,031.00 2.90% $ 1,029.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to November 30, 1993... -3.60% $ 964.00 -1.10% $ 989.00
</TABLE>
36
<PAGE>
In order to reflect the reduced sales charges, in the case of Class A
shares, or the waiver of the contingent deferred sales charge, 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
contingent deferred sales charge 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 Class A
shares and Class B 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 two classes of shares. The
issuance and sale of any additional classes would require an additional order
from the Commission. There is no assurance that such exemptive relief would be
granted. 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 or conversion rights. The rights of redemption
and exchange 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 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.
37
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the value of the Fund's net assets on
November 30, 1993, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------- ----------------
<S> <C> <C>
Net Assets.................................................................... $ 111,454,110 $ 398,518,530
---------------- ----------------
---------------- ----------------
Number of Shares Outstanding.................................................. 10,805,129 38,727,929
---------------- ----------------
---------------- ----------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding).................................................................. $ 10.31 $ 10.29
Sales Charge (for Class A shares: 6.50% of offering price (6.95% of net amount
invested*))................................................................... $ 0.72 $ **
---------------- ----------------
Offering Price................................................................ $ 11.03 $ 10.29
---------------- ----------------
---------------- ----------------
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares-- Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus and "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 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 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.
38
<PAGE>
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 December 31, 1993.
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.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
MERRILL LYNCH INTERNATIONAL EQUITY FUND:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch International Equity Fund as of July 9, 1993. This financial statement is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 statement of assets and liabilities presents fairly, in all
material respects, the financial position of Merrill Lynch International Equity
Fund as of July 9, 1993 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Princeton, New Jersey
July 12, 1993
40
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JULY 9, 1993
<TABLE>
<S> <C>
Assets:
Cash in Bank....................................................................................... $ 100,000
Prepaid registration fees (Note 3)................................................................. 75,625
Deferred organization expenses (Note 4)............................................................ 83,600
-----------
Total Assets......................................................................................... 259,225
Liabilities--accrued expenses........................................................................ 159,225
-----------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares of beneficial interest (par value
$0.10) and 5,000 Class B shares of beneficial interest (par value $0.10) outstanding with an
unlimited number of shares authorized)(Note 1)....................................................... $ 100,000
-----------
-----------
</TABLE>
- ---------------
(1) Merrill Lynch International Equity Fund (the "Fund") was organized as a
Massachusetts business trust on January 3, 1992. The Fund is registered
under the Investment Company Act of 1940 as an open-end investment company.
(2) The Fund intends to enter into an Investment Advisory Agreement (the
"Investment Advisory Agreement") with Merrill Lynch Asset Management (the
"Investment Adviser"), and distribution agreements (the "Distribution
Agreements") with Merrill Lynch Funds Distributor, Inc. (the "Distributor").
(See "Management of the Fund--Advisory and Management Arrangements" in the
Statement of Additional Information.) Certain officers and/or trustees of
the Fund are officers and/or directors of the Investment Adviser and the
Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the date
the Fund commences operations not exceeding five years. In the event that
the Investment Adviser (or any subsequent holder) redeems any of its
original shares prior to the end of the five-year period, the proceeds of
the redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares redeemed
to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the date
of such redemption. In the event that the Fund is liquidated prior to the
end of the five-year period, the Investment Adviser (or any subsequent
holder) shall bear the unamortized deferred organization expenses.
41
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited)
LATIN AMERICA
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
BANKING 109,425 Banco de Galicia y Buenos Aires $2,983,033 $3,446,888 0.7%
S.A. (ADR)(a)
- ------------------------------------------------------------------------------------------------------
ARGENTINA
2,983,033 3,446,888 0.7
TOTAL INVESTMENTS IN ARGENTINEAN
STOCKS
- ------------------
TELECOMMUNICATIONS 75,100 ++Telecommunicacoes Brasileiras
S.A.--Telebras
BRAZIL
2,478,840 2,712,612 0.5
PN (Preferred)(ADR)(a)
476,480 443,478 0.1
12,669,200 Telecomunicacoes Brasileiras
S.A.--Telebras PN (Preferred)
---------- ---------- ---------
2,955,320 3,156,090 0.6
- ------------------------------------------------------------------------------------------------------
2,955,320 3,156,090 0.6
TOTAL INVESTMENTS IN BRAZILIAN
STOCKS
- ------------------
BUILDING AND 55,000 Maderas y Sinteticos S.A. MASISA
CONSTRUCTION
CHILE
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
(Sponsored)(ADR)(a) 977,412 1,093,125 0.2
- ------------------------------------------------------------------------------------------------------
977,412 1,093,125 0.2
TOTAL INVESTMENTS IN CHILEAN STOCKS
- ------------------
BANKING 350,000 Grupo Financiero Bancomer, S.A. de 499,822 462,829 0.1
C.V.'B'
MEXICO
499,800 518,175 0.1
14,700 ++Grupo Financiero Bancomer, S.A. de
C.V. (ADR)(a)
1,982,811 2,552,063 0.5
104,700 ++Servicios Financieros Quadrum,
S.A. de C.V. (ADR)(a)
---------- ---------- ---------
2,982,433 3,533,067 0.7
- ------------------------------------------------------------------------------------------------------
BEVERAGES 386,000 ++Fomento Economico Mexicano, S.A. 2,097,877 2,334,301 0.5
de C.V. (Femsa)(Class B)(ADR)(a)
1,671,325 1,788,000 0.4
298,000 Fomento Economico Mexicano, S.A. de
C.V. (Femsa)
---------- ---------- ---------
3,769,202 4,122,301 0.9
- ------------------------------------------------------------------------------------------------------
BUILDING & 196,000 Cementos Mexicanos, S.A. de C.V.
CONSTRUCTION Nom 'B' (Cemex) 4,025,545 5,107,821 1.0
2,015,000 3,185,000 0.6
130,000 Grupo Tribasa, S.A. de C.V.
(ADR)(a)
---------- ---------- ---------
6,040,545 8,292,821 1.6
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED 563,000 +Grupo Carso, S.A. de C.V., Series A 4,112,559 4,975,391 1.0
- ------------------------------------------------------------------------------------------------------
LEISURE 23,000 ++Grupo Posadas, S.A. de C.V. 374,750 368,000 0.1
(GDS)(b)
- ------------------------------------------------------------------------------------------------------
RETAIL STORES 921,000 Cifra, S.A. de C.V. (Class C) 2,498,768 2,554,620 0.5
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 116,100 Telefonos de Mexico, S.A. de C.V. 6,437,231 6,472,575 1.3
(Telmex) (ADR)(a)
- ------------------------------------------------------------------------------------------------------
26,215,488 30,318,775 6.1
TOTAL INVESTMENTS IN MEXICAN STOCKS
- ------------------
BEVERAGES 3,200 PanAmerican Beverages Inc (Class A) 81,600 116,400 0.0
- ------------------------------------------------------------------------------------------------------
PANAMA
81,600 116,400 0.0
Total Investments in Panamanian
Stocks
- ------------------
FOODS 300,000 Mavesa, S.A. (Ordinary) 137,354 133,617 0.0
- ------------------------------------------------------------------------------------------------------
VENEZEULA
137,354 133,617 0.0
TOTAL INVESTMENTS IN VENEZUELAN
STOCKS
- ------------------
33,350,207 38,264,895 7.6
TOTAL INVESTMENTS IN LATIN AMERICA
</TABLE>
- ------------------
42
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
PACIFIC BASIN
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
ENGINEERING & 1,870,000 Australia National Industries, Ltd.
CONSTRUCTION (Ordinary)
AUSTRALIA
$2,382,622 $2,318,538 0.5%
- ------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 891,200 Burns Philp & Co., Ltd. (Ordinary) 2,617,203 2,439,148 0.5
3,141,532 3,253,510 0.6
524,819 Coca-Cola Amatil, Ltd. (Ordinary)
---------- ---------- ---------
5,758,735 5,692,658 1.1
- ------------------------------------------------------------------------------------------------------
INSURANCE 1,155,958 GIO Australia Holdings Ltd. 2,249,104 2,294,686 0.4
- ------------------------------------------------------------------------------------------------------
PROPERTY 346,000 Lend Lease Corp. 4,026,608 3,984,145 0.8
- ------------------------------------------------------------------------------------------------------
UTILITIES--GAS 495,967 The Australian Gas Light Co. 1,243,557 1,520,970 0.3
(Ordinary)
- ------------------------------------------------------------------------------------------------------
15,660,626 15,810,997 3.1
TOTAL INVESTMENTS IN AUSTRALIAN
STOCKS
- ------------------
AUTOMOBILES 2,912,000 Denway Investment (Ordinary) 668,321 791,663 0.2
- ------------------------------------------------------------------------------------------------------
HONG KONG
BANKING 2,000,000 J.C.G. Holdings 1,299,303 1,592,336 0.3
1,174,524 1,141,886 0.2
3,068,000 Winton Holdings
---------- ---------- ---------
2,473,827 2,734,222 0.5
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED 1,980,000 Citic Pacific Ltd. (Ordinary) 5,086,910 5,177,811 1.0
- ------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 5,300,000 Sun Hung Kai Properties, Ltd. 2,987,728 3,121,885 0.6
(Ordinary)
- ------------------------------------------------------------------------------------------------------
FOODS 4,925,000 C.P. Pokphand Co., Ltd. (Ordinary) 1,492,616 1,992,443 0.4
- ------------------------------------------------------------------------------------------------------
MISCELLANEOUS 30,827 Consolidated Electric Power Ltd. 49,885 49,885 0.0
(Ordinary)
- ------------------------------------------------------------------------------------------------------
PROPERTY 2,588,000 Hang Lung Development Co., Ltd. 4,128,204 4,657,026 0.9
(Ordinary)
3,529,887 4,697,391 0.9
4,100,000 Hopewell Holdings, Ltd.
---------- ---------- ---------
7,658,091 9,354,417 1.8
- ------------------------------------------------------------------------------------------------------
PUBLISHING 2,050,000 Oriental Press Holdings (Ordinary) 954,980 1,552,528 0.3
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 2,638,000 Hong Kong Telecommunications Ltd. 4,492,512 5,020,208 1.0
(Ordinary)
- ------------------------------------------------------------------------------------------------------
UTILITIES 1,830,000 The Hong Kong & China Gas Co. 3,963,130 4,548,644 0.9
(Ordinary)
- ------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 1,551,600 China Light & Power Co., Ltd. 7,552,276 9,139,465 1.8
(Ordinary)
- ------------------------------------------------------------------------------------------------------
37,380,276 43,483,171 8.5
TOTAL INVESTMENTS IN HONG KONG
STOCKS
- ------------------
AUTOMOBILES 643,000 Suzuki Motor Co. (Ordinary) 5,629,757 5,671,444 1.1
- ------------------------------------------------------------------------------------------------------
JAPAN
BEVERAGES 92,000 Chukyo Coca-Cola Bottling, Co., 1,310,757 1,031,239 0.2
Ltd. (Ordinary)
1,754,547 1,548,512 0.3
106,000 Hokkaido Coca-Cola Bottling Co.,
Ltd. (Ordinary)
1,893,379 1,686,880 0.3
102,000 Kinki Coca-Cola Bottling Co., Ltd.
(Ordinary)
2,058,813 1,812,661 0.4
109,000 Mikuni Coca-Cola Bottling Co., Ltd.
1,874,646 1,519,570 0.3
111,000 Sanyo Coca-Cola Bottling Co., Ltd.
---------- ---------- ---------
8,892,142 7,598,862 1.5
- ------------------------------------------------------------------------------------------------------
CAPITAL GOODS 1,044,000 Mitsubishi Heavy Industries, Ltd. 6,829,751 5,745,645 1.1
- ------------------------------------------------------------------------------------------------------
CONSUMER--ELECTRONICS 514,000 Matsushita Electric Industrial Co., 6,884,671 6,422,639 1.3
Ltd.
2,225,083 1,394,386 0.3
23,900 Nintendo Co., Ltd.
---------- ---------- ---------
9,109,754 7,817,025 1.6
- ------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
PACIFIC BASIN
<TABLE>
<CAPTION>
PERCENT
OF
NET
SHARES VALUE ASSETS
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A)
<S> <C> <C> <C> <C> <C>
- ------------------
ELECTRIC 145,000 Chudenko Corp. (Ordinary)
CONSTRUCTION $5,515,540 $5,009,188 1.0%
JAPAN
(concluded) 4,654,758 3,487,780 0.7
319,000 Sanki Engineering Co., Ltd.
(concluded)
4,212,638 3,639,287 0.7
170,000 Taihei Dengyo Kaisha, Ltd.
---------- ---------- ---------
14,382,936 12,136,255 2.4
- ------------------------------------------------------------------------------------------------------
ELECTRICAL 164,000 Murata Manufacturing Co., Ltd.
EQUIPMENT 5,306,131 5,273,796 1.0
5,975,862 5,006,615 1.0
478,000 Sumitomo Electric Industries Ltd.
4,194,965 3,344,359 0.7
280,000 The Nippon Signal Co., Ltd.
---------- ---------- ---------
15,476,958 13,624,770 2.7
- ------------------------------------------------------------------------------------------------------
IRON & STEEL 150,000 Maruichi Steel Tube, Ltd. 2,867,531 2,466,924 0.5
(Ordinary)
- ------------------------------------------------------------------------------------------------------
OFFICE EQUIPMENT 502,000 Canon, Inc. (Ordinary) 6,830,982 6,318,817 1.2
- ------------------------------------------------------------------------------------------------------
PACKAGING 270,000 Toyo Seikan Kaisha, Ltd. (Ordinary) 7,945,683 6,772,326 1.3
- ------------------------------------------------------------------------------------------------------
PHARMACEUTICAL 233,000 Sankyo Co., Ltd. (Ordinary) 6,209,166 5,116,409 1.0
4,328,178 3,897,464 0.8
210,000 Taisho Pharmaceutical Co., Ltd.
(Ordinary)
---------- ---------- ---------
10,537,344 9,013,873 1.8
- ------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 187,000 Fuji Photo Film Co., Ltd. 4,608,001 3,882,947 0.8
- ------------------------------------------------------------------------------------------------------
PROPERTY & 833,000 Dai-Tokyo Fire & Marine Insurance
CASUALTY Co., Ltd.
INSURANCE 6,527,106 5,663,543 1.1
4,786,714 3,896,362 0.8
684,000 Fuji Fire & Marine Insurance Co.,
Ltd.
5,976,357 4,762,220 0.9
836,000 Koa Fire & Marine Insurance Co.,
Ltd.
7,697,403 5,721,610 1.1
970,000 Nichido Fire & Marine Insurance
Co., Ltd.
3,374,142 2,944,230 0.6
377,000 Sumitomo Marine & Fire Insurance
Co., Ltd.
7,728,106 6,261,852 1.2
614,000 Tokio Marine & Fire Insurance Co.,
Ltd.
---------- ---------- ---------
36,089,828 29,249,817 5.7
- ------------------------------------------------------------------------------------------------------
RETAIL SALES 126,000 Ito-Yokado Co., Ltd. (Ordinary) 5,941,895 6,100,882 1.2
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPANESE
STOCKS 135,142,562 116,399,587 22.9
- ------------------
LEISURE 157,000 Genting BHD 1,450,561 1,657,608 0.3
MALAYSIA
1,427,440 1,669,730 0.3
700,000 Magnum Corp. BHD
---------- ---------- ---------
2,878,001 3,327,338 0.6
- ------------------------------------------------------------------------------------------------------
STEEL 1,032,000 Maruichi Malaysia Steel Tube BHD 2,616,958 2,219,528 0.4
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 243,000 Telekom Malaysia BHD 1,586,715 1,824,424 0.4
462,197 595,237 0.1
118,000 Uniphone Telecommunications BHD
---------- ---------- ---------
2,048,912 2,419,661 0.5
- ------------------------------------------------------------------------------------------------------
7,543,871 7,966,527 1.5
TOTAL INVESTMENTS IN MALAYSIAN
STOCKS
- ------------------
TELECOMMUNICATIONS 60,000 Telecom (Class C)(ADR)(a) 2,698,682 2,565,000 0.5
- ------------------------------------------------------------------------------------------------------
NEW ZEALAND
2,698,682 2,565,000 0.5
TOTAL INVESTMENTS IN NEW ZEALAND
STOCKS
- ------------------
BANKING 315,000 United Overseas Bank Ltd. (Foreign 2,262,524 2,540,005 0.5
Registered)
- ------------------------------------------------------------------------------------------------------
SINGAPORE
2,262,524 2,540,005 0.5
TOTAL INVESTMENTS IN SINGAPORAN
STOCKS
- ------------------
BANKING 369,100 Bangkok Bank Co., Ltd. (Foreign 2,591,948 2,959,764 0.6
Registered)
- ------------------------------------------------------------------------------------------------------
THAILAND
2,591,948 2,959,764 0.6
TOTAL INVESTMENTS IN THAI STOCKS
- ------------------
203,280,489 191,725,051 37.6
TOTAL INVESTMENTS IN THE PACIFIC
BASIN
- ------------------
</TABLE>
44
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
SOUTHEAST ASIA
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
INSURANCE 48,200 Grasim (ADR)(a) $ 815,815 $ 855,550 0.2%
- ------------------------------------------------------------------------------------------------------
INDIA
815,815 855,550 0.2
TOTAL INVESTMENTS IN INDIAN STOCKS
- ------------------
815,815 855,550 0.2
TOTAL INVESTMENTS IN SOUTHEAST ASIA
- ------------------
WESTERN
EUROPE
- ------------------
UTILITIES 13,629 Energie-Versorgung 1,340,508 1,633,041 0.3
Niederoesterreich AG
AUSTRIA
1,362,079 1,438,547 0.3
24,555 Verbund Oesterreichische
Elekrizitats AG
---------- ---------- ---------
2,702,587 3,071,588 0.6
- ------------------------------------------------------------------------------------------------------
2,702,587 3,071,588 0.6
TOTAL INVESTMENTS IN AUSTRIAN
STOCKS
- ------------------
BANKING 8,100 Generale de Banque S.A. (Ordinary) 1,978,003 2,008,264 0.4
- ------------------------------------------------------------------------------------------------------
BELGIUM
CHEMICALS 3,200 Solvay Group (Ordinary) 1,240,133 1,260,606 0.2
- ------------------------------------------------------------------------------------------------------
FOODS 34,000 GIB Group (Bearer) 1,200,598 1,256,970 0.2
- ------------------------------------------------------------------------------------------------------
METAL & MINING 19,801 Union Miniere N.V. 1,306,574 1,232,790 0.2
0 32,089 0.0
5,177 Union Miniere N.V. (Warrants)(c)
---------- ---------- ---------
1,306,574 1,264,879 0.2
- ------------------------------------------------------------------------------------------------------
5,725,308 5,790,719 1.0
TOTAL INVESTMENTS IN BELGIAN STOCKS
- ------------------
BANKING 7,360 Den Danske Bank AF (Ordinary) 375,263 401,066 0.1
- ------------------------------------------------------------------------------------------------------
DENMARK
375,263 401,066 0.1
TOTAL INVESTMENTS IN DANISH STOCKS
- ------------------
PAPER & FOREST 306,500 Enso-Gutzeit OY
PRODUCTS 1,987,636 1,954,471 0.4
FINLAND
1,721,368 1,693,179 0.3
43,900 +Metsa Serla OY
1,627,001 1,672,037 0.3
107,900 Repola OY S
---------- ---------- ---------
5,336,005 5,319,687 1.0
- ------------------------------------------------------------------------------------------------------
5,336,005 5,319,687 1.0
TOTAL INVESTMENTS IN FINNISH STOCKS
- ------------------
AUTOMOBILES 19,750 Peugeot S.A. 2,314,748 2,339,976 0.5
- ------------------------------------------------------------------------------------------------------
FRANCE
BANKING 35,300 Compagnie Financiere de Suez 2,018,337 2,016,803 0.4
(Ordinary)
2,018,937 1,838,915 0.4
23,720 Compagnie Financiere de Paribas
2,052,425 2,251,117 0.4
19,000 Societe Generale de Surveillance
S.A.
(Class A) (Ordinary)
---------- ---------- ---------
6,089,699 6,106,835 1.2
- ------------------------------------------------------------------------------------------------------
CHEMICALS 37,800 Rhone-Poulenc S.A. 933,807 946,035 0.2
- ------------------------------------------------------------------------------------------------------
CONSUMER--MISCELLANEOUS 21,000 Christian Dior S.A. 1,296,657 1,164,406 0.2
- ------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 29,000 Matra Hachette (Ordinary) 719,726 684,250 0.1
- ------------------------------------------------------------------------------------------------------
OIL--RELATED 28,000 Societe Nationale Elf Aquitaine 2,046,602 1,928,171 0.4
(Ordinary)
- ------------------------------------------------------------------------------------------------------
PETROLEUM 40,500 Total S.A. (Class B) 2,047,886 2,059,299 0.4
- ------------------------------------------------------------------------------------------------------
RETAIL TRADE 17,150 Pinault Printemps S.A. 2,053,184 2,384,554 0.5
- ------------------------------------------------------------------------------------------------------
17,502,309 17,613,526 3.5
TOTAL INVESTMENTS IN FRENCH STOCKS
- ------------------
</TABLE>
45
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
WESTERN
EUROPE
(continued)
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
AUTOMOBILES 2,202 Bayerische Motorenwerke AG (BMW) $ 722,839 $ 783,127 0.2%
(Bearer)
GERMANY
2,432,057 2,303,857 0.5
5,529 Daimler-Benz AG
1,411,388 1,396,744 0.3
16,242 Volkswagen AG (Pref. Warrants)(c)
711,409 733,996 0.1
3,815 Volkswagen AG (Pref.)
---------- ---------- ---------
5,277,693 5,217,724 1.1
- ------------------------------------------------------------------------------------------------------
BANKING 11,867 Deutsche Bank AG (Ordinary) 5,773,552 5,860,162 1.1
- ------------------------------------------------------------------------------------------------------
BUILDING & 954 Hochtief AG
CONSTRUCTION 614,240 570,108 0.1
- ------------------------------------------------------------------------------------------------------
CHEMICALS 15,212 BASF AG (Ordinary) 2,448,022 2,403,482 0.5
3,801,567 4,039,576 0.8
20,996 Bayer AG (Ordinary)
---------- ---------- ---------
6,249,589 6,443,058 1.3
- ------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 6,314 Schering AG
CARE 3,628,348 3,895,449 0.8
- ------------------------------------------------------------------------------------------------------
INSURANCE 3,650 Allianz AG Hlde (Warrants)(c) 140,309 220,251 0.0
- ------------------------------------------------------------------------------------------------------
MACHINERY 68,200 Kloeckner Werke AG 3,365,767 4,111,404 0.8
1,946,489 2,139,692 0.4
10,000 Man AG (Ordinary)
2,320,918 2,805,213 0.5
12,976 Mannesmann AG (Ordinary)
---------- ---------- ---------
7,633,174 9,056,309 1.7
- ------------------------------------------------------------------------------------------------------
METAL & MINING 15,360 Thyssen AG (Ordinary) 1,933,747 2,126,866 0.4
- ------------------------------------------------------------------------------------------------------
UTILITIES 10,106 Veba Vereinigte Elektrizitaets & 2,415,178 2,686,174 0.5
Bergwerks
AG (Ordinary)
850,851 1,206,856 0.2
15,000 Veba (Warrants)(c)
---------- ---------- ---------
3,266,029 3,893,030 0.7
- ------------------------------------------------------------------------------------------------------
34,516,681 37,282,957 7.2
TOTAL INVESTMENTS IN GERMAN STOCKS
& WARRANTS
- ------------------
BEVERAGES 29,810 Hellenic Bottling 792,760 824,351 0.2
- ------------------------------------------------------------------------------------------------------
GREECE
792,760 824,351 0.2
TOTAL INVESTMENTS IN GREEK STOCKS
- ------------------
BANKING 498,000 Bank of Ireland (Ordinary) 1,939,145 2,028,149 0.4
- ------------------------------------------------------------------------------------------------------
IRELAND
BUILDING & 610,000 CRH PLC (Ordinary)
CONSTRUCTION 2,870,247 2,982,854 0.6
- ------------------------------------------------------------------------------------------------------
4,809,392 5,011,003 1.0
TOTAL INVESTMENTS IN IRISH STOCKS
- ------------------
DIVERSIFIED 2,969,500 Compagnie Industrial Riunite S.p.A. 2,777,436 2,455,749 0.5
(CIR)
- ------------------------------------------------------------------------------------------------------
ITALY
Paper & Forest 235,550 Cartiere Burgo S.p.A. (Ordinary)
Products 1,148,584 1,241,189 0.2
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 2,032,280 STET, Di Risp (Non Conv.) 4,123,619 3,355,404 0.7
- ------------------------------------------------------------------------------------------------------
UTILITIES--GAS 147,200 Italgas (Sud) S.p.A. 412,771 389,546 0.1
- ------------------------------------------------------------------------------------------------------
8,462,410 7,441,888 1.5
TOTAL INVESTMENTS IN ITALIAN STOCKS
- ------------------
BANKING 60,250 ABN Amro Bank (Ordinary) 2,030,533 2,187,604 0.4
- ------------------------------------------------------------------------------------------------------
NETHERLANDS
BEVERAGES 8,504 Heineken Holdings (Class A) 705,797 782,984 0.2
949,291 935,393 0.2
9,000 Heineken N.V.
---------- ---------- ---------
1,655,088 1,718,377 0.4
- ------------------------------------------------------------------------------------------------------
CHEMICALS 32,500 Akzo N.V. (Ordinary) 3,030,063 3,007,569 0.6
1,695,186 1,702,580 0.3
32,600 Dutch State Mining N.V. (Ordinary)
---------- ---------- ---------
4,725,249 4,710,149 0.9
- ------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
WESTERN EUROPE
(continued)
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
INSURANCE 79,282 AEGON N.V. (Ordinary) $3,874,041 $4,185,977 0.8%
NETHERLANDS
3,571,667 3,962,980 0.8
89,840 Amev N.V. (Ordinary)
(concluded)
3,491,374 3,994,375 0.8
91,197 Internationale Nederlanden Groep
N.V.
---------- ---------- ---------
10,937,082 12,143,332 2.4
- ------------------------------------------------------------------------------------------------------
PAPER & FOREST 130,477 Koninklijke KNP
PRODUCTS 2,479,390 2,714,877 0.5
- ------------------------------------------------------------------------------------------------------
RETAIL TRADE 5,888 De Boer Winkelbedr N.V. 221,972 220,524 0.0
- ------------------------------------------------------------------------------------------------------
TRANSPORTATION 192,180 KLM Royal Dutch Airlines 3,769,039 4,218,683 0.8
- ------------------------------------------------------------------------------------------------------
25,818,353 27,913,546 5.4
TOTAL INVESTMENTS IN NETHERLANDS
STOCKS
- ------------------
BUILDING & 37,800 Soares Da Costa S.A.
CONSTRUCTION 976,555 838,923 0.2
- ------------------------------------------------------------------------------------------------------
PORTUGAL
976,555 838,923 0.2
TOTAL INVESTMENTS IN PORTUGUESE
STOCKS
- ------------------
BANKING 16,920 Banco Popular Espanol (Ordinary) 1,907,099 1,849,705 0.4
- ------------------------------------------------------------------------------------------------------
SPAIN
OIL--RELATED 112,640 Repsol S.A. (Ordinary) 3,018,225 3,166,426 0.6
- ------------------------------------------------------------------------------------------------------
REAL ESTATE 21,160 Vallehermoso 304,926 346,984 0.1
43,543 57,836 0.0
3,527 Vallehermoso Espanola S.A.
---------- ---------- ---------
348,469 404,820 0.1
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 328,940 Telofonica Nacional de Espania S.A. 3,958,662 3,922,902 0.8
(Ordinary)
- ------------------------------------------------------------------------------------------------------
UTILITIES 343,000 Fuerzas Electricas de Cataluna, 1,940,025 1,960,070 0.4
FECSA (Class A)
- ------------------------------------------------------------------------------------------------------
11,172,480 11,303,923 2.3
TOTAL INVESTMENTS IN SPANISH STOCKS
- ------------------
BUILDING RELATED 115,600 +Svedala Industry 2,053,238 1,830,735 0.4
- ------------------------------------------------------------------------------------------------------
SWEDEN
METAL & MINING 240,460 +Trelleborg AB (Class B) 1,658,348 1,847,222 0.4
- ------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 151,750 Astra "A" Fria
PRESCRIPTION 3,179,941 2,995,078 0.6
- ------------------------------------------------------------------------------------------------------
6,891,527 6,673,035 1.4
TOTAL INVESTMENTS IN SWEDISH STOCKS
- ------------------
BANKING 7,633 Swiss Bank Corp. (Bearer) 2,488,783 2,442,560 0.5
- ------------------------------------------------------------------------------------------------------
SWITZERLAND
BUILDING MATERIALS 3,341 Holderbank Financiere Glarus AG 1,836,580 1,870,960 0.4
(Bearer)
- ------------------------------------------------------------------------------------------------------
CHEMICALS 3,862 Ciba-Geigy AG (Registered) 1,855,786 2,013,389 0.4
- ------------------------------------------------------------------------------------------------------
ELECTRICAL 9,076 BBC Brown Boveri & Cie
EQUIPMENT 5,672,958 6,093,021 1.2
634,312 720,720 0.1
1,638 Landis & Gyr AG (Registered)
---------- ---------- ---------
6,307,270 6,813,741 1.3
- ------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 4,928 Nestle AG (Registered) 3,555,996 3,807,701 0.7
- ------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL 1,535 Roche Holding Genusschein AG
CARE 5,598,050 6,155,350 1.2
5,509,003 5,772,693 1.1
2,392 Sandoz AG (Registered)
---------- ---------- ---------
11,107,053 11,928,043 2.3
- ------------------------------------------------------------------------------------------------------
INSURANCE 495 Baloise Holding Insurance 645,450 838,200 0.2
3,480,329 4,066,757 0.8
7,861 Winterthur (Registered)
---------- ---------- ---------
4,125,779 4,904,957 1.0
- ------------------------------------------------------------------------------------------------------
MACHINERY 1,568 Sulzer Gebrueder AG (Registered) 803,207 794,453 0.2
- ------------------------------------------------------------------------------------------------------
METAL & MINING 4,762 Alusuisse-Lonza Holdings 1,714,589 1,707,971 0.3
(Registered)
- ------------------------------------------------------------------------------------------------------
33,795,043 36,283,775 7.1
TOTAL INVESTMENTS IN SWISS STOCKS
- ------------------
</TABLE>
47
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONTINUED)
WESTERN EUROPE
(concluded)
<TABLE>
<CAPTION>
PERCENT
OF
SHARES VALUE NET
INDUSTRIES HELD STOCKS, BONDS, WARRANTS & RIGHTS COST (NOTE 1A) ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------
BANKING--INTERNATIONAL 3,300,000 Yapi Kredi Bankasi A.S. (Ordinary) $1,012,571 $1,360,341 0.3%
- ------------------------------------------------------------------------------------------------------
TURKEY
1,012,571 1,360,341 0.3
TOTAL INVESTMENTS IN TURKISH STOCKS
- ------------------
AEROSPACE 1,233,000 Rolls Royce PLC (Ordinary) 2,762,128 3,159,106 0.6
- ------------------------------------------------------------------------------------------------------
UNITED KINGDOM
AIRLINES 572,400 British Airways PLC (Ordinary) 3,011,250 3,560,442 0.7
- ------------------------------------------------------------------------------------------------------
BANKING 403,000 Barclays Bank, Ltd. (Ordinary) 3,111,286 3,485,563 0.7
3,521,709 3,833,389 0.8
464,700 National Westminster Bank PLC
(Ordinary)
---------- ---------- ---------
6,632,995 7,318,952 1.5
- ------------------------------------------------------------------------------------------------------
BEVERAGES 793,000 Grand Metropolitan PLC (Ordinary) 4,963,397 4,803,431 0.9
- ------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 999,250 Tarmac PLC (Ordinary) 2,248,643 2,101,443 0.4
- ------------------------------------------------------------------------------------------------------
CONSUMER--GOODS 127,500 Vendome Luxury Group (Units) 700,055 598,583 0.1
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED 660,000 BTR PLC (Warrants)(c) 1,298,259 1,231,600 0.2
- ------------------------------------------------------------------------------------------------------
ELECTRICAL 628,000 General Electric Co., Ltd. PLC
EQUIPMENT (Ordinary) 3,321,592 3,101,777 0.6
- ------------------------------------------------------------------------------------------------------
ELECTRONICS 368,000 Chubb Security Group (Ordinary) 2,021,481 1,986,554 0.4
- ------------------------------------------------------------------------------------------------------
FOODS 243,000 Argyll Group PLC (Ordinary) 983,292 1,000,475 0.2
1,954,253 1,952,965 0.4
666,000 Tesco PLC (Ordinary)
---------- ---------- ---------
2,937,545 2,953,440 0.6
- ------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE 290,000 Tate & Lyle PLC (Ordinary) 1,703,824 1,743,729 0.3
- ------------------------------------------------------------------------------------------------------
INSURANCE 456,300 Commercial Union Assurance Co. PLC 4,365,810 4,098,608 0.8
(Ordinary)
- ------------------------------------------------------------------------------------------------------
LEISURE & 243,500 The Rank Organisation PLC
ENTERTAINMENT (Ordinary) 2,814,188 3,164,471 0.6
3,274,626 3,082,496 0.6
220,600 Thorn EMI (Ordinary)
---------- ---------- ---------
6,088,814 6,246,967 1.2
- ------------------------------------------------------------------------------------------------------
MEDIA/PUBLISHING 481,500 Pearson PLC (Ordinary) 3,865,846 4,303,568 0.8
1,724,335 1,533,501 0.3
1,170,000 WPP Group PLC
---------- ---------- ---------
5,590,181 5,837,069 1.1
- ------------------------------------------------------------------------------------------------------
OIL--RELATED 552,000 British Petroleum Co., Ltd. 2,603,346 2,726,403 0.5
- ------------------------------------------------------------------------------------------------------
RETAIL TRADE 318,000 Boots Co. PLC (Ordinary) 2,310,051 2,536,109 0.5
1,294,125 1,394,362 0.3
350,000 Dixons Group PLC (Ordinary)
3,599,242 3,565,428 0.7
2,031,600 Sears PLC
---------- ---------- ---------
7,203,418 7,495,899 1.5
- ------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 291,500 British Telecommunications PLC 1,998,497 2,033,361 0.4
(Ordinary)
- ------------------------------------------------------------------------------------------------------
UTILITIES--GAS 730,000 British Gas PLC (Ordinary) 3,521,282 3,529,889 0.7
- ------------------------------------------------------------------------------------------------------
62,972,517 64,527,253 12.5
TOTAL INVESTMENTS IN UNITED KINGDOM
STOCKS
& WARRANTS
- ------------------
222,861,761 231,657,581 45.3
TOTAL INVESTMENTS IN WESTERN EUROPE
- ------------------
</TABLE>
48
<PAGE>
Merrill Lynch International Equity Fund, November 30, 1993
SCHEDULE OF INVESTMENTS (Unaudited) (CONCLUDED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
COMMERCIAL PAPER* $10,321,000 General Electric Capital
Corp., 3.20% due 12/01/1993 $10,321,000 $10,321,000 2.0%
- ----------------------------------------------------------------------------------------------
Total Investments in
Commercial Paper 10,321,000 10,321,000 2.0
- ----------------------------------------------------------------------------------------------
US GOVERNMENT & 15,000,000 Federal Home Loan Bank,
AGENCY OBLIGATIONS 3.01% due 12/13/1993 14,984,950 14,984,950 2.9
10,000,000 Federal Home Loan Mortgage
Corp., 3.04% due 12/06/1993 9,995,778 9,995,778 2.0
Federal National Mortgage
Association: 3.02% due
10,000,000 12/21/1993 9,983,222 9,982,330 2.0
4,000,000 3.16% due 1/04/1994 3,988,062 3,988,062 0.8
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN US
GOVERNMENT & AGENCY
OBLIGATIONS 38,952,012 38,951,120 7.7
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES 49,273,012 49,272,120 9.7
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Investments $509,581,284 511,775,197 100.4
-----------
Put Options Purchased (Cost--$549,000)** 184,030 0.1
Call Options Written (Premiums Received--$425,750)*** (605,410) (0.1)
Unrealized Appreciation on Forward Foreign Exchange
Contracts++ 1,395,792 0.3
Variation Margin on Stock Index Futures Contracts++++ 105,892 0.0
Liabilities in Excess of Other Assets (2,882,861) (0.6)
----------- ---
Net Assets $509,972,640 100.0%
----------- -----
----------- -----
- ----------------------------------------------------------------------------------------------
<FN>
(a) American Depositary Receipt (ADR).
(b) Global Depositary Shares (GDS).
(c) Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration
date.
++ Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $8,485,000,
representing 1.66% of net assets.
-------------------------------------------------------------------
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1A)
-------------------------------------------------------------------
Fomento Economico
Mexicano S.A. de
C.V. (Femsa)
(Class B)(ADR) 8/13/93 $2,097,877 $2,334,301
Grupo Financiero
Bancomer, S.A. de
C.V. (ADR) 8/13/93 499,800 518,175
Grupo Posadas S.A. de
C.V. (GDS) 10/26/93 374,750 368,000
Servicios Financieros
Quadrum, S.A. (ADR) 9/15/93 1,982,811 2,552,063
Telecomunicacoes
Brasileiras,
S.A. -- Telebras PN
(Preferred)(ADR) 8/25/93 2,478,840 2,712,612
-------------------------------------------------------------------
Total $7,434,078 $8,485,151
--------- ---------
--------- ---------
-------------------------------------------------------------------
++++ Stock Index futures contracts as of November 30, 1993 were as
follows:
-------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE
CONTRACTS ISSUE DATE (NOTE 1E)
-------------------------------------------------------------------
150 Nikkei 225 3/11/94 $11,414,691
-------------------------------------------------------------------
Total Stock Index Futures
Contracts
(Total Contract
Price--$11,308,799) $11,414,691
----------
----------
-------------------------------------------------------------------
* Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Fund.
-------------------------------------------------------------------
** Put options purchased as of November 30, 1993 are as follows:
-------------------------------------------------------------------
PAR VALUE VALUE
SUBJECT (NOTES
TO PUT ISSUE COST 1A & 1D)
-------------------------------------------------------------------
$7,000,000 Ffr currency put
option, strike
price 5.84,
expiring 1/12/94 $ 24,150 $ 19,180
13,000,000 DM currency put
option, strike
price 1.675,
expiring 1/12/94 100,750 70,590
50,000,000 Y currency put
option, strike
price 103.60,
expiring 1/12/94 392,500 82,500
8,000,000 Nlg currency put
option strike
price 1.885,
expiring 1/12/94 31,600 11,760
-------------------------------------------------------------------
TOTAL PUT OPTIONS PURCHASED $ 549,000 $ 184,030
--------- ---------
-------------------------------------------------------------------
*** Call options written as of November 30, 1993 are as follows:
-------------------------------------------------------------------
PAR VALUE VALUE
SUBJECT (NOTES
TO CALL ISSUE COST 1A & 1D)
-------------------------------------------------------------------
$13,000,000 DM Currency call
option, strike
price 1.774,
expiring 1/12/94 $ 100,750 $ (52,910)
50,000,000 Y currency call
option, strike
price 109.50,
expiring 1/12/94 325,000 (552,500)
-------------------------------------------------------------------
TOTAL CALL OPTIONS WRITTEN $ 425,750 $(605,410)
--------- ---------
--------- ---------
-------------------------------------------------------------------
+ Non-income producing securities.
++ Forward foreign exchange contracts as of November 30, 1993 are as
follows:
-------------------------------------------------------------------
FOREIGN UNREALIZED
CURRENCY EXPIRATION APPRECIATION
SOLD DATE (NOTE 1C)
-------------------------------------------------------------------
A$ 10,450,701 January 1994 $ 6,326
Bef 48,239,100 January 1994 7,744
Chf 14,279,772 January 1994 53,676
DM 16,887,000 December 1993 166,146
DM 32,996,928 January 1994 138,446
Dkr 1,493,052 January 1994 1,321
Pta 745,950,500 January 1994 90,876
Fim 16,606,018 January 1994 22,615
Frf 77,584,430 January 1994 65,037
Nlg 11,377,200 December 1993 87,816
Nlg 15,696,954 January 1994 48,304
Y 11,143,590,000 January 1994 696,338
Skr 8,491,676 January 1994 11,147
-------------------------------------------------------------------
TOTAL (US COMMITMENT--$181,020,000) $1,395,792
---------
-------------------------------------------------------------------
TOTAL UNREALIZED APPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS $1,395,792
---------
---------
-------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1993 (Unaudited)
- ---------
ASSETS:
<S> <C> <C> <C>
Investments, at value (identified cost--$509,581,284) (Note 1a)....... $511,775,197
Variation margin on stock index futures contracts (Note 1e & 5)....... 105,892
Put options purchased, at value (cost--$549,000) (Notes 1a & 1d)...... 184,030
Unrealized appreciation on forward foreign exchange contracts (Note
1e)................................................................... 1,395,792
Foreign cash (Note 1c)................................................ 7,703,024
Cash.................................................................. 113,690
Receivables:
Capital shares sold.................................................. $8,484,189
Securities sold...................................................... 8,089,144
Dividends............................................................ 575,193 17,148,526
---------
Deferred organization expenses (Note 1h).............................. 68,350
Prepaid registration fees and other assets (Note 1h).................. 64,600
----------
Total assets.......................................................... 538,559,101
----------
<S> <C> <C> <C>
- ---------
LIABILITIES:
Call options written, at value (premiums received--$425,750) (Notes 1a
& 1d)................................................................. 605,410
Payables:
Securities purchased................................................. 25,960,304
Capital shares redeemed.............................................. 595,532
Distributor (Note 2)................................................. 356,335
Investment adviser (Note 2).......................................... 321,370 27,233,541
---------
Accrued expenses and other liabilities................................ 747,510
----------
Total liabilities..................................................... 28,586,461
----------
- ---------
NET ASSETS:
Net assets............................................................ $509,972,640
----------
----------
- ---------
NET ASSETS
Class A Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized........................................... $1,080,513
CONSIST OF:
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized........................................... 3,872,793
Paid-in capital in excess of par...................................... 499,807,624
Accumulated investment loss--net...................................... (441,018)
Undistributed realized capital gains on investments and foreign
currency transactions--net............................................ 2,518,301
Unrealized appreciation on investments and foreign currency
transactions--net..................................................... 3,134,427
----------
Net assets............................................................ $509,972,640
----------
----------
- ---------
NET ASSET VALUE:
Class A--Based on net assets of $111,454,110 and 10,805,129 shares of
beneficial interest outstanding...................................... $ 10.31
----------
----------
Class B--Based on net assets of $398,518,530 and 38,727,929 shares of
beneficial interest outstanding...................................... $ 10.29
----------
----------
- ---------
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 30, 1993+ TO
NOVEMBER 30, 1993
(Unaudited)
- ---------
INVESTMENT
<S> <C> <C> <C>
Dividends (net of $140,660 foreign withholding tax)................... $1,244,092
INCOME
Interest and discount earned.......................................... 772,879
----------
(NOTES 1F & 1G):
Total income.......................................................... 2,016,971
----------
- ---------
EXPENSES:
Distribution fees--Class B (Note 2)................................... 926,816
Investment advisory fees (Note 2)..................................... 910,109
Custodian fees........................................................ 305,805
Transfer agent fees--Class B (Note 2)................................. 102,182
Maintenance fees--Class A (Note 2).................................... 71,666
Registration fees (Note 1h)........................................... 53,529
Printing and shareholder reports...................................... 27,030
Transfer agent fees--Class A (Note 2)................................. 25,342
Accounting services (Note 2).......................................... 16,960
Trustees' fees and expenses........................................... 7,950
Professional fees..................................................... 5,830
Amortization of organization expenses (Note 1h)....................... 3,180
Other................................................................. 1,590
----------
Total expenses........................................................ 2,457,989
----------
Investment loss--net.................................................. (441,018)
----------
- ---------
REALIZED AND
Realized gain from:
UNREALIZED GAIN ON
Investments--net..................................................... $ 132,201
INVESTMENTS &
Foreign currency transactions........................................ 2,386,100 2,518,301
---------
FOREIGN CURRENCY
TRANSACTIONS--NET
Unrealized appreciation on:
(NOTES 1C, 1G & 3):
Investments--net..................................................... 2,299,805
Foreign currency transactions........................................ 834,622 3,134,427
--------- ----------
Net realized and unrealized gain on investments and foreign currency
transactions.......................................................... 5,652,728
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $5,211,710
----------
----------
- ---------
+ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 30,
1993+ TO
NOV. 30,
INCREASE (DECREASE) IN NET ASSETS: 1993
(Unaudited)
<S> <C>
- ---------
OPERATIONS:
Investment loss--net........................................................... $ (441,018)
Realized gain on investments and foreign currency transactions--net............ 2,518,301
Unrealized appreciation on investments and foreign currency
transactions--net.............................................................. 3,134,427
----------
Net increase in net assets resulting from operations........................... 5,211,710
----------
- ---------
BENEFICIAL INTEREST
Net increase in net assets derived from beneficial interest transactions....... 504,660,930
----------
TRANSACTIONS
(NOTE 4):
- ---------
NET ASSETS:
Total increase in net assets................................................... 509,872,640
Beginning of period............................................................ 100,000
----------
End of period*................................................................. $509,972,640
----------
- ---------
* Accumulated investment loss--net............................................... $ (441,018)
----------
- ---------
+ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
52
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -------------
FOR THE FOR THE
PERIOD PERIOD
JULY 30, JULY 30,
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM 1993+ 1993+ TO
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. TO NOV. 30, NOV. 30,
INCREASE (DECREASE) IN NET ASSET VALUE: 1993 1993(1)
- ----------------------------------------------------------------- (Unaudited) (Unaudited)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 10.00 $ 10.00
----------- -------------
Investment income (loss)--net................................... .01 (.01)
Realized and unrealized gain on investments and foreign currency
transactions--net................................................ .30 .30
----------- -------------
Total from investment operations................................ .31 .29
----------- -------------
Net asset value, end of period................................... $ 10.31 $ 10.29
----------- -------------
- -----------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............................... 3.10%++ 2.90%++
----------- -------------
----------- -------------
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution fees.... 1.19%* 1.21%*
----------- -------------
----------- -------------
Expenses......................................................... 1.44%* 2.21%*
----------- -------------
----------- -------------
Investment income (loss)--net.................................... .26%* (.56)%*
----------- -------------
----------- -------------
- -----------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......................... $ 111,454 $ 398,519
----------- -------------
----------- -------------
Portfolio turnover............................................... 17.31% 17.31%
----------- -------------
----------- -------------
- --------------------------------------------------------------------------------
(1) Based on average shares outstanding during the period.
* Annualized.
+ Commencement of Operations.
** Total investment returns
exclude the effects
of sales loads.
++ Aggregate total investment return.
See Notes to Financial Statements.
53
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 the ongoing
account maintenance fee and except that Class B Shares bear certain expenses
related to the distribution of such shares and have exclusive voting rights with
respect to matters relating to such 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. 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, 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) Repurchase agreements -- The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) 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.
(d) 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.
(e) Futures contracts -- The Fund may purchase or sell futures contracts 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 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.
(f) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law,
54
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
NOTES TO FINANCIAL STATEMENTS (Unaudited) (CONTINUED)
a withholding tax may be imposed on interest, dividends, and capital gains at
various rates.
(g) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(h) 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.
(i) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management ("MLAM"). MLAM is the name under which Merrill Lynch Investment
Management, Inc. ("MLIM") does business. MLIM is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. The Fund has also entered into
Distribution Agreements 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, pursuant 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
MLAM actually receives. For the period July 30, 1993 to November 30, 1993, MLAM
paid MLAM U.K. a fee of $86,994 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 "Distribution Plans")
for Class A and Class B Shares pursuant to 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 distribution-related services to the Fund for
Class B Shares. For the period ended November 30, 1993, MLFD earned $71,666 and
$926,816 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 November 30, 1993, MLFD earned underwriting discounts of
$119,814, and MLPF&S earned dealer concessions of $2,693,159, on sales of the
Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $42,743 relating to
transactions in Class B Shares and $75,217 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 Merrill
Lynch &Co., Inc., 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 November 30, 1993 were
$499,746,952 and $39,569,757, respectively.
55
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND, NOVEMBER 30, 1993
NOTES TO FINANCIAL STATEMENTS (Unaudited) (CONCLUDED)
Net realized and unrealized gains (losses) as of November 30, 1993 were as
follows:
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------
REALIZED UNREALIZED
GAINS GAINS
(LOSSES) (LOSSES)
- -----------------------------------------------
<S> <C> <C>
Long-term
investments........... $ 131,077 $2,194,805
Short-term
investments........... 1,124 (892)
Foreign currency
transactions.......... (553,658) (16,540)
Options written....... -- (179,660)
Options purchased..... (40,950) (364,970)
Forward foreign
exchange contracts... 2,980,708 1,395,792
Stock index futures
contracts............. -- 105,892
---------- -----------
Total................. $2,518,301 $3,134,427
---------- -----------
---------- -----------
- -----------------------------------------------
</TABLE>
Transactions in put options purchased for the period ended November 30, 1993
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
PREMIUMS
PAR VALUE PAID
- ----------------------------------------------
<S> <C> <C>
Outstanding put
options purchased at
beginning of
period............... $ -- $ --
Options purchased.... 91,000,000 589,950
Options expired...... (13,000,000) (40,950)
---------- -----------
Outstanding put
options purchased at
end
of period........... $78,000,000 $ 549,000
---------- -----------
---------- -----------
- ----------------------------------------------
</TABLE>
Transactions in call options written for the period ended November 30, 1993 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..... $63,000,000 $ 425,750
------------ ---------
Outstanding call
options written at
end
of period.......... $63,000,000 $ 425,750
------------ ---------
------------ ---------
- ---------------------------------------------
</TABLE>
As of November 30, 1993, net unrealized appreciation for Federal income tax
purposes aggregated $2,193,913, of which $26,215,519 related to appreciated
securities and $24,021,606 related to depreciated securities. At November 30,
1993, the aggregate cost of investments for Federal income tax purposes was
$509,581,284.
4. BENEFICIAL INTEREST TRANSACTIONS:
Net increase in net assets derived from beneficial interest transactions was
$504,660,930 for the period ended November 30, 1993.
Transactions in shares of beneficial interest for Class A and Class B were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------
CLASS A SHARES FOR
THE PERIOD
JULY 30, 1993+ TO DOLLAR
NOVEMBER 30, 1993 SHARES AMOUNT
- ---------------------------------------------
<S> <C> <C>
Shares sold.......... 12,235,764 $124,392,649
---------- ----------
Total issued......... 12,235,764 124,392,649
Shares redeemed...... (1,435,635) (14,651,914)
---------- ----------
Net increase......... 10,800,129 $109,740,735
---------- ----------
---------- ----------
- ---------------------------------------------
</TABLE>
Prior to July 30, 1993 (commencement of operations), the Fund issued 5,000
shares to MLAM for $50,000.
<TABLE>
<CAPTION>
- ---------------------------------------------
CLASS B SHARES FOR
THE PERIOD
JULY 30, 1993+ TO DOLLAR
NOVEMBER 30, 1993 SHARES AMOUNT
- ---------------------------------------------
<S> <C> <C>
Shares sold.......... 39,776,122 $405,677,927
---------- ----------
Total issued......... 39,776,122 405,677,927
Shares redeemed...... (1,053,193) (10,757,732)
---------- ----------
Net increase......... 38,722,929 $394,920,195
---------- ----------
---------- ----------
- ---------------------------------------------
</TABLE>
Prior to July 30, 1993 (commencement of operations), the Fund issued 5,000
shares to MLAM for $50,000.
5. COMMITMENTS:
At November 30, 1993, the Fund had entered into forward foreign exchange
contracts under which it had agreed to purchase and sell various foreign
currency with an approximate value of $1,055,000 and $89,000, respectively.
56
<PAGE>
TABLE OF CONTENTS
PAGE
-----------
Investment Objective and Policies.............. 2
Hedging Techniques........................... 3
Investment Restrictions...................... 7
Management of the Fund......................... 10
Trustees and Officers........................ 10
Advisory and Management Arrangements......... 11
Purchase of Shares............................. 13
Redemption of Shares........................... 17
Portfolio Transactions and Brokerage........... 18
Determination of Net Asset Value............... 19
Shareholder Services........................... 20
Taxes.......................................... 32
Performance Data............................... 36
General Information............................ 37
Description of Shares........................ 37
Computation of Offering Price Per
Share..................................... 38
Independent Auditors......................... 38
Custodian.................................... 38
Transfer Agent............................... 38
Legal Counsel................................ 38
Reports to Shareholders...................... 39
Additional Information....................... 39
Independent Auditors' Report................... 40
Financial Statements........................... 41
Code #16748
Statement of
Additional Information
[Art]
- ------------------------------------------------------
MERRILL LYNCH
INTERNATIONAL
EQUITY FUND
January 14, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND
SUPPLEMENT DATED JANUARY 14, 1994, TO PROSPECTUS DATED JANUARY 14, 1994
FOR USE IN WISCONSIN
The Fund is authorized to invest up to 10% of its total assets in
securities which cannot be readily resold because of legal or contractual
restrictions or which are otherwise not readily marketable. Restrictions on
resale and illiquidity may involve additional risks or costs to the Fund.
Code #16747WI
