<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1994
SECURITIES ACT FILE NO. 33-44917
INVESTMENT COMPANY ACT FILE NO. 811-6521
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 6 /X/
(CHECK APPROPRIATE BOX OR BOXES.)
-------------------
MERRILL LYNCH
INTERNATIONAL EQUITY FUND
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
(Registrant's Telephone Number, including Area Code (609) 282-2800)
ARTHUR ZEIKEL
MERRILL LYNCH INTERNATIONAL EQUITY FUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
Philip L. Kirstein, Esq. Counsel for the Fund:
MERRILL LYNCH ASSET BROWN & WOOD
MANAGEMENT One World Trade Center
P.O. Box 9011 New York, New York 10048-0557
Princeton, New Jersey 08543-9011 Attention: Thomas R. Smith, Jr.,
Esq.
Frank P. Bruno, Esq.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of Rule 485.
-------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON JULY 25, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- --------------- -----------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page..................................... Cover Page
Item 2. Synopsis....................................... Fee Table; Alternative Sales Arrangements
Item 3. Condensed Financial Information................ Financial Highlights
Item 4. General Description of Registrant.............. Risks and Special Considerations; Investment
Objective and Policies; Additional
Information
Item 5. Management of the Fund......................... Fee Table; Investment Objective and Policies;
Portfolio Transactions; Management of the
Fund; Inside Back Cover Page
Item 6. Capital Stock and Other Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered........... Cover Page; Fee Table; Alternative Sales
Arrangements; Purchase of Shares; Shareholder
Services; Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase....................... Fee Table; Alternative Sales Arrangements;
Shareholder Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings...................... Not Applicable
PART B
Item 10. Cover Page..................................... Cover Page
Item 11. Table of Contents.............................. Back Cover Page
Item 12. General Information and History................ Not Applicable
Item 13. Investment Objectives and Policies............. Investment Objective and Policies
Item 14. Management of the Fund......................... Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities................................... Management of the Fund
Item 16. Investment Advisory and Other Services......... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and Other Practices....... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............. General Information
Item 19. Purchase, Redemption and Pricing of Securities Purchase of Shares; Redemption of Shares;
Being Offered................................ Determination of Net Asset Value; Shareholder
Services; General Information
Item 20. Tax Status..................................... Dividends and Distributions; Taxes
Item 21. Underwriter.................................... Purchase of Shares
Item 22. Calculation of Performance Data................ Performance Data
Item 23. Financial Statements........................... Statement of Assets and Liabilities; Financial
Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C
to this Registration Statement.
</TABLE>
<PAGE>
PROSPECTUS
SEPTEMBER 29, 1994
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------
Merrill Lynch International Equity Fund (the "Fund") is a diversified,
open-end management investment company seeking capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. The Fund is
designed for investors seeking to complement their U.S. holdings through foreign
equity investments. The Fund should be considered as a vehicle for
diversification and not as a balanced investment program. Investments may be
shifted among the various equity markets of the world outside of the U.S.
depending upon management's outlook with respect to prevailing trends and
developments. It is anticipated that a substantial portion of the Fund's assets
will be invested in the developed countries of Europe and the Far East and that
a significant portion of its assets also may be invested in developing
countries. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. There can be no assurance that the Fund's
investment objective will be achieved. INVESTMENTS ON AN INTERNATIONAL BASIS IN
FOREIGN SECURITIES MARKETS INVOLVE CERTAIN RISK FACTORS. SEE "RISKS AND SPECIAL
CONSIDERATIONS" BELOW.
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 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
(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 September 29, 1994 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
-------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(CONTINUED FROM COVER PAGE)
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.
ON OR ABOUT OCTOBER 21, 1994, THE FUND INTENDS TO COMMENCE OFFERING ADDITIONAL
CLASSES OF SHARES HAVING DIFFERENT SALES CHARGES AND DISTRIBUTION ARRANGEMENTS
THAN THOSE OFFERED BY THIS PROSPECTUS. ALSO, THE FUND'S EXCHANGE PRIVILEGE WILL
BE MODIFIED ON OR ABOUT OCTOBER 24, 1994. SEE "SHAREHOLDER SERVICES -- EXCHANGE
PRIVILEGE" BELOW.
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.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
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
INITIAL SALES CLASS B SHARES
CHARGE DEFERRED SALES
ALTERNATIVE CHARGE 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 0.0%
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)................... 0.10% 0.10%
Custodian Fees................................... 0.07% 0.08%
Other............................................ 0.14% 0.14%
Total Other Expenses..................... 0.31% 0.32%
Total Fund Operating Expenses............................ 1.31% 2.07%
<FN>
- ---------
(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 21.
(b) See "Purchase of Shares -- Deferred Sales Charge Alternative -- Class B
Shares" -- page 23.
(c) See "Management of the Fund -- Advisory and Management Arrangements" --
page 16.
(d) See "Purchase of Shares -- Alternative Sales Arrangements -- Distribution
Plans" -- page 20.
(e) See "Management of the Fund -- Transfer Agency Services" -- page 18.
(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 21.
(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>
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including, for Class A shares, the maximum $65 front-end sales charge and
assuming (1) an operating expense ratio of 1.31% for Class A shares and
2.07% for Class B shares, (2) a 5% annual return throughout the periods
and (3) redemption at the end of the period:
Class A................................................................. $ 77 $ 104 $ 132 $ 213
Class B................................................................. $ 61 $ 85 $ 111 $ 221
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A................................................................. $ 77 $ 104 $ 132 $ 213
Class B................................................................. $ 21 $ 65 $ 111 $ 221
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B 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 fee. See "Purchase of Shares" and "Redemption of Shares".
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 --
Initial Sales Charge Alternative -- Class A 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
4
<PAGE>
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. 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 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 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.
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".
5
<PAGE>
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 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 19.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audit of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal period July 30, 1993 (commencement of
operations) to May 31, 1994, are included in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Fund at the telephone number or
address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 30, 1993+
TO MAY 31, 1994
-----------------------
CLASS A CLASS B++
--------- -----------
<S> <C> <C>
INCREASE IN NET ASSET VALUE:
Net Asset Value, Beginning of Period.............................................. $10.00 $ 10.00
--------- -----------
PER SHARE OPERATING PERFORMANCE:
Investment income (loss) -- net................................................... .04 (.02)
Realized and unrealized gain on investments and foreign currency transactions --
net............................................................................. 1.47 1.46
--------- -----------
Total from investment operations.................................................. 1.51 1.44
--------- -----------
Net Asset Value, End of Period.................................................... $11.51 $ 11.44
--------- -----------
--------- -----------
Total Investment Return**......................................................... 15.10%++ 14.40%++
--------- -----------
--------- -----------
RATIOS TO AVERAGE NET ASSETS:
Expenses excluding maintenance and distribution fees.............................. 1.06%* 1.07%*
--------- -----------
--------- -----------
Expenses.......................................................................... 1.31%* 2.07%*
--------- -----------
--------- -----------
Investment income -- net.......................................................... .55%* (.19)%*
--------- -----------
--------- -----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......................................... $ 208,007 $ 844,295
Portfolio Turnover Rate........................................................... 50.63% 50.63%
--------- -----------
--------- -----------
- ---------
+ 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.
</TABLE>
7
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS
INTERNATIONAL INVESTING. Investments on an international basis involve
certain risks not involved in domestic investment, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities in
the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets. These
forces are, in turn, affected by international balance of payments and other
economic and financial conditions, government intervention, speculation and
other factors. With respect to certain countries, there may be the possibility
of expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments which could affect
investment in those countries. In addition, certain foreign investments may be
subject to foreign withholding taxes. As a result, management of the Fund may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country.
Most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission nor will the issuers thereof be subject to
the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject.
Foreign financial markets, while often growing in trading volume, have, for
the most part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices may be more volatile
than securities of comparable domestic companies. Such markets have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Brokerage commissions and other transaction costs on
foreign securities exchanges are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the U.S.
8
<PAGE>
It is anticipated that a significant portion of the Fund's assets may be
invested in the developing countries of the world, including, but not limited
to, countries located in Eastern Europe, Latin America and the Far East. The
risks noted above as well as in "Restrictions on Foreign Investment" below are
often heightened for investments in developing countries.
RESTRICTIONS ON FOREIGN INVESTMENT. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific class of securities which may have less advantageous terms than
securities of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act, the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for the
Fund to invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including investment advisory fees)
and, indirectly, the expenses of such closed-end investment companies. The Fund
also may seek, at its own cost, to create its own investment entities under the
laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. Also, the Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities", as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
HEDGING STRATEGIES. The Fund may engage in various portfolio strategies to
seek to hedge its portfolio against movements in the equity markets and exchange
rates between currencies by the use of options, futures and options on futures.
Utilization of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
Options and futures transactions in foreign markets are also subject to the risk
factors associated with foreign investments generally, as discussed above. There
can be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time.
BORROWING. The Fund may borrow up to 20% of its total assets, taken at
market value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
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FEES AND EXPENSES. The investment advisory fee (at the annual rate of 0.75%
of the Fund's average daily net assets) and other operating expenses of the Fund
may be higher than the investment advisory fees and operating expenses of other
mutual funds managed by the Investment Adviser and other investment advisers.
OTHER SPECIAL CONSIDERATIONS. Other special considerations are that the Fund
may invest up to 15% of its assets in illiquid or otherwise not readily
marketable securities (however, under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net assets)
and that the Fund may invest more than 5% of its assets in securities issued or
guaranteed by certain foreign governments.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. Under normal
conditions, at least 65% of the Fund's net assets will be invested in such
equity securities. There can be no assurance that the Fund's investment
objective will be achieved. The investment objective of the Fund is a
fundamental policy and may not be changed without the approval of the holders of
a majority of the Fund's outstanding voting securities. The Fund may employ a
variety of investments and techniques to hedge against market and currency risk.
The Fund is designed for investors seeking to complement their U.S. holdings
through foreign equity investments. The Fund should be considered as a vehicle
for diversification and not as a balanced investment program.
The Fund, utilizing the combined purchasing power of its shareholders'
funds, provides the investor with the opportunity to participate with a minimum
investment of $1,000 ($100 for retirement plans) in a diversified portfolio of
equity securities in foreign markets which typically would require substantially
larger commitments. Other advantages include worldwide professional management
and administrative convenience. Unlike many intermediary investment vehicles,
such as closed-end investment companies that invest in a single country, the
Fund intends to diversify investment risk among the capital markets of a number
of countries.
The Fund will invest in an international portfolio of securities of foreign
companies located throughout the world. While there are no prescribed limits on
the geographic allocation of the Fund's investments, management of the Fund
anticipates that a substantial portion of its assets will be invested in the
developed countries of Europe and the Far East. However, for the reasons stated
below, management of the Fund will give special attention to investment
opportunities in the developing countries of the world, including, but not
limited to, Eastern Europe, Latin America and the Far East. It is anticipated
that a significant portion of the Fund's assets may be invested in such
developing countries, and the Fund may invest without limit in such securities.
The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser and by the Fund's
sub-adviser, Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), based
primarily on an assessment of the relative condition and growth potential of the
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various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political factors. Within
such allocations, the Investment Adviser and MLAM U.K. will seek to identify
equity investments in each market which are expected to provide a total return
which equals or exceeds the return of such market as a whole.
A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such countries.
Certain such countries, particularly so-called "emerging" countries (such as
Malaysia, Mexico and Thailand), which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.
While the Fund will primarily emphasize investments in common stock, the
Fund may also invest in preferred stocks, convertible debt securities and other
equity or equity-linked instruments. The Fund reserves the right, as a temporary
defensive measure and to provide for redemptions, to hold cash or cash
equivalents in U.S. dollars or foreign currencies and short-term securities
including money market securities. Under certain adverse investment conditions,
the Fund may restrict the markets in which its assets will be invested and may
increase the proportion of assets invested in temporary defensive obligations of
U.S. issuers. Under normal conditions, at least 65% of the Fund's total assets
will be invested in the securities of issuers from at least three different
foreign countries. Investments made for defensive purposes will be maintained
only during periods in which the Investment Adviser or MLAM U.K. determines that
economic or financial conditions are adverse for holding or being fully invested
in equity securities of foreign issuers. A portion of the portfolio normally
will be held in U.S. dollars or short-term interest bearing U.S. dollar-
denominated securities to provide for possible redemptions.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs
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<PAGE>
are receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and GDRs are not
obligated to disclose material information in the United States, and therefore,
there may not be a correlation between such information and the market value of
such securities.
The Fund may invest in securities whose potential return is based on the
change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in an equity index, an interest rate index
or an index based on the values of one or more precious or industrial metals.
Interest and principal payable on a security may also be based on relative
changes among particular indices. In addition, the Fund may invest in securities
whose potential investment return is inversely based on the change in particular
indices. For example, the Fund may invest in securities that pay a higher rate
of interest and principal when a particular index decreases and pay a lower rate
of interest and principal when the value of the index increases. To the extent
that the Fund invests in such types of securities, it will be subject to the
risks associated with changes in the particular indices, which may include
reduced or eliminated interest payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended, but can be offered
and sold to "qualified institutional buyers" under Rule 144A under that Act.
However, the Fund will not invest more than 15% of its assets in illiquid
investments, which includes securities for which there is no readily available
market, securities subject to contractual restrictions on resale, and otherwise
restricted securities, unless the Fund's Board of Trustees continuously
determines, based on the trading markets for the specific restricted security,
that it is liquid. (However, under the law of certain states, the Fund presently
is limited with respect to such investments to 10% of its net assets.) The Board
of Trustees has determined to treat as liquid Rule 144A securities which are
freely tradeable in their primary markets offshore. The Board of Trustees may
adopt guidelines and delegate to the Investment Adviser and MLAM U.K. the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Trustees will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
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OTHER INVESTMENT PRACTICES
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE
TRANSACTIONS. The Fund is authorized to engage in various portfolio strategies
to hedge its portfolio against adverse movements in the equity markets and
exchange rates between currencies.
The Fund has authority to write (I.E., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and engage
in transactions in futures and related options on such futures. The Fund may
also deal in forward foreign exchange transactions and foreign currency options
and futures, and related options on such futures. Each of these portfolio
strategies is described in more detail in Appendix A attached to this
prospectus. Although certain risks are involved in options and futures
transactions (as discussed in "Risk Factors in Options, Futures and Currency
Transactions" in Appendix A to this Prospectus), the Investment Adviser and MLAM
U.K. believe that, because the Fund will engage in such transactions only for
hedging purposes, the options, futures and currency portfolio strategies of the
Fund will not subject the Fund to the risks frequently associated with the
speculative use of options, futures and currency transactions. While the Fund's
use of hedging strategies is intended to reduce the volatility of the net asset
value of Fund shares, the net asset value of the shares of the Fund will
fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in the equity markets or currency exchange rates occur. Reference is
made to Appendix A to this Prospectus and to the Statement of Additional
Information for further information concerning these strategies.
PORTFOLIO TRANSACTIONS. In executing portfolio transactions, the Investment
Adviser and MLAM U.K. seek to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser and MLAM U.K. generally seek
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. The Fund has no obligation to deal with
any broker or group of brokers in the execution of transactions in portfolio
securities. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis and may receive brokerage commissions
from the Fund. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., the Fund may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Brokerage commissions and
other transaction costs on foreign stock exchange transactions are generally
higher than in the U.S., although the Fund will endeavor to achieve the best net
results in effecting its portfolio transactions.
LENDING OF PORTFOLIO SECURITIES. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
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collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of such a loan,
the Fund receives the income on both the loaned securities and the collateral
and thereby increases its yield. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or otherwise, the
Fund could experience delays and costs in gaining access to the collateral and
could suffer a loss to the extent the value of the collateral falls below the
market value of the borrowed securities.
PORTFOLIO TURNOVER. The Investment Adviser and MLAM U.K. will effect
portfolio transactions without regard to holding period, if, in their judgment,
such transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio transactions.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 100% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the 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. The prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligation. Such agreements usually cover short periods, such as under one week.
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
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. In the event of a
default under such a repurchase agreement, 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 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.)
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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.
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.
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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 100 other
registered investment companies and provides investment advisory services to
individual and institutional accounts. As of August 31, 1994, the Investment
Adviser and FAM had a total of approximately $165.7 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Investment Adviser.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Trustees of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser and MLAM U.K., subject to
review by the Board of Trustees. The Investment Adviser is also obligated to
perform certain administrative and management services for the Fund and is
obligated to provide all of the office space, facilities, equipment and
personnel necessary to perform its duties under the Investment Advisory
Agreement.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary
of 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 May 31, 1994, the fee paid by the Investment
Adviser to MLAM U.K. was $401,250.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.75% of the average daily net assets of the Fund. This fee is higher than that
of most mutual funds, including most other mutual funds managed by the
Investment Adviser and other investment advisers, but management of the Fund
believes this fee is justified by the additional investment research and
analysis required in connection with investing in equities on an international
basis. For the fiscal period July 30, 1993 (commencement of operations) to May
31, 1994, the fee paid by the Fund to the Investment Adviser was $4,054,791
(based upon average net assets of approximately $644.9 million). At July 31,
1994, the net assets of the Fund aggregated approximately $1.1 billion. At this
asset level, the annual management fee would aggregate approximately $8,490,100.
The Fund pays certain expenses incurred in its operations, including, among
other things, the investment advisory fees; legal and audit fees; unaffiliated
Trustees' fees and expenses; registration fees; custodian
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<PAGE>
and transfer agency fees; accounting and pricing costs; and certain of the costs
of printing proxies, shareholder reports, prospectuses and statements of
additional information. Also, accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. For the fiscal
period July 30, 1993 (commencement of operations) to May 31, 1994, the Fund
reimbursed the Investment Adviser $142,452 for accounting services. For the
fiscal period July 30, 1993 (commencement of operations) to May 31, 1994, for
the Class A shares the ratio of total expenses excluding account maintenance
fees to average net assets was 1.06% (annualized), and the ratio of total
expenses including account maintenance fees to average net assets was 1.31%
(annualized); for the Class B shares the ratio of total expenses excluding
account maintenance and distribution fees to average net assets was 1.07%
(annualized), and the ratio of total expenses including account maintenance and
distribution fees to average net assets was 2.07% (annualized).
Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (I.E., Europe, Latin America and the
Pacific Basin) will be centralized in London, with country and individual
security decisions made in both London and Princeton, New Jersey. The names of
the persons associated with the Investment Adviser and MLAM U.K. who are
primarily responsible for the day-to-day management of the Fund's portfolio, the
length of time that such persons have been so responsible, and their business
experience during the past five years are as follows:
ANDREW JOHN BASCAND -- VICE PRESIDENT OF THE FUND -- Director of MLAM U.K.
and Vice President of Merrill Lynch Global Asset Management Limited (MLGAM)
since 1993, joined the team in October 1993 as Senior Portfolio Manager/Asset
Allocator primarily responsible for geographical asset allocation of the Fund's
portfolio. Previously, Mr. Bascand was with A.M.P. Asset Management plc in
London and had served as Chief Economist with A.M.P. Investments (NZ) in New
Zealand. He has served as Economic Adviser to the Chief Economist of the Reserve
Bank of New Zealand and as Research Officer of the Bank of England's
International Department. Mr. Bascand is the Asset Allocator for the Fund and,
as such, is primarily responsible for determining the allocation of the Fund's
assets among the three prime regions outside the United States.
ADRIAN HOLMES -- VICE PRESIDENT OF THE FUND -- Managing Director of MLAM
U.K. since 1993, Vice President from 1990 to 1993 and an employee thereof since
1987, and Director of MLGAM since 1993, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio since it
commenced operations. Mr. Holmes is primarily responsible for European
investments.
STEPHEN I. SILVERMAN -- VICE PRESIDENT OF THE FUND -- Vice President of the
Investment Adviser since 1983, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio since it
commenced operations. Mr. Silverman is primarily responsible for Pacific Basin
investments.
GRACE PINEDA -- VICE PRESIDENT OF THE FUND -- Vice President of the
Investment Adviser since 1989, has been a member of the team primarily
responsible for the day-to-day management of the Fund's portfolio 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.
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TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A shareholder account and
$14.00 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 May 31, 1994, the Fund paid
the Transfer Agent $454,630 pursuant to the Transfer Agency Agreement. At July
31, 1994, the Fund had 11,968 Class A shareholder accounts and 84,150 Class B
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate approximately $1,309,748 plus miscellaneous and
out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Investment Adviser and of Merrill Lynch, acts as the distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000, and the minimum subsequent purchase is $50, except that for retirement
plans, the minimum initial purchase is $100, and the minimum subsequent purchase
is $1.
The Fund is offering its shares 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
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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 the
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.
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
19
<PAGE>
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.
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, which is 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, which are 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 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 May 31, 1994, the Fund paid the Distributor
$289,937 pursuant to the Class A Distribution Plan (based on average net assets
subject to the Class A Distribution Plan of approximately $138.3 million), all
of which was paid to Merrill Lynch for providing account maintenance services in
connection with the Class A shares. For the same period, the Fund paid the
Distributor $4,246,639 pursuant to the Class B Distribution Plan (based on
average net assets subject to the Class B Distribution Plan of approximately
$506.5 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. At August 31, 1994, the net assets of the Fund subject to the
Class A Distribution Plan and the Class B Distribution Plan aggregated
approximately $216.5 million for Class A shares and approximately $903.7 million
for Class B shares. At these asset levels, the annual fees paid pursuant to such
Plans would aggregate approximately $136,418 for Class A shares and $2,277,868
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
20
<PAGE>
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, the 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, the
distribution fees and contingent deferred sales charges, and the expenses
consist of financial consultant compensation.
At December 31, 1993, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of the
offering of Class B shares exceeded fully allocated accrued revenues for such
period by approximately $10,851,000 (2.21% of Class B net assets at that date).
As of May 31, 1994, direct cash expenses for the period since commencement of
the offering of Class B shares exceeded direct cash revenues by $5,300,782
(0.63% of Class B net assets at that date).
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
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
SELECTED
SALES CHARGE AS DEALERS
SALES CHARGE AS PERCENTAGE* AS PERCENTAGE
PERCENTAGE OF OF THE NET OF THE
THE OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ----------------------------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
Less than $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
<FN>
- ---------
* Rounded to the nearest one-hundredth percent.
</TABLE>
21
<PAGE>
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, VEBA plans and non-qualified After Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system (herein referred to as "Employer Sponsored Retirement or Savings
Plans")), or a purchase by a TMA-SM- 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
AMOUNT OF PURCHASE SUBJECT TO 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, 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 May 31,
1994, the Fund sold 22,000,407 Class A shares for aggregate net proceeds to the
Fund of $236,735,011. The gross sales charges for the sale of Class A shares of
the Fund for that period were $4,503,139, of which $228,657 and $4,273,549 were
received by the Distributor and Merrill Lynch, respectively. For the fiscal
period July 30, 1993 (commencement of operations) to May 31, 1994, the
Distributor received contingent deferred sales charges of $122,975 with respect
to the redemption of Class A shares, all of which was paid to Merrill Lynch.
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 directors and trustees of certain other Merrill Lynch sponsored
investment companies, to participants in certain benefit plans, 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 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
22
<PAGE>
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 are offered
at net asset value to (i) 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 any
of its affiliates and (ii) certain Employer Sponsored Retirement or Savings
Plans, provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by the Investment Adviser or any
of its affiliates. 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 Merrill Lynch Senior Floating Rate Fund, Inc. (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 Merrill Lynch Senior
Floating Rate Fund, Inc. 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 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 from its own funds. 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 charge will be assessed on an amount equal to the lesser of the
current
23
<PAGE>
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 May 31, 1994, the Distributor
received contingent deferred sales charges of $428,332 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 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 an Individual
Retirement Account ("IRA") or other retirement plan 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 eligible 401(k) or eligible 401(a)
plans 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
24
<PAGE>
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 fee. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payment in excess of the amount payble under the NASD formula
will not be made.
The following table sets forth comparative information as of May 31, 1994,
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the fiscal period July 30, 1993
(commencement of operations) to May 31, 1994:
DATA CALCULATED AS OF MAY 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ALLOWABLE ALLOWABLE AMOUNTS
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY PAID AGGREGATE
GROSS SALES UNPAID AMOUNT TO UNPAID
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE
------------- ----------- ------------- ----------- --------------- -----------
Under NASD Rule as Adopted........... $ 698,234 $ 43,640 $ 1,536 $ 45,176 $ 3,613 $ 41,562
Under Distributor's Voluntary
Waiver.............................. $ 698,234 $ 43,640 $ 3,491 $ 47,131 $ 3,613 $ 43,517
<CAPTION>
<S> <C>
ANNUAL
DISTRIBUTION
FEE AT
CURRENT NET
ASSET
LEVEL(4)
-------------
Under NASD Rule as Adopted........... $ 6,332
Under Distributor's Voluntary
Waiver.............................. $ 6,332
<FN>
- ------------
(1) Purchase price of all eligible Class B shares sold since July 30, 1993
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the average 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.
</TABLE>
25
<PAGE>
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 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.
26
<PAGE>
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.
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 quarterly statements
from the Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
quarterly statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gain distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to the Transfer
Agent. Shareholders 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
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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 $100 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 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
currently 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, and it is presently anticipated that the Fund's existing
exchange privilege will be modified on or about October 24, 1994, as explained
below.
PRESENT EXCHANGE PRIVILEGE. Currently, 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
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exchange on the new Class A shares. The Fund's exchange privilege is presently
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.
Currently, 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 the exchange
privilege is treated as a sale for Federal income tax purposes.
IMPENDING CHANGES._On or about October 24, 1994, the Fund's existing
exchange privilege will be modified as described below if shareholders approve
at a meeting certain matters related to the implementation of the Merrill Lynch
Select Pricing-SM- System pursuant to which each of the funds participating in
the current Dual Distribution System, including the Fund, will offer four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features, instead of the two classes of shares presently offered.
Under the Select Pricing System, shares of Class A and Class D will be offered
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C will be offered to investors choosing the deferred sales charge
alternatives.
The existing Class A shares of certain funds participating in the current
exchange privilege, including the Fund, are subject to an account maintenance
fee and are the equivalent of the new Class D shares. Upon implementation of the
Select Pricing System, such Class A shares automatically will be redesignated
Class D shares. Such shares will not be exchangeable for Class A shares of other
funds beginning on or about October 24, 1994, but will be exchangeable for Class
D shares offered by all funds which operate pursuant to the Select Pricing
System. The following eight other funds currently offer Class A shares to be
redesignated Class D shares: Merrill Lynch Americas Income Fund, Inc., Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Latin America
Fund, Inc. and Merrill Lynch Short-Term Global Income Fund, Inc.
After the implementation date, Class A shares will only be offered to a
limited group of investors including participants in certain retirement plans
and investment programs (such participants are referred to
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herein as "Qualified Purchasers") and existing Class A shareholders. ("Existing
Class A shareholders" will not include holders of the Fund's Class A shares
prior to implementation of the Select Pricing System.) Investors who are not
Qualified Purchasers who hold Class A shares of a specific fund in an account
will be entitled to purchase additional Class A shares of that fund for that
account only. Class A shareholders of one fund who are not Qualified Purchasers
and who wish to exchange their Class A shares for shares of a second fund will
receive Class A shares of that second fund only if such shareholder already
owned in the same account Class A shares of the second fund on the date of the
exchange. Otherwise, shareholders who are not Qualified Purchasers will receive
in exchange for their Class A shares the shares of a new Class D which will be
subject to an account maintenance fee at a maximum annual rate of 0.25% of the
fund's average daily net assets attributable to such new class of shares. An
investor will have the right to exchange Class D shares for Class A shares of
any other fund held in the investor's account, provided that Class A shares of
the fund to be acquired in the exchange are held in the account at the time of
the exchange. Otherwise, Class D shares will only be exchangeable for Class D
shares of another fund.
Class B and Class C shares will be exchangeable only with shares of the same
class. Accordingly, the Class B shareholders' exchange privilege will remain
unchanged. The existing Class B shares of Merrill Lynch Fundamental Growth Fund,
Inc. are presently the equivalent of the new Class C shares and, upon
implementation of the Select Pricing System, automatically will be redesignated
Class C shares. Such shares will not be exchangeable for Class B shares
beginning on or about October 24, 1994, but will be exchangeable instead for
Class C shares to be created in the other funds.
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.
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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 comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., MONEY MAGAZINE, U.S. NEWS & WORLD REPORT, BUSINESS WEEK, CDA
Investment Technology, Inc., FORBES MAGAZINE, FORTUNE MAGAZINE or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered representative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized long-or short-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually. See "Additional
Information -- Determination of Net Asset Value". Dividends and distributions
may be reinvested automatically in shares of the Fund at net asset value without
a sales charge. Shareholders may elect in writing to receive any such dividends
or distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may
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<PAGE>
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
Fund shares for Federal income tax purposes. See "Additional Information --
Taxes".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A
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).
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.
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Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain 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 shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under proposed regulations the Fund
would be able to elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares.
Unrealized losses, however, would not be recognized. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be
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distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary dividend distributions, and any
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset).
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.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value 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
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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 multiple classes of shares. 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.
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SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
-------------------
The Declaration, dated January 3, 1992, and subsequently amended, a copy of
which is on file in the office of the Secretary of the Commonwealth of
Massachusetts, provides that the name "Merrill Lynch International Equity Fund"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Fund shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim of
said Fund, but the "Trust Property" only shall be liable.
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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, futures on securities indicies, 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
A-1
<PAGE>
cash, cash equivalents, U.S. Government securities or other high grade liquid
debt or equity securities denominated in U.S. dollars or non-U.S. currencies
with a securities depository with a value equal to or greater than the exercise
price of the underlying securities. By writing a put, the Fund will be obligated
to purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the option
is outstanding. The Fund may engage in closing transactions in order to
terminate put options that it has written.
PURCHASING OPTIONS. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets. The Fund will engage in options transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange traded contracts are
third-party contracts (I.E., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with terms negotiated by the buyer and seller. See "Restrictions on OTC Options"
below for information as to restrictions on the use of OTC options.
HEDGING FOREIGN CURRENCY RISKS. The Fund is authorized to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund, or the payment of dividends and distributions by the
Fund. Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Fund will not speculate in forward foreign exchange. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Fund to
hedge against a devaluation that is so generally anticipated that the Fund is
not able to contract to sell the currency at a price above the devaluation level
it anticipates.
A-2
<PAGE>
The Fund is also authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund. As
an illustration, the Fund may use such techniques to hedge the stated value in
U.S. dollars of an investment in a pound sterling denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of pounds for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the pound relative to the dollar will tend to be offset by an increase
in the value of the put option. To offset, in whole or in part, the cost of
acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. Listed options are
third-party contracts (I.E., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. The Fund will engage in OTC options only
with member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade or futures exchanges. The Fund
will not speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities which it has committed or anticipates to purchase
which are denominated in such currency and, in the case of securities which have
been sold by the Fund but not yet delivered, the proceeds thereof in its
denominated currency. Further, the Fund will segregate at its custodian cash,
liquid equity or debt securities having a market value substantially
representing any subsequent decrease in the market value of such hedged
security, less any initial or variation margin held in the account of its
broker. The Fund may not incur potential net liabilities of more than 33 1/3% of
its total assets from foreign currency options, futures or related options.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool" as under such regulations if the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) for bona fide hedging purposes and (ii) for
non-hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
A-3
<PAGE>
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options, including
OTC foreign currency options and options on foreign currency futures, only with
member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on foreign currency futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. (Under the law of certain states, the Fund presently is
limited with respect to such investments to 10% of its net assets.) However, if
an OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (I.E., the current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Trustees of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to change or modification by the Securities
and Exchange Commission staff of its position.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. Utilization of
options and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies which are the subject of the hedge. If the price of the
options or futures moves more or less than the price of the hedged securities or
currencies, the Fund will experience a gain or loss which will not be completely
offset by movements in the price of the securities or currencies which are the
subject of the hedge. Transactions in options and options on futures contracts
involve similar risks.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Investment Adviser or MLAM U.K. believes the Fund can receive on each business
day at least two independent bids or offers. However, there can be no assurance
that a liquid secondary market will
A-4
<PAGE>
exist at any specific time. Thus, it may not be possible to close an options or
futures position. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an open
position in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Investment
Adviser and MLAM U.K. do not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
A-5
<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:
1. ............................... 4. ...................................
2. ............................... 5. ...................................
3. ............................... 6. ...................................
(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:
Distribution Elect / / reinvest Elect / / reinvest capital gains
dividends
Options One / / pay dividends One / / pay capital gains in cash
in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
---------------------------
----------------------------
(PLEASE PRINT)
Name .......................................................
First Name Initial Last Name Social Security
No.
or Taxpayer
Identification No.
Name of Co-Owner (if any) ..................................
First Name Initial Last Name ...... , 19 ......
Date
Address ....................................................
...........................................................
(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: ..................... , 19 .....................
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:
/ / $10,000 / / $25,000 / / $50,000 / /
$100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch International Equity
Fund prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch International Equity Fund held as security.
By.................................... ......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name.............................. (2) Name..............................
- --------------------------------------------------------------------------------
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 ...... Withdrawals to be made
[Date] 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 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 a check 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 ...............................................................
or as soon thereafter as possible. (Month)
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-Code F/C No. F/C Last Name
- ------------
Dealer's Customer A/C No.
B-2
<PAGE>
[This page is intentionally left blank.]
<PAGE>
[This page is intentionally left blank.]
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0057
<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
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Fee Table........................................ 3
Alternative Sales Arrangements................... 4
Financial Highlights............................. 7
Risks and Special Considerations................. 8
Investment Objective and Policies................ 10
Management of the Fund........................... 15
Board of Trustees.............................. 15
Advisory and Management Arrangements........... 16
Transfer Agency Services....................... 18
Purchase of Shares............................... 18
Alternative Sales Arrangements................. 19
Initial Sales Charge Alternative--Class A
Shares....................................... 21
Deferred Sales Charge Alternative-- Class B
Shares....................................... 23
Redemption of Shares............................. 26
Shareholder Services............................. 27
Performance Data................................. 30
Additional Information........................... 31
Dividends and Distributions.................... 31
Taxes.......................................... 32
Determination of Net Asset Value............... 34
Organization of the Fund....................... 35
Shareholder Reports............................ 36
Shareholder Inquiries.......................... 36
Appendix A....................................... A-1
Authorization Form............................... B-1
</TABLE>
Code #16747 -- 0994
[LOGO]
Merrill Lynch
International
Equity Fund
PROSPECTUS
September 29, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------
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 September
29, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or writing
the Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus.
-------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
-------------
The date of this Statement of Additional Information is September 29, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity securities
of issuers located in countries other than the United States. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Investment Adviser"), and Merrill Lynch
Asset Management U.K. Limited, the Fund's sub-adviser ("MLAM U.K."), will effect
portfolio transactions without regard to holding period if, in their judgment,
such transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or in general market,
economic or financial conditions. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. Accordingly, while the Fund anticipates
that its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. For
the fiscal period July 30, 1993 (commencement of operations) to May 31, 1994,
the Fund's portfolio turnover rate was 50.63%. The Fund is subject to the
Federal income tax requirement that less than 30% of the Fund's gross income
must be derived from gains from the sale or other disposition of securities held
for less than three months.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued throughout the world which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradeable both in the U.S. and Europe and
are designed for use throughout the world. The Fund may invest in unsponsored
ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and GDRs are not
obligated to disclose material information in the United States, and therefore,
there may not be a correlation between such information and the market value of
such securities.
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The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes in
the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, the Investment Adviser does not believe
that these considerations will have any significant effect on its portfolio
strategy, although there can be no assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies -- Other Investment Practices --
Portfolio Strategies Involving Options, Futures and Forward Foreign Exchange
Transactions" and to Appendix A in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, and options on
such futures and forward foreign currency transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
WRITING COVERED OPTIONS. The Fund is authorized to write (I.E., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A
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closing purchase transaction cancels out the Fund's position as the writer of an
option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a partial
hedge against a decline in the price of the underlying security.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
PURCHASING OPTIONS. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund will not
purchase options on securities if as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the prices of
the options and futures contract move more or less than the prices of the hedged
securities and currencies, the Fund will experience a gain or loss which will
not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such option or future.
However, there can be no assurance
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that a liquid secondary market will exist for any particular call or put option
or futures contract at any specific time. Thus, it may not be possible to close
an option or futures position. The Fund will acquire only over-the-counter
options for which management believes the Fund can receive on each business day
at least two independent bids or offers (one of which will be from an entity
other than a party to the option) unless there is only one dealer, in which case
such dealer's price will be used. In the case of a futures position or an option
on a futures position written by the Fund, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin requirements at
a time when it may be disadvantageous to do so. In addition, the Fund may be
required to take or make delivery of the security or currency underlying the
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Investment Adviser and
MLAM U.K. do not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, I.E., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange between currencies of the different countries in
whose securities it will invest as a hedge against possible variations in the
foreign exchange rates between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Fund enters into a position
hedging transaction, its custodian will place cash or liquid securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. If the value of
the securities placed in the separate account declines, additional cash or
securities will be placed in
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the account so that the value of the account will equal the amount of the Fund's
commitment with respect to such contracts. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 15% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Repurchase agreements usually cover
short periods, such as under one week. Repurchase agreements may be construed to
be collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. As a purchaser, the Fund will require the seller
to provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but constitute only collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
or possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform.
LENDING OF PORTFOLIO SECURITIES. Subject to investment restriction (7)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive collateral in cash or securities issued or guaranteed by the U.S.
Government which are maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. The purpose of such loans
is to permit the borrowers to use such securities for delivery to purchasers
when such borrowers have sold short. If cash collateral is received by the Fund,
it is invested in short-term money market securities, and a portion of the yield
received in respect of such investment is retained by the Fund. Alternatively,
if securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loan premium to be received by the Fund for lending its
portfolio securities. In either event, the total yield on the Fund's portfolio
is increased by loans of its portfolio securities. The Fund will have the right
to regain record ownership of loaned securities to exercise
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beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
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
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at the maximum offering price. Under the law of certain states, the Fund
presently is limited with respect to the investments described in investment
restriction (10) above to 10% of its net assets. The policies set forth in this
paragraph may be amended without the approval of the Fund's shareholders.
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter ("OTC") options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options if,
as a result of any such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 15% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. (Under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net assets.)
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (I.E., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Trustees of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Securities and Exchange Commission staff of its position.
Because of the affiliation of the Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage". Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Investment Adviser
or its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933, as amended,
in which such firms or any of their affiliates participate as an underwriter or
dealer.
The investment restrictions set forth in the Prospectus contain an exception
that permits the Fund to purchase securities pursuant to the exercise of
subscription rights, subject to the condition that such purchase will not result
in the Fund ceasing to be a diversified investment company. Japanese and
European corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such rights would
result in the Fund's interest in the issuing company being diluted. The market
for such rights is not well developed, and accordingly, the Fund may not always
realize full value on the sale of rights. Therefore, the exception applies in
cases where the limits set forth in the investment restrictions in the
Prospectus would otherwise be exceeded by exercising rights or have already been
exceeded as a result of fluctuations in the market value of the Fund's portfolio
securities with the result that the Fund would otherwise be forced either to
sell securities at a time when it might not otherwise have done so or to forego
exercising the rights.
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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 and its predecessors since 1977 and Chief Investment Officer since 1976;
President of Fund Asset Management, L.P. ("FAM") and its predecessors since 1977
and Chief Investment Officer since 1976; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since 1990
and a Senior Vice President thereof from 1985 to 1990; Executive Vice President
of Merrill Lynch & Co., Inc. since 1990; Director of the Distributor.
DONALD CECIL -- TRUSTEE(2) -- 1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER -- TRUSTEE(2) -- 777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY -- TRUSTEE(2) -- 9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
RICHARD R. WEST -- TRUSTEE(2) -- 482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Director of Re
Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), SmithCorona Corporation
(manufacturer of typewriters and word processors) and Alexander's, Inc. (real
estate company).
TERRY K. GLENN -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice President
of the Investment Adviser and FAM and their predecessors 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 and their predecessors since 1982; Senior Vice
President of Princeton Services since 1993.
ANDREW JOHN BASCAND -- VICE PRESIDENT(1)(2) -- Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset Management
plc in London from 1992 to 1993 and Chief Economist of A.M.P. Investments (NZ)
in New Zealand from 1989 to 1991; Economic Adviser to the Chief Economist of the
Reserve Bank of New Zealand from 1987 to 1989.
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ADRIAN HOLMES -- VICE PRESIDENT(1)(2) -- Vice President of the Investment
Adviser and its predecessors since 1990 and associated therewith since 1987.
STEPHEN I. SILVERMAN -- VICE PRESIDENT(1)(2) -- Vice President of the
Investment Adviser and its predecessors since 1983.
GRACE PINEDA -- VICE PRESIDENT(1)(2) -- Vice President and Senior Portfolio
Manager of the Investment Adviser and its predecessors since 1989; analyst and
portfolio manager at Clemente Capital, Inc. from 1982 to 1989.
DONALD C. BURKE -- VICE PRESIDENT(1)(2) -- Vice President and Director of
Taxation of the Investment Adviser and its predecessors 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 and their predecessors 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 and its predecessors since 1985; attorney associated with the
Investment Adviser and its predecessors since 1982.
ROBERT E. PUTNEY, III -- ASSISTANT SECRETARY(1)(2) -- Attorney associated
with the Investment Adviser and its predecessors 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 or manager.
At August 31, 1994, the officers and Trustees of the Fund as a group (15
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee of the Fund, and the other officers of
the Fund, owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Trustee not affiliated with the Investment Adviser a fee
of $3,500 per year plus $500 per Board meeting attended, together with such
Trustee's actual out-of-pocket expenses relating to attendance at meetings. The
Fund also compensates members of its audit committee, which consists of all of
the non-affiliated Trustees, at a rate of $500 per meeting attended. The
Chairman of the audit committee receives an additional fee of $250 per meeting
attended. For the fiscal period July 30, 1993 (commencement of operations) to
May 31, 1994, fees and expenses paid to unaffiliated Trustees aggregated
$26,827.
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Fund -- Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Investment Adviser or MLAM U.K. for the Fund or other
funds for which they act as investment adviser or for other advisory
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clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliates
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser. As described in the
Prospectus, the Investment Adviser receives for its services to the Fund monthly
compensation at the rate of 0.75% of the average daily net assets of the Fund.
For the fiscal period July 30, 1993 (commencement of operations) to May 31,
1994, the investment advisory fees paid by the Fund to the Investment Adviser
aggregated $4,054,791.
The Investment Adviser has also entered into a sub-advisory agreement with
MLAM U.K., a wholly-owned, indirect subsidiary of Merrill Lynch & Co., Inc. and
an affiliate of the Investment Adviser, pursuant to which the Investment Adviser
pays MLAM U.K. a fee in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount that
the Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. For the fiscal period July 30,
1993 (commencement of operations) to May 31, 1994, the sub-advisory fees paid by
the Investment Advisor to MLAM U.K. aggregated $401,250.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
assets. The Investment Adviser's obligation to reimburse the Fund is limited to
the amount of the investment advisory fee. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
The Fund has received an order from the State of California partially
waiving expense limitations described above. Pursuant to the terms of such
order, the expense limitations that would otherwise apply are waived to the
extent the Fund's expense for custodial services, management and auditing fees
exceeds the average of such fees of a group of funds managed by the Investment
Adviser or its subsidiary which primarily invest domestically. For the period
July 30, 1993 (commencement of operations) to May 31, 1994, no reimbursement of
expenses was required pursuant to the applicable expense limitations discussed
above.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Trustees of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Securities and Exchange Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Trustees; accounting and pricing costs
(including the daily calculation of net asset value);
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insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses; and other expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Investment Adviser, and the
Fund reimburses the Investment Adviser for its costs in connection with such
services on a semi-annual basis. For the fiscal period July 30, 1993
(commencement of operations) to May 31, 1994, the amount of such reimbursement
was $142,452. The Distributor will pay certain promotional expenses of the Fund
incurred in connection with the offering of its shares. Certain expenses will be
financed by the Fund pursuant to distribution plans in compliance with Rule
12b-1 under the Investment Company Act. See "Purchase of Shares -- 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 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
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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 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 May 31,
1994, the Fund sold its shares through the Distributor and Merrill Lynch, as a
dealer. During the fiscal period July 30, 1993 (commencement of operations) to
May 31, 1994, the Fund sold 22,000,407 Class A shares for aggregate net proceeds
to the Fund of $236,735,011. The gross sales charges for the sale of Class A
shares of the Fund for that year were $4,503,139, of which $228,657 and
$4,273,549 were received by the Distributor and Merrill Lynch, respectively.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
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
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<PAGE>
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 public offering price of the Class A shares then being purchased plus (b) an
amount equal to the then current net asset value or cost, whichever is higher,
of the purchaser's combined holdings of 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. Shares held in the name of a nominee or custodian under
pension, profit-sharing, or other employee benefit plans may not be combined
with other shares to qualify for the right of accumulation.
LETTER OF INTENTION. Reduced sales charges are applicable to purchases
aggregating $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
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 remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of
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<PAGE>
such Letter would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the Class A
shares then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch
U.S. Treasury Money Fund or Merrill Lynch U.S.A. Government Reserves into the
Fund that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
EMPLOYER SPONSORED RETIREMENT AND SAVINGS PLANS._Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Section 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the Investment Adviser
either directly or through an affiliate. Class A shares are being offered at net
asset value to Employer Sponsored Retirement or Savings Plans, provided the plan
has accumulated $5 million or more in existing plan assets invested in mutual
funds advised by the Investment Adviser charging a front-end sales charge or
contingent deferred sales charge. Assets of Employer Sponsored Retirement or
Savings Plans sponsored by the same sponsor or an affiliated sponsor may be
aggregated. The Class A share reduced load breakpoints also apply to these
aggregated assets. Class A shares may be offered at net asset value to multiple
plans sponsored by the same sponsor or an affiliated sponsor provided that the
addition of one or more of the multiple plans results in aggregate assets of $5
million or more invested in portfolios, mutual funds or trusts advised by the
Investment Adviser either directly or through an affiliate. Employer Sponsored
Retirement or Savings Plans are also offered Class A shares at net asset value,
provided such plan initially has 1,000 or more employees eligible to participate
in the plan. Employees eligible to participate in Employer Sponsored Retirement
or Savings Plans of the same sponsoring employer or its affiliates may be
aggregated. Tax qualified retirement plans within the meaning of Section 401(a)
of the Code meeting any of the foregoing requirements and which are provided
specialized services (E.G., plans whose participants may direct on a daily basis
their plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch Blueprint-SM- Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and 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 Employer Sponsored Retirement
or Savings Plans.
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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
Merrill Lynch Senior Floating Rate Fund, Inc. (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 Merrill Lynch Senior Floating Rate Fund, Inc.
in shares of the Fund. In order to exercise this investment option, Merrill
Lynch Senior Floating Rate Fund, Inc. shareholders must sell their Merrill Lynch
Senior Floating Rate Fund, Inc. shares to Merrill Lynch Senior Floating Rate
Fund, Inc. in connection with a tender offer conducted by Merrill Lynch Senior
Floating Rate Fund, Inc. and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Merrill
Lynch Senior Floating Rate Fund, Inc. shares as to which no Early Withdrawal
Charge (as defined in the Merrill Lynch Senior Floating Rate Fund, Inc.
prospectus) is applicable. Purchase orders from Merrill Lynch Senior Floating
Rate Fund, Inc. shareholders wishing to exercise this investment option will be
accepted only on the day that the related Merrill Lynch Senior Floating Rate
Fund, Inc. 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.
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.
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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.
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
May 31, 1994, the Distributor received contingent deferred sales charges of
$428,332, all of which was paid to Merrill Lynch.
RETIREMENT PLANS. Any Retirement Plan which does not meet the qualifications
to purchase Class A 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
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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 contingent deferred sales charge is also waived for any Class
B shares which are purchased by a Merrill Lynch rollover IRA, that was funded by
a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group, and held in such account at the time of redemption. The minimum initial
and subsequent purchase requirements are waived in connection with all the above
referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser and MLAM U.K. are primarily responsible for the execution of
the Fund's portfolio transactions and the allocation of brokerage. In executing
such transactions, the Investment Adviser and MLAM U.K. seek to obtain the best
net results for the Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order, difficulty
of execution and operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Investment Adviser and MLAM U.K.
generally seek reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available. The Fund has no
obligation to deal with any broker or group of brokers in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the
Investment Adviser and MLAM U.K. may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser and MLAM U.K. under
the Investment 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
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exchanges or traded in over-the-counter markets in the United States or Europe,
as the case may be. ADRs, like other securities traded in the United States, as
well as GDRs traded in the United States, will be subject to negotiated
commission rates.
The Fund may invest in securities traded in the over-the-counter markets and
intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Securities and Exchange Commission. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. See "Investment Objective
and Policies -- Investment Restrictions". For the fiscal period July 30, 1993
(commencement of operations) to May 31, 1994, the Fund paid total brokerage
commissions of $2,692,776, of which $122,601 or 4.6% was paid to Merrill Lynch
for effecting 4.7% of the aggregate amount of transactions on which the Fund
paid brokerage commissions.
The Board of Trustees has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Trustees made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Securities and Exchange Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund, and annual statements as
to aggregate compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday at 4:15 p.m., New York time, on each day during which the
New York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund also will determine
its net asset value on any day in which there is sufficient trading in its
portfolio securities that the net asset value
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<PAGE>
might be affected materially, but only if on any such day the Fund is required
to sell or redeem shares. Any assets or liabilities initially expressed in terms
of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the 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 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. 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. 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.
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<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services, copies of the various plans described below and instructions as to how
to participate in the various services or plans, or how to charge options with
respect thereto, can be obtained from the Fund, the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive quarterly statements from the transfer
agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The quarterly statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A 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
$100 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.
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<PAGE>
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 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.
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
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<PAGE>
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
ON OR ABOUT OCTOBER 24, 1994, THE EXCHANGE PRIVILEGE DESCRIBED BELOW WILL BE
MODIFIED AS EXPLAINED IN THE PROSPECTUS UNDER "SHAREHOLDER SERVICES -- EXCHANGE
PRIVILEGE".
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares for shares of the same class of the funds that issue Class A and
Class B shares listed below. In addition, Class A shareholders of the Fund may
exchange their Class A shares of the Fund for the shares of the "Class A money
market funds", and Class B shareholders of the Fund may exchange their shares
for shares of the "Class B money market funds", on the basis described below.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. 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 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 a money market fund advised by the Investment Adviser or
its affiliates 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
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<PAGE>
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 Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund's Class B shares for two and a half years. The 2.0% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no contingent deferred sales charge
due on this redemption, since by "tacking" the two and a half year holding
period of the Fund's Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares of the Fund
into shares of a money market fund advised by the Investment Adviser or its
affiliates, but the period of time that the Class B shares are held in a 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 money market fund which were acquired as a result of an
exchange for Class B shares of the 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 continued to hold for an additional two and a half years, any
subsequent redemption will not incur a contingent deferred sales charge.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
<TABLE>
<S> <C>
FUNDS ISSUING CLASS A AND CLASS B SHARES:
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC.................................. High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
</TABLE>
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<TABLE>
<S> <C>
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 ARKANSAS MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ASSET GROWTH FUND, INC......... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types
of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND, INC......... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND FOR INVESTMENT
AND RETIREMENT............................. As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 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 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 manage-
ment.
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH CONNECTICUT 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 Connecticut income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND FUND, INC....... Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.................................. Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital
markets.
MERRILL LYNCH DRAGON FUND, INC............... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin,
other than Japan, Australia and New
Zealand.
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 share-
holders the opportunity to own securities
exempt from Florida intangible personal
property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC......... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND,
INC........................................ Long-term growth 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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL HOLDINGS
(residents of Arizona must meet investor
suitability standards)..................... The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST......... Long-term growth and protection of capital
from investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND, INC...... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market
capitalizations located in various foreign
countries and in the United States.
MERRILL LYNCH GLOBAL UTILITY FUND, INC....... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the
ownership or operation of facilities used
to generate, transmit or distribute
electricity, telecommunications, gas or
water.
MERRILL LYNCH GROWTH FUND FOR INVESTMENT AND
RETIREMENT................................. Growth of capital and, secondarily, income
from investment in a diversified portfolio of
equity securities placing principal
emphasis on those securities which
management of the fund believes to be un-
dervalued.
</TABLE>
<TABLE>
<S> <C>
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards)..................... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH LATIN AMERICA
FUND, INC.................................. Capital appreciation by investing primarily
in Latin American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Maryland income
taxes as is consistent with prudent
investment management.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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.
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.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM
FUND....................................... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is 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 MEXICO 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 Mexico income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is 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.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
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.
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 port-
folio of intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Pennsylvania income
taxes as is consistent with prudent
investment management.
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
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 SHORT-TERM GLOBAL INCOME FUND,
INC........................................ As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality
debt securities denominated in various
currencies and multinational currency units
and having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC........ Long-term growth of capital from investments
in securities, primarily equities, of
relatively small companies believed to have
special investment value and emerging
growth companies regardless of size.
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 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.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH WORLD INCOME FUND, INC......... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies,
including multinational currencies.
CLASS A MONEY MARKET FUNDS:
MERRILL LYNCH READY ASSETS TRUST............. Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only for exchanges
within certain retirement plans)........... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation
of capital and liquidity available from
investing in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES................................... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND....... Preservation of capital, liquidity and
current income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
CLASS B MONEY MARKET FUNDS:
MERRILL LYNCH GOVERNMENT FUND................ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities is-
sued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND....................................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
MERRILL LYNCH TREASURY FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obliga-
tions of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements
secured by such obligations.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an 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 continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A
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.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
36
<PAGE>
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 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 ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain 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 shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes. For this purpose, the Fund will allocate foreign taxes and
foreign source income 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.
37
<PAGE>
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.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires the RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
The Fund may invest up to 10% of its total assets in securities of
closed-end investment companies. If the Fund purchases shares of an investment
company (or similar investment entity) organized under foreign law, the Fund
will be treated as owning shares in a passive foreign investment company
("PFIC") for U.S. Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of interest (the
"interest charge"), on a portion of the distributions from such a company and on
gain from the disposition of the shares of such a company (collectively referred
to as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the distributions
received from such PFICs. Alternatively, under proposed regulations the Fund
would be able to elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares.
Unrealized losses, however, would not be recognized. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, I.E., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss in connection with the contract treated as ordinary
gain or loss under Code Section 988 (as described below), gain or loss from
Section 1256 contracts will be 60% long-term and 40%
38
<PAGE>
short-term capital gain or loss. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of changes in price or interest or currency exchange rates
with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts and its short sales of securities. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses incurred
in certain closing transactions in options, futures and forward foreign exchange
contracts and short sales of securities.
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 option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a 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 and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a
39
<PAGE>
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
-------------------
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
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.
40
<PAGE>
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
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED ON INVESTMENT AT PERCENTAGE BASED ON INVESTMENT AT
A HYPOTHETICAL THE END OF THE A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- ---------------------------------------- ------------------- ---------------- ------------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
July 30, 1993 (commencement of
operations) to May 31, 1994............ 9.18% $ 1,076.20 12.57% $ 1,104.00
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to May 31, 1994............ 15.10% $ 1,151.00 14.40% $ 1,144.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
July 30, 1993 (commencement of
operations) to May 31, 1994............ 7.62% $ 1,076.20 10.40% $ 1,104.00
</TABLE>
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 multiple classes of shares.
Upon liquidation of the Fund, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to
shareholders, except for any expenses which may be attributable only to one
class. Shares have no preemptive 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
41
<PAGE>
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.
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 May
31, 1994, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------- --------------
<S> <C> <C>
Net Assets............................................................. $ 208,006,811 $ 844,294,881
-------------- --------------
-------------- --------------
Number of Shares Outstanding........................................... 18,068,449 73,799,056
-------------- --------------
-------------- --------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding).......................................................... $ 11.51 $ 11.44
Sales Charge (for Class A shares: 6.50% of offering price (6.95% of net
amount invested*)).................................................... $ 0.80 $ **
-------------- --------------
Offering Price......................................................... $ 12.31 $ 11.44
-------------- --------------
-------------- --------------
<FN>
- ---------
* 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.
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to
42
<PAGE>
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.
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 August 31, 1994.
The Fund was organized as an unincorporated business trust under the laws of
Massachusetts on January 3, 1992. Its executive offices are located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
-------------------
The Declaration of Trust establishing the Fund, dated January 3, 1992, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch International Equity Fund" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of said Fund
but the "Trust Property" only shall be liable.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH INTERNATIONAL EQUITY FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch International Equity Fund, as of
May 31, 1994, the related statements of operations and changes in net assets,
and the financial highlights for the period from July 30, 1993 (commencement of
operations) to May 31, 1994. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at May 31, 1994, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
International Equity Fund as of May 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the period from July
30, 1993 to May 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 13, 1994
44
<PAGE>
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Shares Value Percent of
AFRICA Industries Held Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
South Mining 330,000 De Beers Consolidated Mines Ltd.
Africa (ADR)(a) $ 7,820,253 $ 6,930,000 0.7%
Total Investments in Africa 7,820,253 6,930,000 0.7
LATIN
AMERICA
Argentina Banking 109,425 Banco de Galicia y Buenos Aires S.A.
(ADR)(a) 2,983,033 4,130,794 0.4
Energy 161,600 Yacimientos Petroliferos Fiscales S.A.
Sponsored)(ADR)(a) 4,030,726 4,262,200 0.4
Utilities 31,000 ++Transportadora de Gas Del Sur(TGS)(c) 426,061 434,000 0.0
Total Investments in Argentina 7,439,820 8,826,994 0.8
Brazil Banking 219,915,138 Banco Bradesco PN 1,792,139 1,524,566 0.1
Mining 19,900,000 Companhia Vale do Rio Doce S.A. 2,156,632 2,016,297 0.2
Telecommunications 75,100 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)(a)(c) 2,825,087 2,816,250 0.3
16,605,580 Telecomunicacoes Brasileiras S.A.--
Telebras PN 626,531 487,128 0.0
91,069,200 Telecomunicacoes Brasileiras S.A.--
Telebras (Preferred) 3,396,481 3,496,647 0.3
3,510,000 Telecomunicacoes de Sao Paulo S.A.
(Preferred) 1,036,415 1,020,120 0.1
------------- ------------- ------
7,884,514 7,820,145 0.7
Utilities--Electric 200,300 Companhia Energetica de Minas Gerais
S.A.(CEMIG)(ADR)(a) 4,545,774 3,054,575 0.3
Total Investments in Brazil 16,379,059 14,415,583 1.3
</TABLE>
45
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<TABLE>
<CAPTION>
LATIN AMERICA Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Chile Building & 55,000 Maderas y Sinteticos S.A.(MASISA)
Construction (Sponsored)(ADR)(a) $ 977,412 $ 1,512,500 0.1%
Telecommunications 20,000 Compania de Telefonos de Chile S.A.
(ADR)(a) 2,406,988 1,820,000 0.2
Total Investments in Chile 3,384,400 3,332,500 0.3
Mexico Beverages 278,000 Fomento Economico Mexicano, S.A. de C.V.
(Femsa)(ADR)(a)(c) 1,742,736 1,310,075 0.1
356,000 Fomento Economico Mexicano, S.A. de C.V.
(Femsa)(Class B) 1,965,085 1,746,779 0.2
215,000 Panamerican Beverages, Inc.(Class A) 6,826,250 6,423,125 0.6
------------- ------------- ------
10,534,071 9,479,979 0.9
Building & 89,437 Cementos Mexicanos, S.A. de C.V. (Cemex)
Construction (Class B)(ADR)(a) 1,607,856 1,274,477 0.1
953,437 Cementos Mexicanos, S.A. de C.V. Nom 'B'
(Cemex) 6,646,928 7,046,020 0.7
181,821 Grupo Tribasa, S.A. de C.V. (ADR)(a) 4,762,433 5,045,533 0.5
------------- ------------- ------
13,017,217 13,366,030 1.3
Diversified 210,000 ++Grupo Carso, S.A. de C.V.(ADR)(a) 4,070,394 4,200,000 0.4
735,000 Grupo Carso, S.A. de C.V. Series A 5,890,684 7,323,450 0.7
------------- ------------- ------
9,961,078 11,523,450 1.1
Financial Services 119,700 Servicios Financieros Quadrum,
S.A. de C.V. (ADR)(a)(c) 2,451,561 2,154,600 0.2
Leisure 75,000 Grupo Situr, S.A.(ADR)(a)(c) 1,875,000 2,165,625 0.2
542,000 Grupo Situr, S.A.(Ordinary) 1,640,868 1,517,339 0.1
------------- ------------- ------
3,515,868 3,682,964 0.3
Retail Stores 921,000 Cifra, S.A. de C.V. (Class C) 2,498,768 2,423,101 0.2
Telecommunications 215,600 Telefonos de Mexico, S.A. de C.V.(Telmex)
(ADR)(a) 12,419,026 13,394,150 1.3
Total Investments in Mexico 54,397,589 56,024,274 5.3
Peru Mining 227,266 Southern Peru Copper Corp. 728,471 873,300 0.1
Total Investments in Peru 728,471 873,300 0.1
Venezuela Foods 140,000 Mavesa S.A.(ADR)(a)(c) 1,004,375 910,000 0.1
400,000 Mavesa S.A.(Ordinary) 137,354 134,211 0.0
------------- ------------- ------
1,141,729 1,044,211 0.1
Utilities--Electric 141,960 C.A. La Electricidad de Caracas
S.A.I.C.A.-S.A.C.A. 332,605 357,702 0.0
Total Investments in Venezuela 1,474,334 1,401,913 0.1
Total Investments in Latin America 83,803,673 84,874,564 7.9
NORTH
AMERICA
Canada Foreign Government Canadian Government Bonds:
Obligations C$ 12,750,000 6.50% due 8/01/1996 10,008,529 8,979,314 0.9
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NORTH Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
25,800,000 5.75% due 3/01/1999 $ 18,644,485 $ 16,763,480 1.6%
-------------- ------------- ------
28,653,014 25,742,794 2.5
Total Investments in North America 28,653,014 25,742,794 2.5
PACIFIC
BASIN
Australia Diversified 2,067,000 BTR NYLEX 5,250,110 4,714,906 0.4
Engineering & 2,160,000 Australia National Industries, Ltd.
Construction (Ordinary) 2,844,419 3,268,750 0.3
Food & Beverage 768,836 Coca-Cola Amatil, Ltd.(Ordinary) 3,798,092 4,858,268 0.5
3,900,000 Goodman Fielder Wattie, Ltd.(Ordinary) 4,500,227 4,001,782 0.4
-------------- ------------- ------
8,298,319 8,860,050 0.9
Food & Household 1,762,200 Burns Philp & Co., Ltd.(Ordinary) 5,417,082 5,099,356 0.5
Products
Media 704,074 The News Corp. Ltd. 5,132,939 4,690,015 0.4
Natural Gas 372,000 Broken Hill Proprietary Co. 5,154,321 5,030,862 0.5
Real Estate 494,221 Lend Lease Corp. 5,964,856 6,019,760 0.6
Total Investments in Australia 38,062,046 37,683,699 3.6
Hong Kong Banking 3,158,000 Winton Holdings 1,200,321 970,843 0.1
Property 2,588,000 Hang Lung Development Co., Ltd.(Ordinary) 4,128,204 4,689,923 0.4
Telecommunications 2,638,000 Hong Kong Telecommunications Ltd.
(Ordinary) 4,492,512 5,224,439 0.5
Utilities 2,196,000 The Hong Kong & China Gas Co.(Ordinary) 3,963,130 4,633,331 0.4
183,000 ++The Hong Kong & China Gas Co.
(Warrants)(b) 0 104,819 0.0
-------------- ------------- ------
3,963,130 4,738,150 0.4
Utilities--Electric 1,551,600 China Light & Power Co., Ltd. (Ordinary) 7,552,276 8,636,179 0.8
Total Investments in Hong Kong 21,336,443 24,259,534 2.2
Japan Automobiles 1,239,000 Suzuki Motor Co. (Ordinary) 14,003,522 16,464,723 1.6
407,000 Toyota Motor Corp. 7,430,442 8,210,038 0.8
-------------- ------------- ------
21,433,964 24,674,761 2.4
Beverages 99,000 Chukyo Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,398,440 1,372,371 0.1
106,000 Hokkaido Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,754,547 1,773,423 0.2
102,000 Kinki Coca-Cola Bottling Co., Ltd.
(Ordinary) 1,893,379 1,901,530 0.2
111,000 Mikuni Coca-Cola Bottling Co., Ltd. 2,093,307 1,899,522 0.2
111,000 Sanyo Coca-Cola Bottling Co., Ltd. 1,874,646 1,941,969 0.2
-------------- ------------- -------
9,014,319 8,888,815 0.9
Capital Goods 2,800,000 Mitsubishi Heavy Industries, Ltd. 18,078,701 20,531,549 1.9
Chemicals 116,000 Shimachu Co. (Ordinary) 4,860,372 4,934,990 0.5
250,000 Shin-Etsu Chemical Co., Ltd. (Ordinary) 5,053,884 5,282,027 0.5
-------------- ------------- ------
9,914,256 10,217,017 1.0
</TABLE>
47
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
PACIFIC BASIN Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
JAPAN Construction 446,000 Sanki Engineering Co., Ltd. $ 6,307,262 $ 5,585,660 0.5%
(concluded) 371,000 Taihei Dengyo Kaisha, Ltd. 9,667,248 10,534,130 1.0
-------------- ------------- ------
15,974,510 16,119,790 1.5
Consumer 535,000 Matsushita Electric Industrial Co., Ltd. 8,511,279 9,359,943 0.9
Electronics 267,000 Rohm Co. 9,371,978 10,925,048 1.0
-------------- ------------- ------
17,883,257 20,284,991 1.9
Diversified 238,000 Sony Corp.(Ordinary) 13,375,906 14,152,581 1.3
Electric Construction 214,000 Chudenko Corp.(Ordinary) 8,045,860 8,285,851 0.8
Electrical Equipment 569,000 The Nippon Signal Co., Ltd. 7,950,113 7,180,497 0.7
1,415,000 Sumitomo Electric Industries, Ltd. 19,791,497 21,509,082 2.0
-------------- ------------- ------
27,741,610 28,689,579 2.7
Electronics 872,000 Hitachi Ltd. 7,650,968 9,003,442 0.9
390,000 Murata Manufacturing Co., Ltd. 15,255,815 17,449,331 1.7
-------------- ------------ ------
22,906,783 26,452,773 2.6
Iron & Steel 330,000 Maruichi Steel Tube, Ltd.(Ordinary) 5,881,382 6,025,813 0.6
Office Equipment 1,154,000 Canon, Inc.(Ordinary) 17,439,277 19,196,558 1.8
Packaging 609,000 Toyo Seikan Kaisha, Ltd.(Ordinary) 17,864,689 17,466,539 1.7
Pharmaceuticals 699,000 Sankyo Co., Ltd.(Ordinary) 17,050,198 15,637,285 1.5
763,000 Taisho Pharmaceutical Co., Ltd.(Ordinary) 15,232,435 14,588,910 1.4
-------------- ------------- ------
32,282,633 30,226,195 2.9
Photography 743,000 Fuji Photo Film Co., Ltd. 17,555,576 16,124,379 1.5
Property & Casualty 1,475,000 Dai-Tokyo Fire & Marine Insurance
Insurance Co., Ltd. 11,241,300 11,577,199 1.1
851,000 Fuji Fire & Marine Insurance Co., Ltd. 5,819,056 5,613,671 0.5
1,268,000 Koa Fire & Marine Insurance Co., Ltd. 8,833,667 8,849,331 0.8
363,000 Mitsui Marine & Fire Insurance Co., Ltd. 2,929,014 3,036,568 0.3
1,566,000 Nichido Fire & Marine Insurance Co., Ltd. 11,986,774 12,725,621 1.2
351,000 Nippon Fire & Marine Insurance Co., Ltd. 2,500,899 2,647,600 0.3
1,217,000 Sumitomo Marine & Fire Insurance Co.,
Ltd. 10,299,475 11,634,799 1.1
1,352,000 Tokio Marine & Fire Insurance Co., Ltd. 16,730,311 17,707,839 1.7
1,257,000 Yasuda Fire & Marine Insurance Co., Ltd. 9,408,702 10,010,335 0.9
-------------- ------------- ------
79,749,198 83,802,963 7.9
Retail Sales 372,000 Ito-Yokado Co., Ltd.(Ordinary) 18,707,735 19,133,461 1.8
Retail Stores 33,000 Sangetsu Co.(Ordinary) 1,170,180 1,119,981 0.1
Telecommunications 278 Nippon Telephone & Telegraph Corp.
(Ordinary) 2,565,202 2,298,948 0.2
112,000 Nisshinbo Industries 1,045,613 1,263,480 0.1
-------------- ------------ -----
3,610,815 3,562,428 0.3
Transportation 878,000 Nippon Express Co., Ltd. 8,878,536 9,149,331 0.9
-------------- ------------ ------
Total Investments in Japan 367,509,187 384,105,355 36.5
Malaysia Leisure 157,000 Genting BHD 1,450,561 1,886,946 0.2
Steel 1,032,000 Maruichi Malaysia Steel Tube BHD 2,616,958 2,880,782 0.3
</TABLE>
48
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
PACIFIC BASIN Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Telecommunications 118,000 Uniphone Telecommunications BHD $ 462,197 $ 594,735 0.1%
Total Investments in Malaysia 4,529,716 5,362,463 0.6
New Paper & Forest Product 2,967,800 Carter Holt Harvey, Ltd. 6,873,959 6,861,040 0.7
Zealand
Telecommunication 60,000 Telecom Corp. of New Zealand
(Class C)(ADR)(a) 2,698,682 2,797,500 0.3
Total Investments in New Zealand 9,572,641 9,658,540 1.0
South Financial Services 170,590 Hanyang Securities Co. 3,913,001 3,027,348 0.3
Korea
Foods 1,400 ++Lotte Confectionary Co.(Ordinary) 188,438 167,607 0.0
Utilities 130,000 ++Korea Electric Power Corp. 4,919,521 4,968,975 0.5
Total Investments in South Korea 9,020,960 8,163,930 0.8
Thailand Banking 369,100 Bangkok Bank Co., Ltd.(Foreign Registered) 2,591,948 3,106,360 0.3
Total Investments in Thailand 2,591,948 3,106,360 0.3
Total Investments in the Pacific Basin 452,622,941 472,339,881 45.0
SOUTHEAST
ASIA
India Publishing & Broadcasting 380,000 ++Videocon International Ltd.(ADR)(a) 4,045,504 3,040,000 0.3
Total Investments in Southeast Asia 4,045,504 3,040,000 0.3
WESTERN
EUROPE
Austria Utilities 46,355 Verbund Oesterreichische Elekrizitats AG 2,625,340 2,361,859 0.2
Total Investments in Austria 2,625,340 2,361,859 0.2
Belgium Banking 15,000 Generale de Banque S.A.(Ordinary) 3,677,777 3,649,128 0.3
Chemicals 3,200 Solvay Group(Ordinary) 1,240,133 1,489,802 0.1
Retail Trade 70,000 Delhaize 'le Lion' Group(Ordinary) 2,882,324 2,830,624 0.3
Total Investments in Belgium 7,800,234 7,969,554 0.7
Finland Banking 800,000 Kansallis-Osake-Pankki 2,025,866 1,765,777 0.2
Commodity Linked US$36,000,000 Finnish Export Credit, 0.00%
Notes due 3/10/1997(d) 36,000,000 35,737,200 3.4
Diversified 235,000 Outokumpu OY 3,395,069 3,976,677 0.4
Paper & Forest 306,500 Enso-Gutzeit OY 1,987,636 2,226,856 0.2
Products 86,150 Metsa Serla OY 3,366,405 3,533,660 0.3
165,300 Repola OY S(c) 2,629,547 2,736,403 0.3
-------------- ------------- ------
7,983,588 8,496,919 0.8
Total Investments in Finland 49,404,523 49,976,573 4.8
</TABLE>
49
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(continued)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
France Automobiles 33,050 Peugeot S.A. $ 4,338,149 $ 4,750,791 0.5%
Banking 26,092 Compagnie Financiere de Paribas 2,018,937 1,812,717 0.2
2,900 Compagnie Financiere de Paribas(Ordinary)
(New Shares) 184,249 191,169 0.0
35,300 Compagnie Financiere de Suez(Ordinary) 2,018,337 1,908,006 0.2
19,000 Societe Generale de Surveillance S.A.
(Class A)(Ordinary) 2,052,425 2,062,722 0.2
-------------- ------------- ------
6,273,948 5,974,614 0.6
Chemicals 155,900 Rhone-Poulenc S.A. 3,910,519 3,900,270 0.4
Insurance 35,400 Societe Centrale du Groupe des Assurances
Nationales S.A. 3,149,239 2,686,450 0.3
Total Investments in France 17,671,855 17,312,125 1.8
Germany Automobile Parts 13,500 Continental AG 2,068,760 2,237,682 0.2
21,000 ++Continental AG(Warrants)(b) 1,195,162 1,194,343 0.1
-------------- ------------- ------
3,263,922 3,432,025 0.3
Automobiles 10,520 Daimler-Benz AG 4,945,899 5,167,214 0.5
3,815 Volkswagen AG (Preferred) 711,409 880,652 0.1
26,212 ++Volkswagen AG (Preferred)(Warrants)(b) 2,406,624 2,723,242 0.3
-------------- ------------- ------
8,063,932 8,771,108 0.9
Banking 13,867 Deutsche Bank AG(Ordinary) 6,786,387 6,216,532 0.6
Chemicals 15,212 BASF AG(Ordinary) 2,448,022 2,886,949 0.3
23,946 Bayer AG(Ordinary) 4,396,079 5,288,803 0.5
-------------- ------------- ------
6,844,101 8,175,752 0.8
Insurance 3,650 ++Allianz AG Holding(Warrants)(b) 140,309 172,065 0.0
1,350 ++Munich Reinsurance Co.(Ordinary) 2,359,488 2,422,445 0.2
-------------- ------------- ------
2,499,797 2,594,510 0.2
Machinery 68,200 Kloeckner Werke AG 3,365,767 6,160,402 0.6
Metal & Mining 29,860 Thyssen AG(Ordinary) 4,172,755 5,022,074 0.5
Utilities 41,000 ++Vereinigte Elektrizitaets & Bergwerks AG
(Veba)(Warrants)(b) 1,765,109 1,857,968 0.2
Total Investments in Germany 36,761,770 42,230,371 4.1
Greece Beverages 29,810 Hellenic Bottling Co. S.A. 792,760 854,529 0.1
Financial Services 44,800 Etba Leasing S.A.(Ordinary) 1,628,693 1,093,631 0.1
Total Investments in Greece 2,421,453 1,948,160 0.2
Hungary Foods 5,250 Pick Szeged Reszvenytarsasag(ADR)(a) 366,608 348,679 0.0
Total Investments in Hungary 366,608 348,679 0.0
Ireland Building & 610,000 CRH PLC (Ordinary) 2,912,864 3,157,238 0.3
Construction
Closed-End Funds 1,400,000 First Ireland Investment Co. 2,176,323 2,031,725 0.2
</TABLE>
50
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(continued)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Foreign Government IEP3,500,000 Irish Gilts, 9.25% due 7/11/2003 $ 5,950,560 $ 5,419,063 0.5%
Obligations
Forest Products 1,710,300 Jefferson Smurfit Group PLC(Ordinary) 8,331,246 8,093,413 0.8
Total Investments in Ireland 19,370,993 18,701,439 1.8
Italy Diversified 2,220,000 Compagnie Industrial Riunite S.p.A.(CIR) 2,154,516 3,627,907 0.3
Insurance 154,900 Assicurazioni Generali(Ordinary) 4,070,240 4,410,415 0.4
Telecommunications 1,000,000 STET, Di Risp(Non Conv.) 2,016,347 2,809,554 0.3
Total Investments in Italy 8,241,103 10,847,876 1.0
Nether- Banking 89,500 ABN Amro Bank(Ordinary) 3,083,255 2,930,767 0.3
lands
Beverages 8,504 Heineken Holdings(Class A) 705,797 912,872 0.1
9,000 Heineken N.V. 949,291 1,100,298 0.1
-------------- ------------- ------
1,655,088 2,013,170 0.2
Chemicals 41,125 Akzo N.V.(Ordinary) 3,932,413 4,637,571 0.4
Electrical Equipment 218,500 Philips Industries Inc. 5,139,779 6,077,013 0.6
Insurance 79,282 AEGON N.V.(Ordinary) 3,874,041 4,139,255 0.4
94,665 Amev N.V.(Ordinary) 3,772,731 3,746,568 0.4
91,197 Internationale Nederlanden Groep N.V. 3,491,374 3,752,699 0.4
-------------- ------------- ------
11,138,146 11,638,522 1.2
Paper & Forest 130,477 ++Koninklijke KNP 2,479,390 3,388,370 0.3
Products 43,492 ++Koninklijke KNP(Preferred) 176,682 180,617 0.0
-------------- ------------- ------
2,656,072 3,568,987 0.3
Transportation 192,180 KLM Royal Dutch Airlines 3,769,039 5,344,990 0.5
Total Investments in the Netherlands 31,373,792 36,211,020 3.5
Portugal Banking 341,700 Banco Comercial Portugues S.A. 5,019,557 4,734,156 0.4
89,000 Banco Comercial Portugues S.A.(ADR)(a) 1,289,946 1,212,625 0.1
-------------- ------------- ------
6,309,503 5,946,781 0.5
Building & 37,800 Sociedade de Construsoes Soares da Costa
Construction S.A. 976,555 717,469 0.1
Retail Stores 6,300 Estabelecimentes Jeronimo Martins & Filho
S.A. 494,447 479,789 0.0
Total Investments in Portugal 7,780,505 7,144,039 0.6
Spain Banking 16,920 Banco Popular Espanol(Ordinary) 1,907,099 1,906,074 0.2
Oil--Related 112,640 Repsol S.A.(Ordinary) 3,018,225 3,556,615 0.3
Real Estate 3,527 Vallehermoso Espanola S.A.(New) 43,620 69,994 0.0
Telecommunications 328,940 Telefonica Nacional de Espana S.A.
(Ordinary) 3,958,662 4,465,139 0.4
Total Investments in Spain 8,927,606 9,997,822 0.9
Sweden Building Related 158,100 Svedala Industry(c) 3,038,534 3,467,817 0.3
Engineering 183,850 ++SKF AB 3,438,484 3,089,322 0.3
95,800 ++SKF AB'B'Free 1,859,982 1,609,774 0.2
-------------- ------------- ------
5,298,466 4,699,096 0.5
Metals & Mining 204,460 ++Trelleborg AB(Class B) 1,373,199 2,911,116 0.3
Pharmaceutical-- 151,750 Astra 'A' Fria 3,179,941 3,231,208 0.3
Prescription
Total Investments in Sweden 12,890,140 14,309,237 1.4
</TABLE>
51
<PAGE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
WESTERN EUROPE Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Switzer- Banking 14,033 Swiss Bank Corp(Bearer) $ 4,475,325 $ 4,043,746 0.4%
land
Chemicals 5,512 Ciba-Geigy AG(Registered) 2,750,861 3,341,797 0.3
Electrical 10,481 BBC Brown Boveri & Cie 6,662,929 9,419,444 0.9
Equipment
Health & 11,960 Sandoz AG(Registered) 5,509,003 5,877,632 0.6
Personal Care
Total Investments in Switzerland 19,398,118 22,682,619 2.2
Turkey Automobiles & 245,600 ++Turk Otomobil Fabrikasi A.S.(c) 3,927,600 1,719,200 0.2
Equipment
Total Investments in Turkey 3,927,600 1,719,200 0.2
United Aerospace 300,000 Rolls Royce PLC(Ordinary) 808,335 816,318 0.1
Kingdom
Banking 674,000 National Westminster Bank PLC(Ordinary) 5,149,381 4,340,453 0.4
Beverages 1,336,600 Grand Metropolitan PLC(Ordinary) 8,759,700 8,829,752 0.8
Building Materials 500,000 Blue Circle Industries PLC(Ordinary) 2,201,422 2,199,523 0.2
1,907,350 Tarmac PLC(Ordinary) 4,878,546 4,180,844 0.4
-------------- ------------- ------
7,079,968 6,380,367 0.6
Conglomerates 2,380,000 Hanson PLC(Ordinary) 9,968,800 9,089,059 0.9
Consumer--Goods 792,900 Vendome Luxury Group(Units) 4,735,895 5,297,931 0.5
Electrical 1,098,400 General Electric Co., Ltd. PLC(Ordinary) 5,507,919 4,989,656 0.5
Equipment
Food & Beverage 728,000 Tate & Lyle PLC(Ordinary) 4,399,437 4,611,169 0.4
Food & Household 415,000 Cadbury Schweppes PLC(Ordinary) 3,315,705 2,881,914 0.3
Products
Insurance 456,300 Commercial Union Assurance Co. PLC
(Ordinary) 4,365,810 3,580,866 0.3
Leisure & 541,200 Granada Group PLC 4,445,193 3,998,620 0.4
Entertainment 852,350 The Rank Organisation PLC (Ordinary) 5,179,878 4,864,078 0.5
175,600 Thorn EMI (Ordinary) 2,625,146 2,724,891 0.3
-------------- ------------- ------
12,250,217 11,587,589 1.2
Media/Publishing 902,400 Reuters Holdings PLC 6,518,327 6,261,486 0.6
1,270,000 WPP Group PLC 1,865,806 2,265,434 0.2
-------------- ------------- ------
8,384,133 8,526,920 0.8
Oil--Related 716,000 British Petroleum Co., Ltd. 3,681,500 4,157,681 0.4
Pharmaceuticals 1,091,300 Smithkline Beecham Corp. PLC(Class A) 6,606,311 6,334,918 0.6
Retail 1,038,400 Tesco PLC(Ordinary) 3,506,944 3,308,247 0.3
Retail Trade 210,800 Boots Co. PLC(Ordinary) 1,756,467 1,628,385 0.2
2,640,200 Sears Holdings 4,730,391 4,789,428 0.5
-------------- ------------- ------
6,486,858 6,417,813 0.7
Telecommunications 883,800 Cable & Wireless Public Co. Ltd.
(Ordinary) 6,321,413 5,798,416 0.5
Utilities--Electric 836,000 Scottish Power PLC(Ordinary) 4,327,044 4,350,567 0.4
Total Investments in the United Kingdom 105,655,370 101,299,636 9.7
Total Investments in Western Europe 334,617,010 345,060,209 33.1
52
<PAGE>
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
<C> <C> <S> <C> <C> <C>
Commercial Paper* US$ 10,000,000 ANZ (Delaware) Inc., 4.00% due 6/03/1994 $ 9,997,778 $ 9,997,778 0.9%
10,089,000 General Capital Electric Co.,
4.22% due 6/01/1994 10,089,000 10,089,000 1.0
-------------- ------------- ------
20,086,778 20,086,778 1.9
US Government US Treasury Bills:
Obligations* 485,000 3.40% due 6/16/1994 484,313 484,235 0.0
385,000 3.42% due 6/16/1994 384,451 384,393 0.0
725,000 3.43% due 6/16/1994 723,964 723,857 0.0
350,000 3.48% due 6/16/1994 349,492 349,448 0.0
70,000 3.50% due 6/16/1994 69,898 69,890 0.0
450,000 3.51% due 6/16/1994 449,342 449,290 0.0
220,000 3.52% due 6/16/1994 219,677 219,653 0.0
825,000 3.53% due 6/16/1994 823,787 823,699 0.1
250,000 3.65% due 6/16/1994 249,620 249,606 0.0
39,000,000 3.71% due 6/23/1994 38,911,578 38,907,559 3.7
700,000 3.105% due 7/07/1994 697,827 697,194 0.1
-------------- ------------- ------
43,363,949 43,358,824 3.9
Total Investments in Short-Term
Securities 63,450,727 63,445,602 5.8
<CAPTION>
OPTIONS Number of Contracts/ Premiums
PURCHASED Face Amount Paid
<C> <C> <S> <C> <C> <C>
Call Options 194,819 Topix Index, expiring October 1994
Purchased at Yen 2270 278,895 313,181 0.0
188,501 Topix Index, expiring May 1995
at Yen 2330 420,000 370,731 0.0
-------------- ------------- ------
698,895 683,912 0.0
Currency Call 10,000,000 French Franc, expiring September 1994 at
Options Purchased Frf 5.77 145,500 329,800 0.0
8,500,000 German Deutschemark, expiring September
1994 at DM 1.679 133,875 266,475 0.0
5,160,000 Netherlands Guilder, expiring September
1994 at NLG 1.885 83,334 162,024 0.0
-------------- ------------- ------
362,709 758,299 0.0
Currency Put 14,800,000 German Deutschemark, expiring June 1994
Options Purchased at DM 1.70 236,060 19,240 0.0
40,000,000 Japanese Yen, expiring September 1994
at Yen 105 924,000 688,000 0.0
80,000,000 Japanese Yen, expiring September 1994
at Yen 107 1,792,000 752,000 0.1
12,640,000 Netherlands Guilder, expiring June 1994
at NLG 1.915 195,920 12,008 0.0
-------------- ------------- ------
3,147,980 1,471,248 0.1
Total Options Purchased 4,209,584 2,913,459 0.1
Total Investments 979,222,706 1,004,346,509 95.4
</TABLE>
53
<PAGE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
OPTIONS Number of Contracts/ Premiums Value Percent of
WRITTEN Face Amount Issue Received (Note 1a) Net Assets
<C> <C> <S> <C> <C> <C>
Call Options 9,039 Hang Seng Index, expiring July 1994
Written at HKD 12212 $ (664,005) $ (103,933) 0.0%
Currency Call $ 10,000,000 French Franc, expiring September 1994
Options Written at Frf 5.595 (64,500) (156,500) 0.0
8,500,000 German Deutschemark, expiring September
1994 at DM 1.628 (60,350) (127,925) 0.0
5,160,000 Netherlands Guilder, expiring September
1994 at NLG 1.827 (37,926) (77,658) 0.0
-------------- ------------- ------
(162,776) (362,083) 0.0
Put Options Written 194,819 Topix Index, expiring October 1994 at
Yen 2270 (205,795) (158,072) 0.0
Total Options Written (1,032,576) (624,088) 0.0
Total Investments, Net of Options Written $978,190,130 1,003,722,421 95.4
============
Variation Margin on Stock Index Futures Contracts** 309,684 0.0
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (883,161) (0.1)
Other Assets Less Liabilities 49,152,748 4.7
============== ======
Net Assets $1,052,301,692 100.0%
============== ======
<FN>
(a) American Depositary Receipt(ADR).
(b) Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of shares
are subject to adjustment under certain conditions until the
expiration date.
(c) Restricted securities pursuant to Rule 144A. The value of the Fund's
investment in restricted securities was approximately $17,714,000, representing
1.7% of net assets.
(d) The redemption value including interest, if any, is linked to the Goldman
Sachs Commodity Index. This note is not principal protected.
++ Non-income producing security.
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
** Stock index futures contracts as of May 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1d)
45 FTSE 100 LIFFE June 1994 $ 5,032,260
184 Nikkei 225 CME June 1994 19,283,200
333 Nikkei 225 SIMEX June 1994 33,379,588
433 Nikkei 225 CME September 1994 45,703,150
Total Stock Index Futures Contracts Purchased
(Total Contract Price--$101,425,951) $ 103,398,198
=============
** Stock index features contracts sold as of May 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1d)
150 EOE20 EOE June 1994 $(6,531,689)
Total Stock Index Futures Contracts Sold
(Total Contract Price-$6,779,073) $(6,531,689)
============
*** Forward foreign exchange contracts as of May 31, 1994 were as follows:
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Sold Date (Note 1b)
A$ 23,732,602 September 1994 $ (85,964)
Bf 207,054,996 September 1994 (262,617)
DM 33,651,062 September 1994 (847,398)
Fmk 18,726,095 September 1994 (45,699)
Frf 86,635,768 September 1994 (658,555)
Nlg 27,242,454 September 1994 (603,995)
Pta 1,012,303,596 September 1994 (185,644)
Skr 29,179,296 September 1994 (57,881)
Yen 14,896,716,999 September 1994 1,864,592
Total (US Commitment--$215,822,774) $ (883,161)
============
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts $ (883,161)
============
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of May 31, 1994
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$975,013,122) (Note 1a) $1,001,433,050
Put options purchased, at value (cost--$4,209,584) 2,913,459
Variation margin on stock index futures contracts (Notes 1d & 5) 309,684
Foreign cash (Note 1b) 6,052,023
Cash 972,464
Receivables:
Securities sold $47,458,000
Capital shares sold 12,920,369
Dividends 3,551,811
Forward foreign exchange contracts (Note 1b) 707,316
Interest 651,653 65,289,149
-----------
Deferred organization expenses (Note 1g) 56,896
Prepaid registration fees and other assets (Note 1g) 58,099
--------------
Total assets 1,077,084,824
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1b) 883,161
Call options written, at value (premiums received--$1,032,576) (Notes 1a & 1c) 624,088
Payables:
Securities purchased 18,069,030
Capital shares redeemed 2,975,288
Distributor (Note 2) 759,700
Investment adviser (Note 2) 670,109 22,474,127
-----------
Accrued expenses and other liabilities 801,756
--------------
Total liabilities 24,783,132
--------------
Net Assets: Net assets $1,052,301,692
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number of shares
Consist of: authorized $ 1,806,845
Class B Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized 7,379,906
Paid-in capital in excess of par 979,944,938
Undistributed realized capital gains on investments and foreign currency transactions--
net 36,233,997
Unrealized appreciation on investments and foreign currency transactions--net 26,936,006
--------------
Net assets $1,052,301,692
==============
Net Asset Class A--Based on net assets of $208,006,811 and 18,068,449 shares of beneficial
Value: interest outstanding $ 11.51
==============
Class B--Based on net assets of $844,294,881 and 73,799,056 shares of beneficial
interest outstanding $ 11.44
==============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
July 30, 1993++
to May 31,1994
<C> <S> <C> <C>
Investment Dividends (net of $1,043,207 foreign withholding tax) $ 7,646,918
Income Interest and discount earned 2,508,301
(Notes 1e & --------------
1f) : Total income 10,155,219
--------------
Expenses: Distribution and maintenance fees--Class B (Note 2) 4,246,574
Investment advisory fees (Note 2) 4,054,791
Custodian fees 564,442
Registration fees (Note 1g) 406,198
Transfer agent fees--Class B (Note 2) 369,783
Maintenance fees--Class A (Note 2) 289,933
Accounting services (Note 2) 142,452
Transfer agent fees--Class A (Note 2) 84,847
Printing and shareholder reports 73,513
Trustees' fees and expenses 26,827
Professional fees 25,401
Amortization of organization expenses (Note 1g) 11,454
Pricing fees 8,558
Other 14,000
--------------
Total expenses 10,318,773
--------------
Investment loss--net (163,554)
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 45,327,087
Gain (Loss) Foreign currency transactions--net (8,929,536) 36,397,551
on Invest- -------------
ments & Unrealized appreciation/depreciation on:
Foreign Investments-net 29,232,371
Currency Foreign currency transactions--net (2,296,365) 26,936,006
Transactions ------------- --------------
- --Net(Notes Net realized and unrealized gain on investments and foreign currency transactions 63,333,557
1b, 1f & 3): --------------
Net Increase in Net Assets Resulting from Operations $ 63,170,003
==============
<FN>
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
July 30, 1993++
to May 31, 1994
Increase (Decrease) in Net Assets:
<C> <S> <C>
Operations: Investment loss--net $ (163,554)
56
<PAGE>
<CAPTION>
For the Period
July 30, 1993++
to May 31, 1994
Increase (Decrease) in Net Assets:
<C> <S> <C>
Operations: Investment loss--net $ (163,554)
Realized gain on investments and foreign currency transactions--net 36,397,551
Unrealized appreciation on investments and foreign currency transactions--net 26,936,006
--------------
Net increase in net assets resulting from operations 63,170,003
--------------
Beneficial Net increase in net assets derived from beneficial interest transactions 989,031,689
Interest ==============
Transactions
(Note 4):
Net Assets: Total increase in net assets 1,052,201,692
Beginning of period 100,000
--------------
End of period $1,052,301,692
==============
<FN>
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. July 30, 1993++ to
May 31, 1994
Increase (Decrease) in Net Asset Value: Class A Class B*
<C> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ----------- -----------
Performance: Investment income (loss)--net .04 (.02)
Realized and unrealized gain on investments and foreign currency
transactions--net 1.47 1.46
----------- -----------
Total from investment operations 1.51 1.44
----------- -----------
Net asset value, end of period $ 11.51 $ 11.44
=========== ===========
Total Based on net asset value per share 15.10%+++ 14.40%+++
Investment =========== ===========
Return:***
Ratios to Expenses, excluding account maintenance and distribution fees 1.06%** 1.07%**
Average =========== ===========
Net Assets: Expenses 1.31%** 2.07%**
=========== ===========
Investment income (loss)--net .55%** (.19)%**
=========== ===========
Supplemental Net assets, end of period (in thousands) $ 208,007 $ 844,295
Data: =========== ===========
Portfolio turnover 50.63% 50.63%
=========== ===========
<FN>
*Based on average outstanding shares during the period.
**Annualized.
***Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch International Equity Fund (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-
end management investment company. The shares of the Fund are
divided into Class A Shares and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject
to a contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same
terms and conditions, except that Class A Shares bear the expenses
of its ongoing account maintenance fee with respect to the Class A
Shares and Class B Shares bear the expenses of its ongoing account
maintenance fee and distribution fee with respect to the Class B
Shares and have exclusive voting rights with respect to matters relat-
ing to its respective distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the principal
market on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Securities traded in the over-
the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. Portfolio
securities which are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Short-term securities are valued at amortized cost,
which approximates market value.
Options written by the Fund are valued at the last asked price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, at the average of the last asked price
as obtained from one or more dealers. Options purchased by the
Fund are valued at their last bid price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the average of the last bid price as obtained from two
or more dealers, unless there is only one dealer, in which case
that dealer's price is used.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign cur-
rency transactions are the result of settling (realized) or valuing
(unrealized) such transactions expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized
over the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter for-
eign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar-denominated
securities owned by the Fund, sold by the Fund but not yet delivered,
or committed or anticipated to be purchased by the Fund.
(c) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is sold through an exercise of an option, the related
premium received (or paid) is deducted from (or added to) the basis
of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(d) Futures contracts--The Fund may purchase or sell futures con-
tracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation
in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains
or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(e) Income taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provi-
sion is required. Under the applicable foreign tax law, a withholding
tax may be imposed on interest, dividends, and capital gains at
various rates.
(f) Security transactions and investment income--Security transac-
tions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
dates except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amorti-
zation of discount) is recognized on the accrual basis. Realized gains
and losses on security transactions are determined on the identified
cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration fees
are charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(i) Reclassification--Accumulated investment loss--net in the
amount of $163,554 was reclassified to undistributed realized
gains--net.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January
1, 1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
58
<PAGE>
For such services, the Fund pays a monthly fee of 0.75%, on an annual
basis, of the average daily value of the Fund's net assets. MLAM has
entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursu-
ant to which MLAM pays MLAM U.K. a fee in an amount to be
determined from time to time by the Investment Adviser and MLAM
U.K. but in no event in excess of the amount that the Investment
Adviser actually receives. For the period July 30, 1993 to May 31,
1994, MLAM paid MLAM U.K. a fee of $401,250 pursuant to such
Agreement. Certain of the states in which the shares of the Fund
are qualified for sale impose limitations on the expenses of the
Fund. The most restrictive annual expense limitation requires
that the Investment Adviser reimburse the Fund to the extent the
Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed
2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. MLAM's obligation to
reimburse the Fund is limited to the amount of the management
fee. No fee payment will be made to MLAM during any fiscal year
which will cause such expenses to exceed the most restrictive
expense limitation at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distribu-
tion Plan") for Class A and Class B Shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940 pursuant to
which MLFD receives from the Fund at the end of each month
(a) an account maintenance fee, at an annual rate of 0.25% of the
average daily net assets of the Fund's Class A Shares in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-
agreement) in connection with account maintenance activities, and
(b) an account maintenance fee and a distribution fee at the annual
rates of 0.25% and 0.75%, respectively, of the average daily net assets
of the Fund's Class B Shares in order to compensate the Distributor
and Merrill Lynch (pursuant to a sub-agreement) for the services
it provides and the expenses borne by the Distributor under the
Distribution Agreement. As authorized by the Distribution Plans,
the Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLAM,
which provides for the compensation of MLPF&S in connection
with account maintenance activities for Class A Shares and for
providing account maintenance and distribution-related services
to the Fund for Class B Shares. For the period ended May 31, 1994,
MLFD earned $289,933 and $4,246,574 for Class A and Class B
Shares, respectively, under the Distribution Plans, all of which was
paid to MLPF&S pursuant to the agreement.
For the period ended May 31, 1994, MLFD earned underwriting
discounts of $228,535, and MLPF&S earned dealer concessions of
$4,273,549, on sales of the Fund's Class A Shares.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
MLPF&S also received contingent deferred sales charges of
$428,332 relating to transactions in Class B Shares and $122,975 in
commissions on the execution of portfolio security transactions
for the Fund during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period from July 30, 1993 (commencement of operations) to
May 31, 1994 were $1,167,065,890 and $290,085,723, respectively.
Net realized and unrealized gains (losses) as of May 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Investments:
Long-term $ 34,782,900 $ 26,425,052
Short-term 709 (5,124)
Stock index futures contracts 9,813,375 2,219,631
Options written 730,103 607,795
Options purchased -- (14,983)
------------ ------------
Total Investments 45,327,087 29,232,371
Currency transactions:
Options written (654,392) (199,307)
Options purchased (1,019,600) (1,281,142)
Forward foreign exchange contracts 2,975,734 (883,161)
Foreign currency transactions (10,231,278) 67,245
------------ ------------
Total currency transactions (8,929,536) (2,296,365)
------------ ------------
Total $ 36,397,551 $ 26,936,006
============ ============
</TABLE>
Transactions in call options purchased for the period July 30, 1993
to May 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by
Written Premiums
Options Received
<S> <C> <C>
Outstanding call options written
at beginning of period -- --
Options written $(45,677,012) $ (1,795,687)
Options closed 1,007,973 827,756
Options expired 21,000,000 141,150
------------ ------------
Outstanding call options written
at end of period $(23,669,039) (826,781)
============ ============
</TABLE>
Transactions in put options written for the period July 30, 1993
to May 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by
Written Premiums
Options Received
<S> <C> <C>
Outstanding put options written
at beginning of period -- --
Options written $(101,194,819) $ (1,033,445)
Options expired 33,000,000 389,250
Options exercised 68,000,000 438,400
------------- ------------
Outstanding put options written
at end of period $ (194,819) $ (205,795)
============= ============
</TABLE>
As of May 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $26,304,596, of which $60,379,500 related
to appreciated securities and $34,074,904 related to depreciated
securities. At May 31, 1994, the aggregate cost of investments, for
Federal income tax purposes was $975,550,361.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest trans-
actions was $989,031,689 for the period from July 30, 1993 to
May 31, 1994.
<PAGE>
Transactions in shares of beneficial interest for Class A and Class B
shares were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 22,000,407 $236,735,011
Shares redeemed (3,936,958) (43,370,904)
------------ ------------
Net increase 18,063,449 $193,364,107
============ ============
<FN>
++Prior to July 30, 1993 (commencement of operations), the Fund issued
5,000 shares to MLAM for $50,000.
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 78,960,422 $853,108,016
Shares redeemed (5,166,366) (57,440,434)
------------ ------------
Net increase 73,794,056 $795,667,582
============ ============
<FN>
++Prior to July 30, 1993 (commencement of operations), the Fund issued
5,000 shares to MLAM for $50,000.
</TABLE>
60
<PAGE>
5. Commitments:
At May 31, 1994, the Fund had entered into forward foreign exchange
contracts under which it agreed to purchase and sell various foreign
currency with an approximate value of $1,909,000 and $14,866,000,
respectively.
61
<PAGE>
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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.............................. 18
Portfolio Transactions and Brokerage.............. 19
Determination of Net Asset Value.................. 20
Shareholder Services.............................. 22
Taxes............................................. 36
Performance Data.................................. 40
General Information............................... 41
Description of Shares........................... 41
Computation of Offering Price Per Share......... 42
Independent Auditors............................ 42
Custodian....................................... 42
Transfer Agent.................................. 43
Legal Counsel................................... 43
Reports to Shareholders......................... 43
Additional Information.......................... 43
Independent Auditors' Report...................... 44
Financial Statements.............................. 45
</TABLE>
Code #16748 -- 0994
[LOGO]
Merrill Lynch
International
Equity Fund
STATEMENT OF
ADDITIONAL
INFORMATION
September 29, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the period July 30, 1993 (commencement of
operations) through May 31, 1994.
Contained in Part B:
Financial Statements:
Schedule of Investments as of May 31, 1994.
Statement of Assets and Liabilities as of May 31, 1994.
Statement of Operations for the period July 30, 1993 (commencement of
operations) to May 31, 1994.
Statement of Changes in Net Assets for the period July 30, 1993
(commencement of operations) to May 31, 1994.
Financial Highlights for the period July 30, 1993 (commencement of
operations) to May 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
1(a) -- Amended and Restated Declaration of Trust.(a)
(b) -- Certificate of Establishment and Designation of Class A Shares and Class B Shares.(b)
2 -- Amended and Restated By-Laws of Registrant.(a)
3 -- None.
4 -- Copies of instruments defining the rights of shareholders, including the relevant portions of
the Amended and Restated Declaration of Trust, Certificate of Establishment and Designation and
Amended and Restated By-Laws of Registrant.(b)
5(a) -- Investment Advisory Agreement between Registrant and Merrill Lynch Investment Management,
Inc.(c)
(b) -- Sub-Advisory Agreement between Merrill Lynch Investment Management, Inc. and Merrill Lynch Asset
Management U.K. Limited.(c)
(c) -- Supplement to Investment Advisory Agreement between Registrant and Merrill Lynch Asset
Management, L.P., dated January 3, 1994.
6(a) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(c)
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(c)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with respect
to the Merrill Lynch Mutual Fund Adviser Program.(c)
7 -- None.
8 -- Custodian Agreement between Registrant and Brown Brothers Harriman & Co.(c)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.(c)
(b) -- Agreement relating to the use of the "Merrill Lynch" name.(c)
10 -- None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
<C> <S>
12 -- None.
13 -- Certificate of Merrill Lynch Investment Management, Inc.(b)
14 -- None.
15(a) -- Class A Distribution Plan of Registrant.(c)
(b) -- Class B Distribution Plan of Registrant.(c)
16 -- Schedule of computation of each performance quotation provided in the Registration Statement in
response to Item 22.(c)
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
</TABLE>
- ---------
(a) Filed as an Exhibit to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
(b) Filed as an Exhibit to Pre-Effective Amendment No. 4 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
(c) Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS AUGUST 31, 1994
- ----------------------------------------------------------------------------------------------- -------------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share............................... 186
Class B shares of beneficial interest, par value $0.10 per share............................... 1,015
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and agents
(including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest, as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while in office or thereafter, by reason
of his being or having been such a Trustee, officer, employee or agent,
except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that
as to any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust
shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of
willful misfeasance, gross negligence or reckless disregard of duty, or
the matter of good faith and reasonable belief as to the best interests
of the Trust, had been adjudicated, it would have been adjudicated in
favor of such person. The rights accruing to any Person under these
provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be
otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustees may make
advance
C-2
<PAGE>
payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to receive from
the Registrant by reason of indemnification; and (iii)(a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P., doing business as Merrill Lynch
Asset Management ("MLAM" or the "Investment Adviser"), acts as investment
adviser for the following registered investment companies: Convertible Holdings,
Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., and Merrill Lynch Variable
Series Funds, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM,
acts as the investment adviser for the following registered investment
companies: Apex Municipal
C-3
<PAGE>
Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011, except
that the address of Merrill Lynch Funds for Institutions Series, and Merrill
Lynch Institutional Intermediate Fund is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646. The address of the Investment Adviser and FAM
is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch &
Co., Inc. ("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281. The address of Financial Data Services, Inc. is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since June 1, 1992, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------------ ----------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company
Merrill Lynch Investment
Management, Inc. Limited Partner Investment Advisory Services; Limited
Partner of FAM
Princeton Services, Inc.
("Princeton Services") General Partner General Partner of FAM
Arthur Zeikel President President of FAM; President and Director
of Princeton Services; Director of
Merrill Lynch Funds Distributor, Inc.
("MLFD"); Executive Vice President of
ML & Co.; Executive Vice President of
Merrill Lynch
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------------ ----------------------------------------
<S> <C> <C>
Terry K. Glenn Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of Financial
Data Services, Inc. ("FDS"); President
of Princeton Administrators
Bernard J. Durnin Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Norman R. Harvey Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
N. John Hewitt Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein Senior Vice President, General Senior Vice President, General Counsel
Counsel and Secretary and Secretary of FAM; Senior Vice
President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
International Equity Fund and Merrill Lynch Short-Term Global Income Fund, Inc.
The address of each of these investment companies is P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of MLAM U.K. is Ropemaker Place, 25 Ropemaker
Street, 1st Floor, London EC24 9LY, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged
C-5
<PAGE>
since June 1, 1992, for his own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Glenn, Harvey, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the preceding paragraph:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION WITH MLAM U.K. VOCATION OR EMPLOYMENT
- --------------------------------------- -------------------------------- ---------------------------------------
<S> <C> <C>
Arthur Zeikel Chairman President of the Investment Adviser and
FAM; President and Director of
Princeton Services; Director of MLFD;
Executive Vice President of ML & Co.;
Executive Vice President of Merrill
Lynch
Alan J. Albert Managing Director Vice President of the Investment
Adviser
Terry K. Glenn Managing Director Executive Vice President of the
Investment Adviser and FAM; Executive
Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of FDS;
President of Princeton Administrators
Paul J. Sarosy Managing Director None
Norman R. Harvey Senior Vice President Senior Vice President of the Investment
Adviser and FAM; Senior Vice President
of Princeton Services
Gerald M. Richard Senior Vice President Senior Vice President and Treasurer of
the Investment Adviser and FAM; Senior
Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Jeffrey Lawrence Vice President None
Adrian Holmes Vice President None
Steven J. Yardley Vice President None
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Muncipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund,
C-6
<PAGE>
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured
Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund
II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- -------------------------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Trustee
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Sharon Creveling Vice President and Assistant None
Treasurer
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Michelle T. Lau Vice President None
Debra W. Landsman-Yaros Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Richard L. Rufener Vice President None
Salvatore Venezia Vice President None
William Wasel Vice President None
Lisa Gobora Assistant Vice President None
Susan Kibler Assistant Vice President None
Mark A. Maguire Assistant Vice President None
Patricia A. Schena Assistant Vice President None
Richard Romm Assistant Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
C-7
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund --
Advisory and Management Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund -- Advisory and
Management Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
(a) If requested to do so by the holders of at least 10% of the Fund's
outstanding shares, the Fund will call a meeting of shareholders for the purpose
of voting upon the question of removal of a Trustee or Trustees, and the Fund
will also assist communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940, as amended.
(b)_The Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Township of Plainsboro,
and the State of New Jersey, on the 27th day of September 1994.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND
(Registrant)
By: _________/s/ ARTHUR ZEIKEL________
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Trustee (Principal
(Arthur Zeikel) Executive Officer) September 27, 1994
/s/ GERALD M. RICHARD Treasurer (Principal Financial
(Gerald M. Richard) and Accounting Officer) September 27, 1994
DONALD CECIL*
(Donald Cecil) Trustee September 27, 1994
EDWARD H. MEYER*
(Edward H. Meyer) Trustee September 27, 1994
CHARLES C. REILLY*
(Charles C. Reilly) Trustee September 27, 1994
RICHARD R. WEST*
(Richard R. West) Trustee September 27, 1994
*By /s/ ARTHUR ZEIKEL
(Arthur Zeikel, Attorney-in-Fact) September 27, 1994
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ---------------------------------------------------------------- ------
1(a) -- Amended and Restated Declaration of Trust.(a)
(b) -- Certificate of Establishment and Designation of Class A
Shares and Class B Shares.(b)
2 -- Amended and Restated By-Laws of Registrant.(a)
3 -- None.
4 -- Copies of instruments defining the rights of shareholders,
including the relevant portions of the Amended and Restated
Declaration of Trust, Certificate of Establishment and
Designation and Amended and Restated By-Laws of
Registrant.(b)
5(a) -- Investment Advisory Agreement between Registrant and Merrill
Lynch Investment Management, Inc.(c)
(b) -- Sub-Advisory Agreement between Merrill Lynch Investment
Management, Inc. and Merrill Lynch Asset Management U.K.
Limited.(c)
(c) -- Supplement to Investment Advisory Agreement between
Registrant and Merrill Lynch Asset Management, L.P., dated
January 3, 1994.
6(a) -- Class A Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
(b) -- Class B Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
(c) -- Letter Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc. with respect to the Merrill Lynch
Mutual Fund Adviser Program.(c)
7 -- None.
8 -- Custodian Agreement between Registrant and Brown Brothers
Harriman & Co.(c)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial
Data Services, Inc.(c)
(b) -- Agreement relating to the use of the "Merrill Lynch" name.(c)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Investment Management, Inc.(b)
14 -- None.
15(a) -- Class A Distribution Plan of Registrant.(c)
(b) -- Class B Distribution Plan of Registrant.(c)
16 -- Schedule of computation of each performance quotation
provided in the Registration Statement in response to Item
22.(c)
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
<PAGE>
- ---------
(a) Filed as an Exhibit to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
(b) Filed as an Exhibit to Pre-Effective Amendment No. 4 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
(c) Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 306 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- --------------------------------- -----------------------------
Compass plate, circular graph Back cover of Prospectus and
paper and Merrill Lynch Logo back cover of Statement of
including stylized market bull. Additional Information.
<PAGE>
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
MERRILL LYNCH ASSET MANAGEMENT
As of January 1, 1994, merrill Lynch Investment Management, Inc. d/b/a Merrill
Lynch Asset Management was reorganized as a limited partnership, formally
known as Merrill Lynch Asset Management, L.P. and continuing to do business
under the name Merrill Lynch Asset management ("MLAM"). The general partner of
MLAM is Princeton Services, Inc. and the limited partners are Merrill Lynch
Investment Management, Inc. and Merrill Lynch & Co., Inc. Pursuant to Rule
202(a) (1)-1 under the Investment Advisers Act of 1940 and Rule 2a-6 under the
Investment Company Act of 1940 such reorganization did not constitute as
assignment of this investment advisory agreement since it did not involve a
change of control or management of the investment adviser. Pursuant to the
requirements of Section 205 of the Investment Advisers Act of 1940, however,
Merrill Lynch Asset Management hereby supplements this investment advisor
agreement by undertaking to advise you to any change in the membership of the
partnership within a reasonable time after any such change occurs.
By /s/ Arthur Zeikel
------------------------------
Dated: January 3, 1994
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch International Equity Fund:
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 33-44917 of our report dated July 13, 1994, appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
September 28, 1994
<PAGE>
[ARTICLE] 6
[CIK] 0000882533
[NAME] MERRILL LYNCH INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
[PERIOD-TYPE] 10-MOS
[FISCAL-YEAR-END] MAY-31-1994
[PERIOD-START] JUL-30-1993
[PERIOD-END] MAY-31-1994
[INVESTMENTS-AT-COST] 979222706
[INVESTMENTS-AT-VALUE] 1004346509
[RECEIVABLES] 65289149
[ASSETS-OTHER] 7449166
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1077084824
[PAYABLE-FOR-SECURITIES] 18069030
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 6714102
[TOTAL-LIABILITIES] 24783132
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 989131689
[SHARES-COMMON-STOCK] 18068449
[SHARES-COMMON-PRIOR] 5000
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 36233997
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 26936006
[NET-ASSETS] 208006811
[DIVIDEND-INCOME] 7646918
[INTEREST-INCOME] 2508301
[OTHER-INCOME] 0
[EXPENSES-NET] 10318773
[NET-INVESTMENT-INCOME] (163554)
[REALIZED-GAINS-CURRENT] 36397551
[APPREC-INCREASE-CURRENT] 26936006
[NET-CHANGE-FROM-OPS] 63170003
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 22000407
[NUMBER-OF-SHARES-REDEEMED] 3936958
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 1052201692
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4054791
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 10318773
[AVERAGE-NET-ASSETS] 138336032
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] .04
[PER-SHARE-GAIN-APPREC] 1.47
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.51
[EXPENSE-RATIO] 1.31
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000882533
[NAME] MERRILL LYNCH INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
[PERIOD-TYPE] 10-MOS
[FISCAL-YEAR-END] MAY-31-1994
[PERIOD-START] JUL-30-1993
[PERIOD-END] MAY-31-1994
[INVESTMENTS-AT-COST] 979222706
[INVESTMENTS-AT-VALUE] 1004346509
[RECEIVABLES] 65289149
[ASSETS-OTHER] 7449166
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1077084824
[PAYABLE-FOR-SECURITIES] 18069030
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 6714102
[TOTAL-LIABILITIES] 24783132
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 989131689
[SHARES-COMMON-STOCK] 73799056
[SHARES-COMMON-PRIOR] 5000
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 36233997
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 26936006
[NET-ASSETS] 844294881
[DIVIDEND-INCOME] 7646918
[INTEREST-INCOME] 2508301
[OTHER-INCOME] 0
[EXPENSES-NET] 10318773
[NET-INVESTMENT-INCOME] (163554)
[REALIZED-GAINS-CURRENT] 36397551
[APPREC-INCREASE-CURRENT] 26936006
[NET-CHANGE-FROM-OPS] 63170003
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 78960422
[NUMBER-OF-SHARES-REDEEMED] 5166366
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 1052201692
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4054791
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 10318773
[AVERAGE-NET-ASSETS] 506543532
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] (.02)
[PER-SHARE-GAIN-APPREC] 1.46
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.44
[EXPENSE-RATIO] 2.07
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
