<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1995
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.
[X]
POST-EFFECTIVE AMENDMENT NO. 4
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 8
(CHECK APPROPRIATE BOX OR BOXES.)
----------------
MERRILL LYNCH INTERNATIONAL EQUITY FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800)
ARTHUR ZEIKEL
MERRILL LYNCH 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:
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.
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date), pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a
previously filed post-effective amendment.
----------------
The Registrant has registered an indefinite number of its shares 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 24, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Fee Table; Merrill Lynch Select
Pricing SM System
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 5A. Management's Discussion of
Fund Performance.......... Not Applicable
Item 6. Capital Stock and Other
Securities................ Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered............. Cover Page; Fee Table; Merrill Lynch
Select Pricing SM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase... Fee Table; Merrill Lynch Select
Pricing SM System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings.. Not Applicable
PART B
Item 10. Cover Page................. Cover Page
Item 11. Table of Contents.......... Back Cover Page
Item 12. General Information and
History................... Not Applicable
Item 13. Investment Objectives and
Policies.................. Investment Objective and Policies
Item 14. Management of the Fund..... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................ Management of the Fund
Item 16. Investment Advisory and
Other Services............ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities................ General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status................. Dividends and Distributions; Taxes
Item 21. Underwriter................ Purchase of Shares
Item 22. Calculation of Performance
Data...................... Performance Data
Item 23. Financial Statements....... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
SEPTEMBER 27, 1995
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. For more information on
the Fund's investment objective and policies, please see "Investment Objective
and Policies" on page 11.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select Pricing SM
System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated September 27, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSAC-
TION EXPENSES:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of of-
fering price)..... 5.25%(c) None None 5.25%(c)
Sales Charge Im-
posed on Dividend
Reinvestments..... None None None None
Deferred Sales
Charge (as a per-
centage of origi-
nal purchase price
or redemption pro-
ceeds, whichever 4.0% during the first
is lower)......... None(d) year, 1% for one None(d)
decreasing 1.0% annually year
thereafter to 0.0% after
the
fourth year
Exchange Fee....... None None None None
ANNUAL FUND OPERAT-
ING EXPENSES (AS A
PERCENTAGE OF AVER-
AGE NET ASSETS)
(e):
Investment Advisory
Fees(f)........... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(g):
Account Maintenance
Fees.............. None 0.25% 0.25% 0.25%
Distribution Fees.. None 0.75% 0.75% None
(Class B shares convert
to
Class D shares
automatically
after approximately
eight years
and cease being subject
to
distribution fees)
Other Expenses:
Custodial Fees..... 0.10% 0.10% 0.10% 0.10%
Shareholder Servic-
ing Costs(h)...... 0.13% 0.17% 0.17% 0.13%
Other.............. 0.11% 0.11% 0.11% 0.11%
---- ---- ---- ----
Total Other Ex- 0.34% 0.38% 0.38% 0.34%
penses........... ---- ---- ---- ----
Total Fund Operat- 1.09% 2.13% 2.13% 1.34%
ing Expenses...... ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and investment programs. The Class A shares offered by
this Prospectus differ from the Class A shares offered prior to October
21, 1994. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares" --page 22.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" --page 24.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares" --page 22.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge will instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
(e) Information for Class B and Class D shares is stated for the fiscal year
ended May 31, 1995. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending May 31, 1996.
(f) See "Management of the Fund--Advisory and Management Arrangements" --page
17.
(g) See "Purchase of Shares--Distribution Plans" --page 27.
(h) See "Management of the Fund--Transfer Agency Services" --page 19.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment includ-
ing the maximum $52.50
initial sales charge
(Class A and Class D
shares only) and assuming
(1) the Total Fund Oper-
ating Expenses for each
class set forth above;
(2) a 5% annual return
throughout the periods
and (3) redemption at the
end of the period:
Class A................. $ 63 $ 85 $ 109 $ 178
Class B................. $ 62 $ 87 $ 114 $ 227*
Class C................. $ 32 $ 67 $ 114 $ 246
Class D................. $ 65 $ 93 $ 122 $ 205
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A................. $ 63 $ 85 $ 109 $ 178
Class B................. $ 22 $ 67 $ 114 $ 227*
Class C................. $ 22 $ 67 $ 114 $ 246
Class D................. $ 65 $ 93 $ 122 $ 205
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders
who hold their shares for an extended period of time may pay more in Rule 12b-
1 distribution fees than the economic equivalent of the maximum front-end
sales charges permitted under the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge
its customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 60 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM", or the "Investment Adviser") or its affiliate, Fund Asset Management,
L.P. ("FAM"). Funds advised by MLAM or FAM are referred to herein as "MLAM-
advised mutual funds".
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, are imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
(footnotes appear on following page)
4
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A:
Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to ML & Co. and its subsidiaries (the term
"subsidiaries", when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-
owned and controlled by ML & Co.) and their directors and employees and
to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement plans
in connection with certain investment programs. Certain purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived, such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all MLAM-
advised mutual funds. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
Class B:
Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares and a CDSC if they are redeemed within
four years of purchase. Approximately eight years after issuance, Class
B shares will convert automatically into Class D shares of the Fund,
which are subject to an account maintenance fee but no distribution
fee; Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares automatically
after approximately ten years. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the
5
<PAGE>
conversion and holding periods for certain retirement plans, is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C:
Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Trustees and regulatory limitations.
Class D:
Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain investment
programs. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the initial sales charge and, in
the case of Class D shares, the account maintenance fee. Class A, Class B,
Class C and Class D share holdings will count toward a right of accumulation
which may qualify the investor for reduced initial sales charges on new
initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
6
<PAGE>
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual 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 year ended May 31, 1995, 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>
CLASS A CLASS B CLASS C CLASS D (1)
----------- -------------------- ----------- --------------------
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
OCTOBER 21, FOR THE JULY 30, OCTOBER 21, FOR THE JULY 30,
1994+ TO YEAR ENDED 1993+ TO 1994+ TO YEAR ENDED 1993+ TO
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1995 1995 1994++ 1995 1995 1994++
----------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 11.73 $ 11.44 $ 10.00 $ 11.62 $ 11.51 $ 10.00
------- -------- -------- ------- -------- --------
Investment income
(loss)--net............ .26 .02 (.02) .24 .10 .04
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... (1.05) (.69) 1.46 (1.09) (.68) 1.47
------- -------- -------- ------- -------- --------
Total from investment
operations............. (.79) (.67) 1.44 (.85) (.58) 1.51
------- -------- -------- ------- -------- --------
Less dividends and
distributions:
Investment income--net. (.15) (.04) -- (.13) (.12) --
Realized gain on
investments--net...... (.54) (.54) -- (.54) (.54) --
------- -------- -------- ------- -------- --------
Total dividends and
distributions.......... (.69) (.58) -- (.67) (.66) --
------- -------- -------- ------- -------- --------
Net Asset Value, end of
period................. $ 10.25 $ 10.19 $ 11.44 $ 10.10 $ 10.27 $ 11.51
======= ======== ======== ======= ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. (6.78)%# (5.91)% 14.40%# (7.36)%# (5.11)% 15.10%#
======= ======== ======== ======= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... 1.23%* 1.13% 1.07%* 1.30%* 1.09% 1.06%*
======= ======== ======== ======= ======== ========
Expenses................ 1.23%* 2.13% 2.07%* 2.30%* 1.34% 1.31%*
======= ======== ======== ======= ======== ========
Investment income
(loss)--net............ 4.64%* .23% (.19)%* 4.26%* .85% .55%*
======= ======== ======== ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $74,478 $961,941 $844,295 $25,822 $188,583 $208,007
======= ======== ======== ======= ======== ========
Portfolio Turnover...... 63.95% 63.95% 50.63% 63.95% 63.95% 50.63%
======= ======== ======== ======= ======== ========
</TABLE>
- --------
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
(1) Includes Class D shares sold after October 21, 1994 and the Fund's
outstanding Class A shares which were redesignated Class D shares as of
October 21, 1994.
8
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS
International Investing. Investments on an international basis involve
certain risks not involved in domestic investment, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. With respect to certain countries, there may be the
possibility of expropriation of assets, confiscatory taxation, high rates of
inflation, political or social instability or diplomatic developments which
could affect investment in those countries. In addition, certain foreign
investments may be subject to foreign withholding taxes. As a result,
management of the Fund may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to invest in a
particular country.
Most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission nor will the issuers thereof be subject to
the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which
U.S. companies are subject.
Foreign financial markets, while often growing in trading volume, have, for
the most part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices may be more volatile
than securities of comparable domestic companies. Such markets have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could result in temporary periods when assets of the
Fund are uninvested and no return is earned thereon. The inability of the Fund
to make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems either could result in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. There is generally less government supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the U.S.
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
9
<PAGE>
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.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. Securities rated in the medium to
lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are predominately
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. The Fund does
not intend to purchase debt securities that are in default or which the
Investment Adviser believes will be in default.
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
10
<PAGE>
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.
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% (10% to the extent required by certain state laws) of its
total assets in illiquid investments, which includes securities for which there
is no readily available market, 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
11
<PAGE>
("MLAM U.K."), based primarily on an assessment of the relative condition and
growth potential of the various economies and securities markets, currency and
taxation considerations and other pertinent financial, social, national and
political factors. Within such allocations, the Investment Adviser and MLAM
U.K. will seek to identify equity investments in each market which are expected
to provide a total return which equals or exceeds the return of such market as
a whole.
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's equity investments may also include preferred stocks, convertible debt
securities and other instruments the return on which is linked to the
performance of a common stock or a basket or index of common stocks ("equity
securities"). The Fund may also invest in non-equity securities including debt
securities, cash or cash equivalents in U.S. dollars or foreign currencies and
short-term securities including money market securities. Under certain adverse
investment conditions, for defensive purposes, the Fund may restrict the
markets in which its assets will be invested and may increase the proportion of
assets invested in short-term 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 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
12
<PAGE>
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.
The Fund also may invest up to 35% of its net assets in longer-term, non-
convertible debt securities emphasizing debt securities which offer the
opportunity for capital appreciation. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
in relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Fund will not seek to benefit
from anticipated short-term fluctuations in currency exchange rates. The Fund
may, from time to time, invest in debt securities with relatively high yields
(as compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("government entities"), issued or guaranteed by
international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders", usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. See "Investment Objective and Policies"
in the Statement of Additional Information for additional information regarding
ratings of debt securities. In purchasing such securities, the Fund will rely
on the Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the
13
<PAGE>
issuer's management and regulatory matters. The Fund does not intend to
purchase debt securities that are in default or which the Investment Adviser
believes will be in default.
The Fund may also 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% (10% to the extent required by
certain state laws) of its total 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. The
Board of Trustees has determined to treat as liquid Rule 144A securities which
are freely tradeable in their primary markets offshore. The Board of Trustees
may adopt guidelines and delegate to the Investment Adviser and MLAM U.K. the
daily function of determining and monitoring liquidity of restricted
securities. The Board of Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Trustees will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
OTHER INVESTMENT PRACTICES
Portfolio Strategies Involving Options, Futures and Forward Foreign Exchange
Transactions. The Fund is authorized to engage in various portfolio strategies
to hedge its portfolio against adverse movements in the equity markets and
exchange rates between currencies.
14
<PAGE>
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
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
15
<PAGE>
the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
Portfolio Turnover. The Investment Adviser and MLAM U.K. will effect
portfolio transactions without regard to holding period, if, in their judgment,
such transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio
transactions. Accordingly, while the Fund anticipates that its annual portfolio
turnover rate should not exceed 100% under normal conditions, it is impossible
to predict portfolio turnover rates. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period
although it may be affected by currency fluctuations. The prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligation. Such agreements usually cover short periods, such as under one
week. In the event of default by the seller under a repurchase agreement, the
Fund may suffer time delays and incur costs or possible losses in connection
with disposition of the underlying securities. Repurchase agreements maturing
in more than seven days are deemed illiquid by the Securities and Exchange
Commission and are therefore subject to the Fund's investment restriction
limiting investments in securities that are not readily marketable to 15% (10%
to the extent required by certain state laws) of the Fund's total assets.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Among the Fund's fundamental policies, the Fund may
not 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
(excluding the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Trustees without shareholder approval. As a non-
fundamental policy the Fund may not borrow amounts in excess of 20% of its
total assets taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes, such as the redemption of Fund
shares. The Fund will not purchase securities while borrowings are outstanding.
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.
16
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Trustees 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 of the Investment Adviser and FAM; President and
Director of Princeton Services, Inc.; Executive Vice President of ML & Co.;
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.
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
ADVISORY AND MANAGEMENT ARRANGEMENTS
MLAM acts as the investment adviser for the Fund and provides the Fund with
management and business advisory services. The Investment Adviser is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Investment Adviser, or its affiliate, FAM, acts as the
investment adviser to more than 125 other registered investment companies and
provides investment advisory services to individual and institutional accounts.
As of August 31, 1995, the Investment Adviser and FAM had a total of
approximately $188.9 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.
17
<PAGE>
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML
& Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
For the fiscal year ended May 31, 1995, the fee paid by the Investment Adviser
to MLAM U.K. was $1,278,923.
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 year ended May 31, 1995, the fee paid by the Fund to the
Investment Adviser was $9,162,743 (based upon average net assets of
approximately $1.2 billion). At August 31, 1995, the net assets of the Fund
aggregated approximately $1.3 billion. At this asset level, the annual
management fee would aggregate approximately $9,531,681.
The Fund pays certain expenses incurred in its operations, including, among
other things, the investment advisory fees; legal and audit fees; unaffiliated
Trustees' fees and expenses; registration fees; custodian and transfer agency
fees; accounting and pricing costs; and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Also, accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. For the fiscal
year ended May 31, 1995 the Fund reimbursed the Investment Adviser $236,221 for
accounting services. For the fiscal year ended May 31, 1995, the ratio of total
expenses to average net assets was 2.13% and 1.34% for Class B and Class D
shares, respectively. For the period October 21, 1994 (commencement of
operations) to May 31, 1995, the annualized ratio of total expenses to average
net assets was 1.23% and 2.30% for Class A and Class C shares, respectively.
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. Information
about 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 is set forth below:
Andrew John Bascand--Vice President of the Fund--Director of MLAM U.K. and
Director of Merrill Lynch Global Asset Management Limited (MLGAM) since 1993,
joined the team in October 1993 as Senior Portfolio Manager/Asset Allocator and
the person primarily responsible for the day-to-day management 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.
18
<PAGE>
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.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (formerly Financial Data
Services, Inc.) (the "Transfer Agent"), which is a wholly-owned subsidiary of
ML & Co., acts as the Fund's transfer agent pursuant to a Transfer Agency,
Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, the Transfer Agent receives an annual fee of $11.00
per Class A or Class D shareholder account and $14.00 per Class B or Class C
shareholder account, nominal miscellaneous fees (e.g., account closing fees)
and is entitled to reimbursement for out-of-pocket expenses incurred by it
under the Transfer Agency Agreement. For the fiscal year ended May 31, 1995,
the Fund paid the Transfer Agent $2,004,622 pursuant to the Transfer Agency
Agreement. At August 31, 1995, the Fund
19
<PAGE>
had 8,974 Class A shareholder accounts, 101,459 Class B shareholder accounts,
4,420 Class C shareholder accounts and 14,296 Class D shareholder accounts. At
this level of accounts, the annual fee payable to the Transfer Agent would
aggregate approximately $1,738,276 plus miscellaneous and out-of-pocket
expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Investment Adviser and of Merrill Lynch, acts as the distributor of
the shares of the Fund. Shares of the Fund are offered continuously for sale
by the Distributor and other eligible securities dealers (including Merrill
Lynch). Shares of the Fund may be purchased from securities dealers or by
mailing a purchase order directly to the Transfer Agent. The minimum initial
purchase is $1,000, and the minimum subsequent purchase is $50, except that
for retirement plans, the minimum initial purchase is $100, and the minimum
subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15
minutes after the close of business on the New York Stock Exchange on that day
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the New York Stock Exchange
on that day. If the purchase orders are not received by the Distributor prior
to 30 minutes after the close of business on the New York Stock Exchange,
orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and their relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares
of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a contingent deferred sales charge and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing System is set forth under "Merrill Lynch Select
Pricing SM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares
20
<PAGE>
(footnotes continued on next page)
bear the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The deferred sales charges and account maintenance fees
that are imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, will be imposed directly
against those classes and not against all assets of the Fund and, accordingly,
such charges will not affect the net asset value of any other class or have
any impact on investors choosing another sales charge option. Dividends paid
by the Fund for each class of shares will be calculated in the same manner at
the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-
1 distribution plan adopted with respect to such class pursuant to which
account maintenance and/or distribution fees are paid. See "Distribution
Plans" below. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year.
21
<PAGE>
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE THE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------------ --------------- ------------------
<S> <C> <C> <C>
Less than $25,000........ 5.25% 5.54% 5.00%
$25,000 but less than
$50,000................. 4.75 4.99 4.50
$50,000 but less than
$100,000................ 4.00 4.17 3.75
$100,000 but less than
$250,000................ 3.00 3.09 2.75
$250,000 but less than
$1,000,000.............. 2.00 2.04 1.80
$1,000,000 and over**.... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, may be subject to a CDSC if the
shares are redeemed within one year of purchase at the following rates:
1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000;
and 0.25% on purchases of more than $5,000,000 in lieu of paying an initial
sales charge. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed. A
sales charge of 0.75% will be charged on purchases of $1,000,000 or more of
Class A or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act
of 1933.
As noted above, as a result of the implementation of the Merrill Lynch
Select PricingSM System, Class A shares of the Fund outstanding prior to
October 21, 1994, were redesignated Class D shares. The Class A shares offered
by this Prospectus differ from the Class A shares offered prior to October 21,
1994, in many respects, including sales charges, exchange privilege and the
classes of persons to whom such shares are offered.
During the period October 21, 1994 (commencement of operations) to May 31,
1995, the Fund sold 8,250,116 of its new Class A shares for aggregate net
proceeds to the Fund of $90,125,806. The gross sales charges for the sale of
its Class A shares for the period were $6,163, of which $314 and $5,849 were
received by the Distributor and Merrill Lynch, respectively. During such
period, the Distributor received no CDSCs with respect to redemptions within
one year after purchase of the Class A shares purchased subject to front-end
sales charge waivers.
22
<PAGE>
During the fiscal year ended May 31, 1995, the Fund sold 8,565,081 of its
Class D shares (including Class A shares sold prior to October 21, 1994) for
aggregate net proceeds to the Fund of $95,498,843. The gross sales charges for
the sale of its Class D shares for the period were $1,059,463, of which $68,028
and $991,435 were received by the Distributor and Merrill Lynch, respectively.
During such periods the Distributor received no CDSCs with respect to
redemptions within one year after purchase of Class D shares (including
redesignated Class A shares) purchased subject to front-end sales charge
waivers.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and certain purchases made in connection with
the Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares are
offered at net asset value to ML & Co. and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds who wish to reinvest the net proceeds from a sale
of their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain employer
sponsored retirement or savings plans and to Employee Access Accounts SM
available through employers which provide such plans.
Class D shares are offered at net asset value to an investor who has a
business relationship with a Merrill Lynch financial consultant who joined
Merrill Lynch from another investment firm within six months prior to the date
of purchase if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies. Class
D shares also are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch financial
consultant and who has (i) invested in a mutual fund sponsored by a non-Merrill
Lynch company for which Merrill Lynch has served as a selected dealer
23
<PAGE>
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, or (ii) invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has not served as a
selected dealer, if certain conditions set forth in the Statement of Additional
Information are not.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. The proceeds from account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
24
<PAGE>
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00
2-3..................................................... 2.00
3-4..................................................... 1.00
4 and thereafter........................................ 0.00
</TABLE>
For the fiscal year ended May 31, 1995 the Distributor received CDSCs of
$2,159,588 with respect to the redemption of Class B shares, all of which was
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase) for shares
purchased after October 21, 1994.
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are held
in the MFA program will be included in determining the holding period of Class
B shares reacquired upon termination of participation in the MFA program (see
"Shareholder Services--Exchange Privilege").
25
<PAGE>
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC is also waived for any Class B shares which are purchased by eligible
401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption and for any Class B shares that were acquired and held at the
time of the redemption in an Employee Access Account SM available through
employers providing eligible 401(k) plans. The Class B CDSC also is waived for
any Class B shares which are purchased by a Merrill Lynch rollover IRA, that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group, and held in such account at the time of redemption.
Additional information concerning the waiver of the Class B CDSC is set forth
in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. For the period October 21, 1994
(commencement of operations) to May 31, 1995, the Distributor received CDSCs
of $3,862 with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B
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shares of the Fund held in the account on the Conversion Date will be converted
to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares reacquired upon termination
of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class, in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities.
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The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended May 31, 1995, the Fund paid the Distributor
$9,760,817 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $976.1
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. During the fiscal period October 21, 1994 (commencement of
operations) to May 31, 1995, the Fund paid the Distributor $94,340 pursuant to
the Distribution Plan relating to the Class C shares (based on average net
assets subject to such Distribution Plan of approximately $15.5 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended May 31, 1995, the Fund paid the Distributor $514,516
pursuant to the Distribution Plan relating to the Class D shares (including the
redesignated Class A shares) (based on average net assets subject to such
Distribution Plan of approximately $205.8 million), all of which was paid to
Merrill Lynch for providing account maintenance services in connection with
such shares. At August 31, 1995, the net assets of the Fund subject to the
Class B Distribution Plan aggregated approximately $964.7 million. At this
asset level, the annual fee payable pursuant to the Class B Distribution Plan
would aggregate approximately $9.6 million. At August 31, 1995, the net assets
of the Fund subject to the Class C Distribution Plan aggregated approximately
$31 million. At this asset level, the annual fee payable pursuant to the Class
C Distribution Plan would aggregate approximately $309,996. At August 31, 1995,
the net assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $188.3 million. At this asset level, the annual fee payable
pursuant to the Class D Distribution Plan would aggregate approximately
$470,727.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the Distributor on related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues
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consist of the account maintenance fees, distribution fees and CDSCs, and the
expenses consist of financial consultant compensation. As of May 31, 1995,
direct cash revenues for the period since commencement of the offering of Class
B shares exceeded direct cash expenses by $1,607,687 (.167% of Class B net
assets at that date). At December 31, 1994, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch with respect to Class B
shares for the period since commencement of operations exceeded fully allocated
accrual revenues for such period by approximately $20,778,000 (1.981% of Class
B net assets at that date). Similar fully allocated accrual data is not yet
available with respect to Class C shares which the Fund commenced offering to
the public on October 21, 1994. From October 21, 1994 (commencement of
operations of Class C shares) to May 31, 1995, direct cash expenses exceeded
direct cash revenues by $20,956 (.081% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares,
computed separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
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<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 CDSC which may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. 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 (generally, 4:00 P.M., New York time) on the day
received and that such request is received by the Fund from such dealer not
later than 30 minutes after the close of business on the New York Stock
Exchange on the same day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after the close of
business on the New York Stock Exchange in order to obtain that day's closing
price.
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The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various services or plans, or to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The quarterly statements
will also show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be
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<PAGE>
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Shareholders considering transferring a tax-deferred retirement account such as
an IRA from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA (R), CBA (R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by pre-arranged charges of $50 or more to
his regular bank account. Investors who maintain CMA (R) accounts may arrange
to have periodic investments made in the Fund in their CMA (R) account or in
certain related accounts in amounts of $100 or more through the CMA (R)
Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested in
full and fractional shares of the Fund, without sales charge, at the net asset
value per share next determined after the close of the New York Stock Exchange
on the ex-dividend date of such dividend or distribution. A shareholder may at
any time, by written notification to Merrill Lynch if the shareholder's account
is maintained with Merrill Lynch or by written notification or telephone call
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested, in
which event payment will be mailed on or about the payment date. Cash payments
can also be directly deposited to the shareholder's bank account. No CDSC will
be imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise
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the exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
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The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees and distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
The Fund may also quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower
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<PAGE>
than average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over longer periods of time. In advertisements directed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B shares (such as investors in certain retirement plans) or to reduced
sales charges in the case of Class A and Class D shares, performance data may
take into account the reduced, and not the maximum, sales charge or may not
take into account the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the CDSC, a lower amount
of expenses may be deducted. See "Purchase of Shares". The Fund's total return
may be expressed either as a percentage or as a dollar amount in order to
illustrate the effect of such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all 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 declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class.
Certain gains or losses attributable to foreign currency gains or losses from
certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such
35
<PAGE>
losses exceed other income during a taxable year, (a) the Fund would not be
able to make any ordinary income dividend distributions and (b) distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary income dividend, reducing
each shareholder's tax basis in Fund shares for Federal income tax purposes.
See "Additional Information--Taxes".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will
36
<PAGE>
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 distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and any distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
37
<PAGE>
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares of all classes of the Fund is determined once
daily as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time), on each day during which the
New York Stock Exchange is open for trading. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees payable to
the Investment Adviser and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily.
The per share net asset value of the Class A shares will generally be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance and
38
<PAGE>
higher transfer agency fees applicable with respect to the Class B, Class C and
Class D shares; moreover, the per share net asset value of the Class D shares
generally will be higher than the per share net asset value of the Class B and
Class C shares, reflecting the daily expense accruals of the distribution fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Board of Trustees of
the Fund.
ORGANIZATION OF THE FUND
The Fund was organized on January 3, 1992, under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust". The Fund is authorized to issue an unlimited number of shares
of beneficial interest of $.10 par value of different classes. At the date of
this Prospectus, the shares of the Fund are divided into Class A, Class B,
Class C and Class D shares. Shares of Class A, Class B, Class C and Class D
represent interests in the assets of the Fund and are identical in all respects
except that Class B, Class C and Class D shares bear certain expenses related
to the account maintenance associated with such shares and Class B and Class C
shares bear certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating to account
maintenance and distribution expenditures, as applicable. See "Purchase of
Shares". The Fund has received an order from the Securities and Exchange
Commission permitting the issuance and sale of multiple classes of shares.
Shares issued are fully paid, non-assessable and have no preemptive rights.
Shares have the conversion rights described in this Prospectus.
The Declaration of Trust of the Fund, as amended (the "Declaration"), does
not require that the Fund hold an annual meeting of shareholders. However, the
Fund will be required to call special meetings of shareholders in accordance
with the requirements of the Investment Company Act to seek approval of new
investment advisory and management arrangements, a material increase in
distribution fees or a change in the fundamental policies, objective or
restrictions of the Fund. The Fund also would be required to hold a special
shareholders' meeting to elect new Trustees at such time as less than a
majority of the Trustees holding office have been elected by shareholders. The
Declaration provides that a shareholders' meeting may be called for any reason
at the request of 10% of the outstanding shares of the Fund or by a majority of
the Trustees.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes
39
<PAGE>
to receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
----------------
The Declaration, dated 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.
40
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class
C shares [_] Class D shares
of Merrill Lynch International Equity Fund and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch International Equity Fund
Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
41
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Distributions and Taxes--Taxes") either because I have not been
notified that I am subject thereto as a result of a failure to report all
interest or dividends, or the Internal Revenue Service ("IRS") has notified me
that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch International Equity Fund or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch International
Equity Fund Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch 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.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
- - - .....................................
Dealer Name and Address
- - -
This form when completed should be By ..................................
mailed to: Authorized Signature of Dealer
.............
Merrill Lynch International Equity [_][_][_] [_][_][_][_] F/C Last Name
Fund Branch Code F/C No.
c/o Merrill Lynch Financial Data [_][_][_] [_][_][_][_]
Services, Inc. Dealer's Customer A/C No.
P.O. Box 45289
Jacksonville, FL 32232-5289
42
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner.............................
First Name Initial Last Name Social Security Number or
Taxpayer Identification
Number
Name of Co-Owner (if any).....................
First Name Initial Last Name
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch International Equity
Fund at cost or current offering price. Withdrawals to be made either (check
one) [_] Monthly on the 24th day of each month, or [_] Quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ___________________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
43
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch International Equity Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank To...............................Bank
account for investment in Merrill (Investor's Bank)
Lynch International Equity Fund as
indicated below: Bank Address.........................
Amount of each ACH debit $........
City....... State........ Zip.......
Account Number....................
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month request and authorize you to pay and
beginning or as soon thereafter charge to my account ACH debits
as possible. drawn on my account by and payable
(month) to Merrill Lynch Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked
such debit. If I change banks or personally by me in writing. Until
desire to terminate or suspend this you receive such notice, you shall
program, I agree to notify you be fully protected in honoring any
promptly in writing. I hereby such debit. I further agree that if
authorize you to take any action to any such debit be dishonored,
correct erroneous ACH debits of my whether with or without cause and
bank account or purchases of Fund whether intentionally or
shares including liquidating shares inadvertently, you shall be under no
of the Fund and crediting my bank liability.
account. I further agree that if a
check or debit is not honored upon ............ .....................
presentation, Merrill Lynch Financial Date Signature of
Data Services, Inc. is authorized to Depositor
discontinue immediately the Automatic
Investment Plan and to liquidate ............ .....................
sufficient shares held in my account Bank Signature of Depositor
to offset the purchase made with the Account (If joint account,
dishonored debit. Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
44
<PAGE>
APPENDIX A
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, futures on securities indices, options on such
futures, currency options and futures, and forward foreign exchange
transactions. The Fund may enter into such transactions only in connection with
its hedging strategies. While the Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of Fund shares, the net asset
value of the Fund's shares will fluctuate. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund will only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser and MLAM U.K. believe that, because the
Fund will only engage in these transactions for hedging purposes, the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies discussed below. See "Additional
Information--Taxes".
Set forth below is a description of the hedging instruments the Fund may
utilize with respect to investment and currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at or by a
specified future date and at a price set at the time of the contract. The
principal reason for writing call options is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the securities
alone. By writing covered call options, the Fund gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
partial hedge against the price of the underlying security declining.
The Fund may not write covered call options on underlying securities in an
amount exceeding 15% of the market value of its assets.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as
A-1
<PAGE>
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 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 the 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 defined under such regulations if the Fund adheres
to certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) for bona fide hedging purposes and (ii) for
non-hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
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
A-4
<PAGE>
least two independent bids or offers. However, there can be no assurance that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or 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>
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
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE 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.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 3
Financial Highlights....................................................... 8
Risks and Special Considerations........................................... 9
Investment Objective and Policies.......................................... 11
Other Investment Practices............................................... 14
Investment Restrictions.................................................. 16
Management of the Fund..................................................... 17
Board of Trustees........................................................ 17
Advisory and Management Arrangements..................................... 17
Code of Ethics........................................................... 19
Transfer Agency Services................................................. 19
Purchase of Shares......................................................... 20
Initial Sales Charge Alternatives --
Class A and Class D Shares............................................. 22
Deferred Sales Charge Alternatives --
Class B and Class C Shares............................................. 24
Distribution Plans....................................................... 27
Limitations on the Payment of Deferred Sales Charges..................... 29
Redemption of Shares....................................................... 30
Redemption............................................................... 30
Repurchase............................................................... 30
Reinstatement Privilege --
Class A and Class D Shares............................................. 31
Shareholder Services....................................................... 31
Investment Account....................................................... 31
Systematic Withdrawal Plans.............................................. 32
Automatic Investment Plans............................................... 32
Automatic Reinvestment of Dividends and
Distributions.......................................................... 32
Exchange Privilege....................................................... 32
Performance Data........................................................... 34
Additional Information..................................................... 35
Dividends and Distributions.............................................. 35
Taxes.................................................................... 36
Determination of Net Asset Value......................................... 38
Organization of the Fund................................................. 39
Shareholder Reports...................................................... 39
Shareholder Inquiries.................................................... 40
Authorization Form......................................................... 41
Appendix A................................................................. A-1
</TABLE>
Code #16747 -- 0995
LOGO MERRILL LYNCH
Merrill Lynch International
Equity Fund
[ART]
PROSPECTUS
September 27, 1995
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.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated September
27, 1995 (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 27, 1995.
<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. (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 and the fiscal year ended May
31, 1995, the Fund's portfolio turnover rate was 50.63% and 63.95%,
respectively. 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,
2
<PAGE>
and therefore, there may not be a correlation between such information and the
market value of such securities.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, the Investment
Adviser does not believe that these considerations will have any significant
effect on its portfolio strategy, although there can be no assurance in this
regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies--Other Investment Practices--
Portfolio Strategies Involving Options, Futures and Forward Foreign Exchange
Transactions" and to Appendix A in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency options and futures, and options on
such futures and forward foreign currency transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options,
3
<PAGE>
the Fund gives up the opportunity, while the option is in effect, to profit
from any price increase in the underlying security above the option exercise
price. In addition, the Fund's ability to sell the underlying security will be
limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against a decline in the price of the
underlying security.
The writer of a covered call option has no control over when he 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.
4
<PAGE>
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 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
5
<PAGE>
market value (at the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular foreign currency. If the
Fund enters into a position hedging transaction, its custodian will place cash
or liquid securities in a separate account of the Fund in an amount equal to
the value of the Fund's total assets committed to the consummation of such
forward contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts. The Fund will not enter into a forward contract with
a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the 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.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest. Therefore, the Fund
may invest in debt securities either (a) which are rated in one of the top four
categories by a nationally recognized rating organization or which, in the
Investment Adviser's judgment, possess similar credit characteristics
("investment grade securities") or (b) which are rated below the top four
rating categories or which, in the Investment Adviser's judgment, possess
similar credit characteristics ("high yield securities"). The Investment
Adviser considers ratings as one of several factors in its independent credit
analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During such periods, such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet
6
<PAGE>
the Fund's liquidity needs or in response to a specific economic event such as
deterioration in the creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the bank
or primary dealer or an affiliate thereof agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
Repurchase agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
As a purchaser, the Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase
price at any time during the term of the repurchase agreement. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to perform.
Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive collateral in cash or securities
issued or guaranteed by the U.S. Government which are maintained at all times
in an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrowers to use such
securities for delivery to purchasers when such borrowers have sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk
of failure by the borrower to return the securities involved in such
transactions.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its
7
<PAGE>
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of
1940, as amended (the "Investment Company Act"), means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may
be changed by the Board of Trustees. Under non-fundamental investment
restrictions, the Fund may not:
8
<PAGE>
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. Notwithstanding the 15% limitation
herein, to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund will
observe such limitation. As of the date hereof, therefore, the Fund will
not invest more than 10% of its total assets in securities which are
subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Trustees are not subject
to the limitations set forth in this investment restriction (c).
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction (c), the State of Ohio does not recognize Rule 144A
securities as securities that are free of restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 50% of its
total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities or in securities of issuers
described in (e) below.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers
and directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
9
<PAGE>
i. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund will
not purchase securities while borrowings are outstanding.
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.
10
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Trustee is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Trustee(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of FAM (which term as used herein includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch,
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. ("ML & Co.") since 1990; Director of the Distributor.
Donald Cecil (68)--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 (68)--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 (63)--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; Partner, Small
Cities Cablevision, Inc.
Richard R. West (57)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Director of 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).
Edward D. Zinbarg (60)--Trustee(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of the Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President
of the Investment Adviser and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
Norman R. Harvey (62)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
11
<PAGE>
Andrew John Bascand (33)--Vice President(1)(2)--Director of Merrill Lynch
Asset Management U.K. Limited since 1993 and Director of Merrill Lynch Global
Asset Management Limited since 1994; Senior Economist of A.M.P. Asset
Management plc in London from 1992 to 1993 and Chief Economist of A.M.P.
Investments (NZ) in New Zealand from 1989 to 1991; Economic Adviser to the
Chief Economist of the Reserve Bank of New Zealand from 1987 to 1989.
Adrian Holmes (33)--Vice President(1)(2)--Vice President of the Investment
Adviser and its predecessors since 1990 and associated therewith since 1987.
Stephen I. Silverman (44)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1983.
Grace Pineda (38)--Vice President(1)(2)--Vice President and Senior Portfolio
Manager of the Investment Adviser since 1989; analyst and portfolio manager at
Clemente Capital, Inc. from 1982 to 1989.
Donald C. Burke (35)--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche
LLP from 1982 to 1990.
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
Michael J. Hennewinkel (43)--Secretary(1)(2)--Vice President of the
Investment Adviser since 1985; attorney associated with the Investment Adviser
and FAM since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or FAM
acts as investment adviser or manager.
At August 31, 1995, the officers and Trustees of the Fund as a group (16
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Fund pays each Trustee not affiliated with the 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 and Nominating Committee, which
consists of all of the non-affiliated Trustees, at a rate of $500 per meeting
attended. The Chairman of the Audit and Nominating Committee receives an
additional fee of $250 per meeting attended. For the fiscal year ended May 31,
1995, fees and expenses paid to non-affiliated Trustees by the Fund aggregated
$39,596.
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<PAGE>
The following table sets forth for the fiscal year ended May 31, 1995,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1994, the aggregate compensation paid by all
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Trustees.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED OTHER MLAM/FAM
COMPENSATION AS PART OF ADVISED FUNDS PAID
AME OF TRUSTEESN FROM FUND FUND'S EXPENSES TO TRUSTEES(1)
- ---------------- ------------ ---------------- ------------------
<S> <C> <C> <C>
Donald Cecil.................. $9,750 None $276,350
Edward H. Meyer............... $8,500 None $251,600
Charles C. Reilly............. $8,500 None $276,900
Richard R. West............... $8,500 None $300,900
Edward D. Zinbarg............. $4,042 None $125,500*
</TABLE>
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* $125,500 represents the amount Mr. Zinbarg would have received if he had
been a Trustee for the entire calendar year ended December 31, 1994. Mr.
Zinbarg was elected to the Fund's Board of Trustees effective October 25,
1994.
(1) In addition to the Fund, the Trustees serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (34 funds); Mr. Meyer (34
funds); Mr. Reilly (53 funds); Mr. West (53 funds) and Mr. Zinbarg (16
funds).
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Fund--Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser or MLAM U.K. for
the Fund or other funds for which they act as investment adviser or for other
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser. As described in the
Prospectus, the Investment Adviser receives for its services to the Fund
monthly compensation at the rate of 0.75% of the average daily net assets of
the Fund. For the fiscal period July 30, 1993 (commencement of operations) to
May 31, 1994 and the fiscal year ended May 31, 1995, the investment advisory
fees paid by the Fund to the Investment Adviser aggregated $4,054,791 and
$9,162,743, respectively.
The Investment Adviser has also entered into a sub-advisory agreement with
MLAM U.K., a wholly-owned, indirect subsidiary of ML & Co. and an affiliate of
the 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
13
<PAGE>
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 and the fiscal year ended May
31, 1995, the sub-advisory fees paid by the Investment Adviser to MLAM U.K.
aggregated $401,250 and $1,278,923, respectively.
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 and the fiscal year ended May
31, 1995, no reimbursement of expenses was required pursuant to the applicable
expense limitations discussed above.
The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as
the fees of all Trustees of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Securities and Exchange
Commission fees; expenses of registering the shares under Federal, state or
foreign laws; fees and expenses of unaffiliated Trustees; accounting and
pricing costs (including the daily calculation of net asset value); insurance;
interest; brokerage costs; litigation and other extraordinary or non-recurring
expenses; and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services on a semi-
annual basis. For the fiscal period July 30, 1993 (commencement of operations)
to May 31, 1994 and the fiscal year ended May 31, 1995, the amount of such
reimbursement was $142,452 and $236,221, respectively. The Distributor will pay
certain promotional expenses of the Fund incurred in connection with the
offering of its shares. Certain expenses will be financed by the Fund pursuant
to distribution plans in compliance with Rule 12b-1 under the Investment
Company Act. See "Purchase of Shares--Distribution Plans".
The Investment Adviser is a limited partnership, the partners of which are ML
& Co. and Princeton Services. ML & Co. and Princeton Services 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
14
<PAGE>
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 ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement and sub-advisory agreement will continue in
effect for a period of two years from the date of execution and will remain in
effect from year to year thereafter if approved annually (a) by the Board of
Trustees of the Fund or by a majority of the outstanding shares of the Fund
and (b) by a majority of the Trustees who are not parties to such contracts or
interested persons (as defined in the Investment Company Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by the
vote of a majority of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund, and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 60 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised
by the Investment Adviser or FAM which utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of each class of shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of each class of shares of
the Fund. After the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to shareholders,
the Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and investors. The Distributor also
pays for other supplementary sales literature and advertising costs. The
Distribution Agreements are subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement described under
"Management of the Fund--Advisory and Management Arrangements".
15
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing SM
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994 in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. For the fiscal period July 30, 1993 (commencement of
operations) to May 31, 1994 and the fiscal year ended May 31, 1995, the Fund
sold its shares through the Distributor and Merrill Lynch, as a dealer. During
the fiscal period July 30, 1993 (commencement of operations) to May 31, 1994,
the Fund sold 22,000,407 of its former Class A shares (now redesignated Class
D shares) for aggregate net proceeds to the Fund of $236,735,011. The gross
sales charges for the sale of the former Class A shares of the Fund for that
period were $4,502,084, of which $228,535 and $4,273,549 were received by the
Distributor and Merrill Lynch, respectively. During the fiscal year ended May
31, 1995 the Fund sold 8,565,081 of its Class D shares (including redesignated
Class A shares) for aggregate net proceeds to the Fund of $95,498,843. The
gross sales charges for the sale of the Class D shares of the Fund for that
period were $1,059,463, of which $68,028 and $991,435 were received by the
Distributor and Merrill Lynch, respectively. During the fiscal period October
21, 1994 (commencement of operations) to May 31, 1995, the Fund sold 8,250,116
of its new Class A shares for aggregate net proceeds to the Fund of
$90,125,806. The gross sales charges for the sale of the new Class A shares of
the Fund for that period were $6,163 of which $314 and $5,849 were received by
the Distributor and Merrill Lynch, respectively.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as
that term is defined in the Investment Company Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund
or shares of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or FAM who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing SM System commenced operation)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class D Shares"), if the following conditions
are met. First, the sale of the closed-end fund shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately reinvested
in Eligible Class A or Class D Shares. Second, the closed-end fund shares must
either
16
<PAGE>
have been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option. Class A shares of the Fund are offered
at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. ("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a
sale of certain of their shares of common stock of Senior Floating Rate Fund in
shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund
shares to the Senior Floating Rate Fund in connection with a tender offer
conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a thirteen-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan-participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds,
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intention (minimum of $25,000), the investor will be notified and
must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the
17
<PAGE>
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or
Class D shares equal to five percent of the intended amount will be held in
escrow during the thirteen-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter
of Intention must be at least five percent of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to
the reduced percentage sales charge which would be applicable to a single
purchase equal to the total dollar value of the Class A shares then being
purchased under such Letter, but there will be no retroactive reduction of the
sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Employer Sponsored Retirement and Savings Plans. Class A or Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred
compensation plans within the meaning of Section 403(b) and 457 of the Code,
other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system,
herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has accumulated $20 million or more in MLAM-advised mutual
funds (in the case of Class A shares) or $5 million or more in MLAM-advised
mutual funds (in the case of Class D shares). Class D shares may be offered at
net asset value to new Employer Sponsored Retirement or Savings Plans,
provided the plan has $3 million or more initially invested in MLAM-advised
mutual funds. Assets of Employer Sponsored Retirement or Savings Plans
sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares)
or between 500 and 999 employees eligible to participate in the plan (in the
case of Class D shares). Employees eligible to participate in Employer
Sponsored Retirement or Savings Plans of the same sponsoring employer or its
affiliates may be aggregated. Tax qualified retirement plans within the
meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch
Blueprint SM Program, are offered Class A shares at a price equal to net asset
value per share plus a reduced sales charge of 0.50%. Any Employer Sponsored
Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge schedule and
possible CDSC schedule disclosed in the Prospectus, if it is otherwise
eligible to purchase Class A shares, (ii) purchasing Class D shares at the
initial sales charge and possible CDSC schedule disclosed in the Prospectus,
(iii) if the Employer Sponsored Retirement or Savings Plan meets the specified
requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption, or, if the Employer Sponsored Retirement or Savings Plan does not
qualify to purchase Class B shares with a waiver of the CDSC upon redemption,
purchasing Class C shares at the CDSC schedule disclosed in the Prospectus.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above referenced Employer Sponsored Retirement or
Savings Plans.
18
<PAGE>
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Trustees of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred
basis; and second, such purchase of Class D shares must be made within 90 days
after such notice of termination.
Class D shares of the Fund will be offered at net asset value, without a
sale charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
TMA SM Managed Trust. Class A shares are offered to TMA SM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or
company acquired
19
<PAGE>
in a tax-free transaction may be adjusted in appropriate cases to reduce
possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Trustees shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Trustees must consider all factors
they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Trustees who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Trustees concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Trustees or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholder, and all material amendments are required to
be approved by the vote of the Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee
20
<PAGE>
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestment
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance
being the maximum amount payable minus amounts received from the payment of
the distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of May 31, 1995,
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and the Distributor's voluntary maximum.
DATA CALCULATED AS OF MAY 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(/1/) CHARGE BALANCE(/2/) PAYABLE DISTRIBUTOR(/3/) BALANCE LEVEL(/4/)
---------- --------- ------------ ------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD JULY 30, 1993
(COMMENCEMENT OF
OPERATIONS) TO MAY 31,
1995:
Under NASD Rule As
Adopted............... $991,895 $61,993 $6,214 $68,207 $13,094 $55,113 $7,215
Under Distributor's
Voluntary Waiver...... $991,895 $61,993 $4,959 $66,952 $13,094 $53,858 $7,215
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO MAY 31,
1995:
Under NASD Rule as
Adopted............... $ 24,513 $ 1,532 $ 54 $ 1,586 $ 75 $ 1,511 $ 194
</TABLE>
- --------
(1) Purchase price of all eligible Class B and Class C shares sold during the
periods indicated, other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
21
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or such Exchange is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Securities and Exchange Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan, or following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are: (a) any
partial or complete redemption in connection with a tax-free distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan or part of a series of equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal period July 30,
1993 (commencement of operations) to May 31, 1994 and the fiscal year ended May
31, 1995, with respect to redemptions of Class B shares, the Distributor
received CDSCs of $428,332 and $2,159,588, respectively, all of which was paid
to Merrill Lynch. Similarly, for the fiscal period October 21, 1994
(commencement of operations) to May 31, 1995, with respect to redemptions of
Class C shares, the Distributor received CDSCs of $3,862, all of which was paid
to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements,
then it may purchase Class B shares with a waiver of the CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code; provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified
22
<PAGE>
retirement plans within the meaning of Section 401(a) and 403(b) of the Code
which are provided specialized services (e.g., plans whose participants may
direct on a daily basis their plan allocations among a menu of investments) by
independent administration firms contracted through Merrill Lynch also may
purchase Class B shares with a waiver of the CDSC. The CDSC also is waived for
any Class B or Class C shares which are purchased by an Eligible 401(k) Plan or
Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of redemption.
The Class B CDSC also is waived for any Class B shares which are purchased by a
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group, and held in such
account at the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above referenced Retirement
Plans. The CDSC is also waived for any Class B shares that were acquired and
held at the time of redemption by Employee Access Accounts available through
employers that provide Eligible 401(k) Plans. The initial minimum for such
accounts is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
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
23
<PAGE>
effecting its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges and brokers than in the
United States.
Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the United States, as well as GDRs traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the over-the-counter markets and
intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Securities and Exchange Commission. Since transactions in the over-
the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-
affiliated brokers in connection with comparable transactions. See "Investment
Objective and Policies--Investment Restrictions". For the fiscal period
July 30, 1993 (commencement of operations) to May 31, 1994, the Fund paid total
brokerage commissions of $2,692,776, of which $122,601 or 4.6% was paid to
Merrill Lynch for effecting 4.7% of the aggregate amount of transactions on
which the Fund paid brokerage commissions. For the fiscal year ended May 31,
1995, the Fund paid total brokerage commissions of $3,122,404, of which
$140,629, or 4.5%, was paid to Merrill Lynch for effecting 5.3% of the
aggregate amount of transactions in 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.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time) on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund also
will determine its net asset value on any day in which there is sufficient
trading in its portfolio securities that the net asset value might be affected
materially, but only if on any such day the Fund is required to sell or redeem
shares. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the management fees and any account maintenance and/or distribution
fees, are accrued daily. The per share net asset value of Class B, Class C and
Class D shares generally will be lower than the per share net asset value of
Class A shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares, and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities, including ADRs, EDRs or GDRs, 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. 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. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the over-
the-counter market, the last bid price. 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 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.
25
<PAGE>
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of the New
York Stock Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gain
distributions.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the transfer
agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the transfer agent. Shareholders considering transferring a tax-
deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a
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<PAGE>
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if (s)he is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. An
investor whose shares of the Fund are held within a CMA (R) or CBA (R) account
may arrange to have periodic investments made in the Fund in amounts of $100
($1 for retirement accounts) or more through the CMA (R)/CBA (R) Automated
Investment Program.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund as of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect to receive either their dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the close
of business of the New York Stock Exchange (generally 4:00 P.M., New York time)
on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the Exchange is not open for business on
such date, the
27
<PAGE>
Class A or Class D 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 or Class D shares in the Investment
Account are automatically reinvested in Class A or Class D shares of the Fund,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Fund's
transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly
accept purchase orders for Class A shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA (R),
CBA (R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month;
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month; and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing SM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund but does not hold Class A shares of the second fund in his
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares
of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class B,
Class C and Class D shares will be exchangeable with shares of the same class
of other MLAM-advised mutual funds. For purposes of computing the CDSC that
may be payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned
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<PAGE>
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain MLAM-
advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchange of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with a reduced or without
a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares") of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C shares, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2.0% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis
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<PAGE>
of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that the Class B or Class C shares are held in a money market fund will
not count towards satisfaction of the holding period requirement for purposes
of reducing the CDSC or with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class B
or Class C shares of the fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2.0% CDSC that would have
been due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ............
High current income consistent with a
policy of limiting the degree of fluctu-
ation in net asset value by investing
primarily in a portfolio of adjustable
rate securities, consisting principally
of mortgage-backed and asset-backed se-
curities.
Merrill Lynch Americas Income
Fund, Inc. .......................
A high level of current income, consis-
tent 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 sur-
rounding waters).
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<PAGE>
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 port-
folio primarily of intermediate-term in-
vestment 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 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 combina-
tion of which will be varied both with
respect to types of securities and mar-
kets in response to changing market and
economic trends.
Merrill Lynch Asset Income Fund, A high level of current income through
Inc............................... investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund For
Investment and Retirement, Inc. ..
As high a level of total investment re-
turn as is consistent with reasonable
risk by investing in common stocks and
other types of securities, including
fixed income securities and convertible
securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc. ............................. income through investment in securities,
primarily equities, that are undervalued
and therefore represent basic investment
value.
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Merrill Lynch California Insured
Municipal Bond Fund...............
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management
through investment in a portfolio con-
sisting 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 as high a level of income exempt
from Federal and California income taxes
as is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term in-
vestment grade California Municipal
Bonds.
Merrill Lynch California Municipal
Bond Fund.........................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund, Inc. .. The highest total investment return con-
sistent with prudent risk through a
fully managed investment policy utiliz-
ing equity, debt and convertible securi-
ties.
Merrill Lynch Colorado Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Connecticut
Municipal Bond Fund...............
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Connecticut income taxes as is consis-
tent with prudent investment management.
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<PAGE>
Merrill Lynch Corporate Bond
Fund, Inc. .......................
Current income from three separate diver-
sified portfolios of fixed income secu-
rities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ...............
Long-term capital 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 coun-
tries 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 cor-
porations domiciled in Europe.
Merrill Lynch Federal
Securities Trust..................
High current return through investments
in U.S. Government and Government agency
securities, including GNMA mortgage-
backed certificates and other mortgage-
backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal income taxes as is consis-
tent with prudent investment management
while serving to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal prop-
erty taxes through investment in a port-
folio primarily of intermediate-term in-
vestment grade Florida Municipal Bonds.
Merrill Lynch Florida Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal in-
come taxes as is consistent with prudent
investment management while seeking to
offer shareholders the opportunity to
own securities exempt from Florida in-
tangible 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 po-
sitioned to benefit from demographic and
cultural changes as they affect consumer
markets.
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Merrill Lynch Fundamental Growth
Fund, Inc.........................
Long-term growth of capital through in-
vestment in a diversified portfolio of
equity securities placing particular em-
phasis on companies that have exhibited
an above-average growth rate in earn-
ings.
Merrill Lynch Fundamental Value
Portfolio .... (available only for
exchanges by certain individual A portfolio of Merrill Lynch Asset
retirement accounts for which Builder Program, Inc., a series fund,
Merrill Lynch acts as custodian) whose objective is to provide capital
appreciation and income by investing in
securities, with at least 65% of the
portfolio's assets being invested in eq-
uities.
Merrill Lynch Global Allocation
Fund, Inc.........................
High total return consistent with prudent
risk, through a fully managed investment
policy utilizing U.S. and foreign equi-
ty, 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 invest-
ment in a global portfolio of debt in-
vestments denominated in various curren-
cies and multinational currency units.
Merrill Lynch Global Convertible
Fund, Inc.........................
High total return from investment primar-
ily in an internationally diversified
portfolio of convertible debt securi-
ties, convertible preferred stock and
"synthetic" convertible securities con-
sisting of a combination of debt securi-
ties or preferred stock and warrants or
options.
Merrill Lynch Global Holdings...... The highest total investment return con-
(residents of Arizona must meet sistent with prudent risk through world-
investor suitability standards) wide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global Opportunity
Portfolio .... (available only for
exchanges by certain individual A portfolio of Merrill Lynch Asset
retirement accounts for which Builder Program, Inc., a series fund,
Merrill Lynch acts as custodian) whose objective is to provide a high to-
tal investment return through an invest-
ment policy utilizing United States and
foreign equity, debt and money market
securities, the combination of which
will vary depending upon changing market
and economic trends.
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<PAGE>
Merrill Lynch Global Resources
Trust.............................
Long-term growth and protection of capi-
tal from investment in securities of
foreign and domestic companies that pos-
sess substantial natural resource as-
sets.
Merrill Lynch Global SmallCap
Fund, Inc.........................
Long-term growth of capital by investing
primarily in equity securities of compa-
nies with relatively small market capi-
talizations 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 se-
curities issued by domestic and foreign
companies primarily engaged in the own-
ership 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, in-
come from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the fund believes to
be undervalued.
Merrill Lynch Healthcare Fund, Capital appreciation through worldwide
Inc....... (residents of Wisconsin investment in equity securities of com-
must meet investor suitability panies that derive or are expected to
standards) derive a substantial portion of their
sales from products and services in
healthcare.
Merrill Lynch Latin America Fund,
Inc...............................
Capital appreciation by investing primar-
ily in Latin American equity and debt
securities.
Merrill Lynch Maryland Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Maryland income taxes as is consistent
with prudent investment management.
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<PAGE>
Merrill Lynch Massachusetts
Limited Maturity Municipal Bond
Fund.............................. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Massachusetts income
taxes as is consistent with prudent in-
vestment management through investment
in a portfolio primarily of intermedi-
ate-term investment grade Massachusetts
Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund...............
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Massachusetts income taxes as is consis-
tent 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 to
provide as high a level of income exempt
from Federal and Michigan income taxes
as is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term in-
vestment grade Michigan Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management.
Merrill Lynch Minnesota Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Minnesota personal income taxes as is
consistent with prudent investment man-
agement.
Merrill Lynch Municipal Bond Fund,
Inc. ........................ Tax-exempt income from three separate di-
versified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund............
Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income ex-
empt from Federal income taxes by in-
vesting in investment grade obligations
with a dollar weighted average maturity
of five to twelve years.
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<PAGE>
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and New Jersey income taxes
as is consistent with prudent investment
management through a portfolio primarily
of intermediate-term investment grade
New Jersey Municipal Bonds.
Merrill Lynch New Jersey Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Mexico income taxes as is consistent
with prudent investment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal, New York State and New
York City income taxes as is consistent
with prudent investment management
through investment in a portfolio pri-
marily of intermediate-term investment
grade New York Municipal Bonds.
Merrill Lynch New York Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal, New
York State and New York City income
taxes as is consistent with prudent in-
vestment management.
Merrill Lynch North Carolina
Municipal Bond Fund...............
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
North Carolina income taxes as is con-
sistent with prudent investment manage-
ment.
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<PAGE>
Merrill Lynch Ohio Municipal Bond
Fund..............................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Ohio income taxes as is consistent with
prudent investment management.
Merrill Lynch Oregon Municipal
Bond Fund.........................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Oregon income taxes as is consistent
with prudent investment management.
Merrill Lynch Pacific Fund, Inc. .. Capital appreciation by investing in eq-
uity securities of corporations domi-
ciled in Far Eastern and Western Pacific
countries, including Japan, Australia,
Hong Kong and Singapore.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Pennsylvania income
taxes as is consistent with prudent in-
vestment management through investment
in a portfolio of intermediate-term in-
vestment grade Pennsylvania Municipal
Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund...............
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Pennsylvania income taxes as is consis-
tent with prudent investment management.
Merrill Lynch Phoenix Fund, Inc.... Long-term growth of capital by investing
in equity and fixed income securities of
issuers in weak financial condition or
experiencing poor operating results be-
lieved to be undervalued relative to the
current or prospective condition of such
issuer.
Merrill Lynch Quality Bond A portfolio of Merrill Lynch Asset
Portfolio..... (available only for Builder Program, Inc., a series fund,
exchanges by certain individual whose objective is to provide a high
retirement accounts for which level of current income through invest-
Merrill Lynch acts as custodian) ment in a diversified portfolio of debt
obligations, such as corporate bonds and
notes, convertible securities, preferred
stocks and governmental obligations.
38
<PAGE>
Merrill Lynch Short-Term Global
Income Fund, Inc. ................
As high a level of current income as is
consistent with prudent investment man-
agement from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining ma-
turities not exceeding three years.
Merrill Lynch Special Value Fund,
Inc...............................
Long-term growth of capital from invest-
ments 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, Capital appreciation through worldwide
Inc............................... investment in equity securities of com-
panies that derive or are expected to
derive a substantial portion of their
sales from products and services in
technology.
Merrill Lynch Texas Municipal Bond
Fund..............................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal in-
come taxes as is consistent with prudent
investment management by investing pri-
marily in a portfolio of long-term, in-
vestment grade obligations issued by the
State of Texas, its political subdivi-
sions, agencies and instrumentalities.
Merrill Lynch U.S. Government
Securities Portfolio... (available
only for exchanges by certain
individual retirement accounts A portfolio of Merrill Lynch Asset
for which Merrill Lynch acts as Builder Program, Inc., a series fund,
custodian) whose objective is to provide a 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 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.
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<PAGE>
Merrill Lynch World Income Fund,
Inc...............................
High current income by investing in a
global portfolio of fixed income securi-
ties denominated in various currencies,
including multinational currencies.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets Trust... Preservation of capital, liquidity and
the highest possible current income con-
sistent with the foregoing objectives
from the short-term money market securi-
ties in which the Trust invests.
Merrill Lynch Retirement Reserves
Money Fund.... (available only for
exchanges within certain Currently the only portfolio of Merrill
retirement plans) Lynch Retirement Series Trust, a series
fund, whose objectives are current in-
come, preservation of capital and li-
quidity 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. Gov-
ernment and repurchase agreements relat-
ing to such securities.
Merrill Lynch U.S. Treasury Money
Fund..............................
Preservation of capital, liquidity and
current income through investment exclu-
sively in a diversified portfolio of
short-term marketable securities which
are direct obligations of the U.S. Trea-
sury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund...... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and se-
curity of principal from investment in
securities issued or guaranteed by the
U.S. Government, its agencies and in-
strumentalities and in repurchase agree-
ments 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.
40
<PAGE>
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 diversi-
fied portfolio of short-term, high qual-
ity 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 se-
curity of principal from investment in
direct obligations of the U.S. Treasury
and up to 10% of its total assets in re-
purchase agreements secured by such ob-
ligations.
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 at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C or Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
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<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. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Commission's exemptive order permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe.
42
<PAGE>
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires the RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as previously described. Some
of these high yield securities may be purchased at a discount and may therefore
cause the Fund to accrue income before amounts due under the obligations are
paid. In addition, a portion of the interest payments on such high yield
securities may be treated as dividends for Federal income tax purposes; in such
case, if the issuer of such high yield/high risk securities is a domestic
corporation, dividend payments by the Fund will be eligible for the dividends
received deduction to the extent of the deemed dividend portion of such
interest payments.
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
43
<PAGE>
regulations the Fund would be able to elect to "mark to market" at the end of
each taxable year all shares that it holds in PFICs. If it made this election,
the Fund would recognize as ordinary income any increase in the value of such
shares. Unrealized losses, however, would not be recognized. By making the
mark-to-market election, the Fund could avoid imposition of the interest charge
with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss in connection with the contract treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts and its short sales of securities. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in options, futures and forward
foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
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.
44
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset). These
rules and the mark-to-market rules described above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
----------------
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
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, Class B,
Class C and Class D shares in accordance with a formula specified by the
Securities and Exchange Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital
45
<PAGE>
gains or losses on portfolio investments over such periods) that would equate
the initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class A and Class D shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As
a result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares, and historical performance data pertaining to
such shares is included in the information provided under the caption "Class D
Shares".
<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to May 31, 1995.. (18.46)% $883.30 (13.16)% $917.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to May 31, 1995.. (6.78)% $932.20 (7.36)% $926.40
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to May 31, 1995.. (11.67)% $883.30 (8.22)% $917.80
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
--------------------------------------- ---------------------------------------
EXPRESSED AS A REDEEMABLE VALUE OF A EXPRESSED AS A REDEEMABLE VALUE OF A
PERCENTAGE BASED HYPOTHETICAL $1,000 PERCENTAGE BASED HYPOTHETICAL $1,000
ON A HYPOTHETICAL INVESTMENT AT THE END ON A HYPOTHETICAL INVESTMENT AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ending May 31,
1995................... (9.47)% $ 905.30 (10.10)% $ 899.00
Inception (July 30,
1993) to May 31, 1995.. 2.50% $1,046.30 1.88% $1,034.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ending May 31,
1995................... (5.91)% $ 940.90 (5.11)% $ 948.90
Inception (July 30,
1993) to May 31, 1995.. 14.40% $1,144.00 15.10% $1,151.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (July 30,
1993) to May 31, 1995.. 4.63% $1,046.30 3.48% $1,034.80
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B shares,
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par
value $0.10 per share, of different classes and to divide or combine the shares
of each class into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in the Fund. At the date of this
Statement of Additional Information, the shares of the Fund are divided into
shares of Class A, Class B, Class C and Class D shares. Under the Declaration
of Trust, the Trustees have the authority to issue separate classes of shares
which would represent interests in the assets of the Fund and have identical
voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related to the distribution and/or account
maintenance of the shares of a class may be borne solely by such class, and a
class may have exclusive voting rights with respect to matters relating to the
expenses being borne only by such class. The Fund has received an order from
the Securities and Exchange Commission 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
47
<PAGE>
distribution to shareholders, except for any expenses which may be attributable
only to one class. Shares have no preemptive rights. The rights of redemption,
exchange and conversion are described elsewhere herein and in the Prospectus.
Shares are fully paid and nonassessable by the Fund.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held in the election of Trustees (to the extent
hereafter provided) and on other matters submitted to a vote of shareholders,
except that shareholders of a class bearing distribution and/or account
maintenance expenses as provided above shall have exclusive voting rights with
respect to matters relating to such distribution 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, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on May 31, 1995, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets................... $74,477,854 $961,940,611 $25,821,874 $188,582,782
=========== ============ =========== ============
Number of Shares Outstanding. 7,267,309 94,389,199 2,556,578 18,369,913
=========== ============ =========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 10.25 $ 10.19 $ 10.10 $ 10.27
Sales Charge (for Class A and
Class D shares: 5.25% of
offering price (5.54% of net
asset value*)).............. 0.57 ** ** 0.57
----------- ------------ ----------- ------------
Offering Price............... $ 10.82 $ 10.19 $ 10.10 $ 10.84
=========== ============ =========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
48
<PAGE>
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 independent Trustees of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with certain foreign banks
and securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood, 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 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.
49
<PAGE>
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares of beneficial interest on August 31, 1995.
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.
50
<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, 1995, the related statements of operations for the year then ended and
changes in net assets and the financial highlights for the year then ended and
for the period from July 30, 1993 (commencement of operations) to May 31, 1994.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1995, by correspondence with the custodian and brokers, or other alternate
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
International Equity Fund as of May 31, 1995, the results of its operations,
the changes in its net assets, and the financial highlights for the periods
presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 18, 1995
51
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Banking 184,370 Nedcor Ltd. (f) $ 8,296,650 $ 8,803,668 0.7%
Africa
Beverages 69,800 South African Breweries Ltd. 1,651,958 1,973,145 0.2
Diversified 52,500 The Morgan Stanley Africa
Investment Fund, Inc. 608,602 630,000 0.1
8,800 New South Africa Fund, Inc. 119,423 126,500 0.0
47,500 Rembrandt Group Ltd. 321,088 345,372 0.0
22,200 Southern Africa Fund, Inc. 328,445 330,225 0.0
-------------- -------------- ------
1,377,558 1,432,097 0.1
Mining 38,800 Anglo American Corp. of South Africa
Ltd. (ADR) (a) 1,866,237 2,061,250 0.2
11,000 De Beers Consolidated Mines Ltd.
(ADR) (a) 245,732 276,375 0.0
-------------- -------------- ------
2,111,969 2,337,625 0.2
Steel 1,618,400 South Africa Iron & Steel Industrial
Corp., Ltd. 1,769,589 1,935,569 0.1
Transportation ZAL 32,000,000 Transnet Ltd., 15% due 10/01/1995 7,714,286 8,698,016 0.7
Total Investments in South Africa 22,922,010 25,180,120 2.0
Total Investments in Africa 22,922,010 25,180,120 2.0
LATIN
AMERICA
Argentina Foreign Government Republic of Argentina:
Obligations ARS 6,000,000 5% due 3/31/2023 2,415,000 3,000,000 0.2
ARS 6,200,000 6.875% due 3/31/2023 3,589,500 3,789,750 0.3
-------------- -------------- ------
6,004,500 6,789,750 0.5
Oil--Related 172,600 Yacimientos Petroliferos Fiscales
S.A. (Sponsored) (ADR) (a) 4,331,570 3,495,150 0.3
Total Investments in Argentina 10,336,070 10,284,900 0.8
Brazil Automobiles 80,000 CAPCO Automotive Products Corp. S.A. 964,050 660,000 0.1
Banking 419,487,753 Banco Bradesco S.A. PN (Preferred) 3,215,742 3,607,502 0.3
Foreign BRC 3,500,000 Republic of Brazil, 7.25% due
Government 4/15/2024 1,906,250 1,995,000 0.2
Obligations
Mining 24,928,000 Companhia Vale do Rio Doce S.A.
(Preferred) 2,673,114 3,765,585 0.3
Oil--Related 32,650,000 Petroleo Brasileiro S.A. (Preferred) 2,988,395 3,059,813 0.2
Steel 200,000 Usinas Siderurgicas de Minas Gerais--
Usiminas S.A. (f) 3,226,000 2,262,500 0.2
Telecommunications 51,551 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR) (a) 2,231,272 1,759,178 0.1
32,213 Telecomunicacoes Brasileiras S.A.--
Telebras ON 1,431 998 0.0
1,122 Telecomunicacoes Brasileiras S.A.--
Telebras ON (Rights) (g) 0 0 0.0
1,524,347 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Preferred) 67,886 53,108 0.0
53,110 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Preferred) (Rights) (g) 0 0 0.0
-------------- -------------- ------
</TABLE>
52
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
2,300,589 1,813,284 0.1
Total Investments in Brazil 17,274,140 17,163,684 1.4
Chile Telecommunications CLP 1,840,000 Compania de Telefonos de Chile S.A.,
4.50% due 1/15/2003 (Convertible) 2,160,652 2,180,400 0.2
45,700 Compania de Telefonos de Chile S.A.
(ADR) (a) 3,573,905 4,044,450 0.3
Total Investments in Chile 5,734,557 6,224,850 0.5
Mexico Beverages 278,000 Fomento Economico Mexicano, S.A.
de C.V. (Femsa) (ADR) (a) (f) 1,742,736 612,295 0.1
Building & 444,500 Cementos Mexicanos, S.A. de C.V.
Construction (Cemex) (Class B) (ADR) (a) 2,153,334 1,444,171 0.1
Diversified 333,000 Grupo Carso, S.A. de C.V. 'A1' (e) 2,213,698 1,560,343 0.1
Telecommunications 74,050 Telefonos de Mexico, S.A. de C.V.
(Telmex) (ADR) (a) 2,858,223 2,082,656 0.2
Total Investments in Mexico 8,967,991 5,699,465 0.5
Venezuela Foods 143,500 Mavesa S.A. (ADR) (a) (f) 1,004,375 394,625 0.0
410,000 Mavesa S.A. (Ordinary) 137,354 74,954 0.0
-------------- -------------- ------
1,141,729 469,579 0.0
Utilities--Electric 267,934 C.A. La Electricidad de Caracas
S.A.I.C.A.-S.A.C.A. 349,541 282,834 0.0
Total Investments in Venezuela 1,491,270 752,413 0.0
Total Investments in Latin America 43,804,028 40,125,312 3.2
NORTH
AMERICA
Canada Diversified 813,000 Horsham Corp. 13,159,293 11,178,750 0.9
Energy Sources 172,000 Imperial Oil Ltd. (ADR) (a) 5,553,542 6,690,774 0.5
Foreign Government C$ 17,000,000 Canadian Government Bonds,
Obligations 8% due 3/15/1997 11,698,417 12,600,044 1.0
Gold/Resources 469,278 American Barrick Resources Corp. 12,031,054 11,827,081 1.0
Total Investments in Canada 42,442,306 42,296,649 3.4
Total Investments in North America 42,442,306 42,296,649 3.4
PACIFIC
BASIN
Australia Diversified 4,545,600 BTR Nylex Ltd. 11,064,684 9,156,293 0.7
Food & Beverage 2,257,873 Burns Philp & Co., Ltd. 6,735,186 5,002,887 0.4
826,644 Coca-Cola Amatil, Ltd. 4,161,752 4,929,961 0.4
-------------- -------------- ------
10,896,938 9,932,848 0.8
Media 707,264 The News Corp., Ltd. 3,610,407 3,760,074 0.3
355,219 The News Corp., Ltd. (Preferred) 1,558,829 1,712,148 0.1
-------------- -------------- ------
5,169,236 5,472,222 0.4
Merchandising 128,600 Amway Asia Pacific Ltd. 3,790,435 4,870,725 0.4
Natural Gas 420,522 Broken Hill Proprietary Co. 5,298,421 5,342,565 0.4
Property 1,381,251 Lend Lease Corp. 17,367,357 18,084,830 1.5
Total Investments in Australia 53,587,071 52,859,483 4.2
</TABLE>
53
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<CAPTION>
PACIFIC
BASIN Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 1,059,226 HSBC Holdings PLC $ 12,086,128 $ 13,762,762 1.1%
Foods 22,107,000 C.P. Pokphand Co., Ltd. 5,870,559 7,859,835 0.6
Multi-Industry 1,823,000 Swire Pacific Ltd. (Class A) 12,042,312 14,082,362 1.1
Telecommunications 11,298,000 Hong Kong Telecommunications, Ltd. 22,159,283 23,881,975 1.9
Utilities 4,647,600 China Light & Power Co., Ltd. 23,140,111 25,416,750 2.1
1,014,000 Hong Kong & China Gas Co., Ltd. 1,431,429 1,645,253 0.1
-------------- -------------- ------
24,571,540 27,062,003 2.2
Total Investments in Hong Kong 76,729,822 86,648,937 6.9
Japan Automobiles 1,736,000 Suzuki Motor Corp. 19,706,557 17,349,734 1.4
Beverages 139,000 Chukyo Coca-Cola Bottling Co., Ltd. 1,835,948 1,486,174 0.1
183,000 Hokkaido Coca-Cola Bottling Co., Ltd. 2,818,281 2,727,144 0.2
165,000 Kinki Coca-Cola Bottling Co., Ltd. 2,625,747 2,341,810 0.2
197,000 Mikuni Coca-Cola Bottling Co., Ltd. 3,160,732 2,562,980 0.2
153,100 Sanyo Coca-Cola Bottling Co., Ltd. 2,334,048 2,426,422 0.2
-------------- -------------- ------
12,774,756 11,544,530 0.9
Capital Goods 3,808,000 Mitsubishi Heavy Industries, Ltd. 25,615,591 26,167,333 2.1
Chemicals 733,000 Shin-Etsu Chemical Co., Ltd. 15,311,687 13,177,528 1.1
Containers 793,000 Toyo Seikan Kaisha, Ltd. 23,909,734 26,261,384 2.1
Electric Construction 380,450 Chudenko Corp. 13,607,957 14,174,069 1.1
435,000 Sanki Engineering Co., Ltd. 6,151,018 4,193,081 0.3
408,100 Taihei Dengyo Kaisha, Ltd. 9,667,248 6,757,422 0.6
-------------- -------------- ------
29,426,223 25,124,572 2.0
Electrical Equipment 910,600 Murata Manufacturing Co., Ltd. 34,192,770 34,786,966 2.8
569,000 The Nippon Signal Co., Ltd. 7,950,113 4,542,578 0.4
565,000 Rohm Co., Ltd. 21,622,065 25,794,205 2.1
650,000 Sumitomo Electric Industries, Ltd. 9,836,109 7,587,818 0.6
-------------- -------------- ------
73,601,057 72,711,567 5.9
Engineering & 830,000 Kinden Corp. 16,648,883 16,197,516 1.3
Construction
Iron & Steel 330,000 Maruichi Steel Tube, Ltd. 5,881,382 6,830,278 0.5
Office Equipment 2,036,000 Canon Inc. 33,971,212 31,786,162 2.5
Pharmaceuticals 816,200 Sankyo Co., Ltd. 18,142,064 18,920,781 1.5
419,000 Taisho Pharmaceutical Co., Ltd. 8,298,783 7,879,480 0.6
-------------- -------------- ------
26,440,847 26,800,261 2.1
Property & Casualty 1,971,000 Dai-Tokyo Fire & Marine Insurance
Insurance Co., Ltd. 14,575,579 13,870,432 1.1
851,000 Fuji Fire & Marine Insurance
Co., Ltd. 5,819,056 4,599,728 0.4
1,268,000 Koa Fire & Marine Insurance
Co., Ltd. 8,833,667 8,068,409 0.7
742,000 Mitsui Marine & Fire Insurance
Co., Ltd. 6,045,628 5,186,541 0.4
1,696,000 Nichido Fire & Marine Insurance
Co., Ltd. 12,951,468 13,800,686 1.1
783,000 Nippon Fire & Marine Insurance
Co., Ltd. 5,748,509 4,954,524 0.4
1,681,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 14,196,547 14,155,789 1.1
1,781,000 Tokio Marine & Fire Insurance
Co., Ltd. 21,375,308 20,432,525 1.6
1,257,000 Yasuda Fire & Marine Insurance
Co., Ltd. 9,408,702 8,518,758 0.7
-------------- -------------- ------
</TABLE>
54
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
98,954,464 93,587,392 7.5
Retailing 510,000 Ito-Yokado Co., Ltd. 26,237,875 27,023,063 2.2
138,000 Sangetsu Co., Ltd. 4,742,639 4,080,426 0.3
-------------- -------------- ------
30,980,514 31,103,489 2.5
Transportation 160,000 Nippon Express Co., Ltd. 1,713,930 1,354,938 0.1
Total Investments in Japan 414,936,837 399,996,684 32.0
Malaysia Leisure 235,500 Genting BHD 1,450,561 2,484,984 0.2
446,000 Sime Darby (Malaysia) BHD 1,037,849 1,267,045 0.1
-------------- -------------- ------
2,488,410 3,752,029 0.3
Transportation 1,064,000 Malaysian International
Shipping Co. BHD 3,055,962 3,411,364 0.3
Total Investments in Malaysia 5,544,372 7,163,393 0.6
New Zealand Foreign Government New Zealand Government Bonds:
Obligations NZ$ 9,570,000 8% due 11/15/1995 5,989,698 6,328,819 0.5
NZ$ 8,200,000 9% due 11/15/1996 4,988,596 5,496,503 0.4
Total Investments in New Zealand 10,978,294 11,825,322 0.9
Philippines Multi-Industry 282,370 Benpres Holdings Corp. (e) (f) 2,772,360 2,295,668 0.2
Total Investments in the Philippines 2,772,360 2,295,668 0.2
Singapore Banking 444,000 United Overseas Bank Ltd.
(Warrants) (b) (e) 1,993,262 2,183,659 0.2
Machinery 259,000 Jurong Shipyard Ltd. 2,090,007 2,138,498 0.2
Newspaper/Publishing 188,000 Singapore Press Holdings Ltd. 2,969,610 3,509,477 0.3
Total Investments in Singapore 7,052,879 7,831,634 0.7
South Korea Telecommunications 4,500 Korea Mobile Telecommunications
Corp. (e) 3,430,390 3,724,466 0.3
Utilities 154,000 Korea Electric Power Corp. 5,946,629 6,060,016 0.5
Total Investments in South Korea 9,377,019 9,784,482 0.8
Taiwan Merchandising 121,020 Hocheng Group Corp. (ADR) (a) (e) (f) 3,458,835 1,724,535 0.1
Total Investments in Taiwan 3,458,835 1,724,535 0.1
Thailand Banking 454,000 Bangkok Bank Co., Ltd. 'Foreign' 4,003,922 4,968,788 0.4
Total Investments in Thailand 4,003,922 4,968,788 0.4
Total Investments in the
Pacific Basin 588,441,411 585,098,926 46.8
SOUTHEAST
ASIA
India Automobiles 102,000 Ashok Leyland Ltd. (GDR) (d) (e) 1,304,580 1,466,760 0.1
63,000 Reliance Industries Ltd.
(ADR) (a) (e) 1,188,746 1,181,250 0.1
-------------- -------------- ------
2,493,326 2,648,010 0.2
Media 643,600 Videocon International Ltd.
(GDR) (d) 6,184,111 2,091,700 0.2
Textiles 30,000 JCT Ltd. (GDR) (d) (e) 557,500 562,500 0.0
20,000 Raymond Woolen Mills Ltd.
(GDR) (d) (e) 300,000 305,000 0.0
-------------- -------------- ------
857,500 867,500 0.0
Tobacco 466,000 Indian Tobacco Co. Ltd. (e) 6,288,713 3,378,500 0.3
Total Investments in India 15,823,650 8,985,710 0.7
</TABLE>
55
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<CAPTION>
SOUTHEAST
ASIA Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Indonesia Energy Equipment & 188,000 P.T. Supreme Cable Manufacturing
Services Company (GDR) (d) $ 534,547 $ 591,195 0.1%
Food & Household 1,138,000 P.T. Wicaksana Overseas
Products International (e) 1,754,711 2,862,893 0.2
Telecommunications 167,580 P.T. Indonesian Satellite Corp.
(ADR) (a) 5,961,188 6,619,410 0.5
Total Investments in Indonesia 8,250,446 10,073,498 0.8
Total Investments in Southeast Asia 24,074,096 19,059,208 1.5
WESTERN
EUROPE
Austria Engineering & 7,300 V.A. Technologie AG 798,071 839,368 0.1
Construction
Utilities 52,905 Verbund Oesterreichische
Elekrizitats AG 3,038,564 3,755,339 0.3
Total Investments in Austria 3,836,635 4,594,707 0.4
Belgium Banking 9,230 Generale de Banque S.A. (Ordinary) 2,268,755 2,923,327 0.2
Total Investments in Belgium 2,268,755 2,923,327 0.2
Finland Banking 2,754,000 Kansallis-Osake-Pankki (e) 4,133,835 2,919,750 0.2
605,000 Unitas Bank Ltd. (e) 1,480,046 1,890,625 0.2
-------------- -------------- ------
5,613,881 4,810,375 0.4
Diversified 235,000 Outokumpu OY 3,395,069 3,775,231 0.3
Paper & Forest 471,500 Enso-Gutzeit OY 3,363,502 3,830,937 0.3
Products 104,250 Metsa Serla OY 3,999,018 4,416,146 0.4
269,600 Repola OY S (f) 4,412,103 5,466,889 0.4
-------------- -------------- ------
11,774,623 13,713,972 1.1
Total Investments in Finland 20,783,573 22,299,578 1.8
France Automobiles 52,000 Peugeot S.A. 7,378,548 7,857,172 0.6
Banking 19,000 Societe Generale de Surveillance
S.A. (Class A) (Ordinary) 2,052,425 2,234,618 0.2
Building & 29,000 Compagnie de Saint-Gobain S.A. 3,470,085 3,633,044 0.3
Construction
Multi-Industry 9,292 EuraFrance S.A. 2,952,247 3,186,685 0.2
Oil & Related 42,525 Societe Nationale Elf Aquitane 2,991,724 3,440,090 0.3
Steel 18,300 Ugine S.A. 1,239,895 1,273,653 0.1
Total Investments in France 20,084,924 21,625,262 1.7
Germany Automobiles 7,200 BMW AG 3,465,277 3,886,306 0.3
22,000 Volkswagen AG 5,859,361 6,198,611 0.5
-------------- -------------- ------
9,324,638 10,084,917 0.8
Chemicals 17,500 BASF AG (Ordinary) 3,354,097 3,752,304 0.3
15,800 Bayer AG (Ordinary) 3,005,961 3,822,328 0.3
-------------- -------------- ------
6,360,058 7,574,632 0.6
</TABLE>
56
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Electronics 7,100 Siemens AG 3,578,944 3,381,911 0.3
Insurance 1,930 Munich Reinsurance Co. (Ordinary) 3,350,470 3,844,131 0.3
Machinery & 77,450 Kloeckner Werke AG (e) 3,951,498 5,681,936 0.5
Equipment 18,200 Mannesmann AG 4,519,528 5,338,219 0.4
-------------- -------------- ------
8,471,026 11,020,155 0.9
Utilities 17,000 Vereinigte Elektrizitaets & Bergwerks
AG (Veba) (Warrants) (b) (e) 731,875 757,095 0.1
Total Investments in Germany 31,817,011 36,662,841 3.0
Greece Banking 29,180 Ergo Bank S.A. (Registered) 1,166,836 1,358,888 0.1
Beverages 186,592 Hellenic Bottling Co. S.A. 3,645,447 5,243,340 0.4
Financial Services 62,720 Etba Leasing S.A. (Ordinary) 1,950,587 1,195,762 0.1
Total Investments in Greece 6,762,870 7,797,990 0.6
Hungary Foods 10,000 Pick Szeged Reszvenytarsasag
(ADR) (a) (e) 627,990 532,450 0.0
5,500 Pick Szeged Reszvenytarsasag
(Ordinary) (e) 269,061 309,164 0.0
-------------- -------------- ------
897,051 841,614 0.0
Telecommunications 4,000 Magyar Tarkozlesi Reszvenytarsasag
(Ordinary) 851,768 590,406 0.0
Total Investments in Hungary 1,748,819 1,432,020 0.0
Ireland Banking 1,239,000 Allied Irish Banks PLC (Ordinary) 5,154,888 5,829,086 0.5
Building & 1,475,300 CRH PLC (Ordinary) 8,238,429 9,382,046 0.8
Construction
Closed-End Funds 2,990,000 First Ireland Investment Co. 4,453,231 5,269,417 0.4
Forest Products 690,000 Jefferson Smurfit Group PLC
(Ordinary) 4,051,433 3,940,242 0.3
Total Investments in Ireland 21,897,981 24,420,791 2.0
Italy Building & 671,350 Fochi Filippo S.p.A. (e) 2,130,531 372,653 0.0
Construction
Diversified 3,863,400 Compagnie Industrial Riunite S.p.A.
(CIR) (e) 3,769,097 3,165,907 0.3
Telecommunications 2,458,000 STET, Di Risp (Non-Convertible) 5,629,782 5,656,108 0.5
Total Investments in Italy 11,529,410 9,194,668 0.8
Netherlands Banking 90,100 ABN Amro Bank (Ordinary) 3,018,860 3,413,354 0.3
Chemicals 45,500 Akzo N.V. (Ordinary) 4,781,143 5,548,780 0.4
71,125 European Vinyls Corporation
International N.V. 3,038,939 3,226,196 0.3
-------------- -------------- ------
7,820,082 8,774,976 0.7
Electrical Equipment 306,000 Philips Industries Inc. 9,064,562 12,212,860 1.0
Insurance 73,500 AEGON N.V. (Ordinary) 3,764,707 5,941,463 0.5
120,000 Amev N.V. (Ordinary) 4,786,225 6,545,455 0.5
105,500 Internationale Nederlanden Groep N.V. 4,342,817 5,727,811 0.5
-------------- -------------- ------
12,893,749 18,214,729 1.5
Paper & Forest 125,677 Koninklijke KNP (Warrants) (b) (e) 433,839 360,669 0.0
Products
Transportation 183,100 KLM Royal Dutch Airlines (e) 4,035,344 5,741,812 0.5
Total Investments in the Netherlands 37,266,436 48,718,400 4.0
Norway Oil & Gas Producers 81,000 Saga Petroleum A.S. (Class A) 957,551 1,163,514 0.1
340,000 Saga Petroleum A.S. (Class B) 3,749,345 4,612,561 0.4
Total Investments in Norway 4,706,896 5,776,075 0.5
</TABLE>
57
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<CAPTION>
WESTERN
EUROPE Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Portugal Banking 89,000 Banco Comercial Portugues S.A.
(ADR) (a) $ 1,289,946 $ 1,179,250 0.1%
241,700 Banco Comercial Portugues S.A.
(Registered) 3,561,811 3,205,096 0.3
-------------- -------------- ------
4,851,757 4,384,346 0.4
Building & 29,470 Sociedade de Construsoes Soares
Construction da Costa S.A. 231,771 584,599 0.0
Retail 171,600 Sonae Investimentos--SGPS S.A. 3,559,893 4,198,748 0.3
Total Investments in Portugal 8,643,421 9,167,693 0.7
Spain Banking 24,500 Banco Popular Espanol (Ordinary) 2,677,926 3,677,204 0.3
Oil--Related 243,750 Repsol S.A. (Ordinary) 7,094,222 7,895,060 0.6
Total Investments in Spain 9,772,148 11,572,264 0.9
Sweden Appliances 102,705 Electrolux AB 4,981,607 4,748,053 0.4
Automobiles & 370,000 Volvo AB 6,780,616 6,509,021 0.5
Equipment
Banking 224,475 Stadshypotek AB 3,310,941 3,336,712 0.3
Building Related 144,000 Svedala Industry (f) 2,795,410 3,966,780 0.3
Engineering 7,560 Celsius Industrier AB 110,459 110,829 0.0
183,850 SKF AB 3,438,484 3,597,823 0.3
95,800 SKF AB 'B' Free 1,859,982 1,868,210 0.1
-------------- -------------- ------
5,408,925 5,576,862 0.4
Forest Products 72,800 Mo Och Domsjo AB 3,647,878 3,847,045 0.3
36,900 Stora Kopparbergs AB 2,328,112 2,314,773 0.2
-------------- -------------- ------
5,975,990 6,161,818 0.5
Metals & Mining 149,100 Avesta Sheffield AB 1,303,285 1,453,811 0.1
Total Investments in Sweden 30,556,774 31,753,057 2.5
Switzerland Chemicals 8,400 Ciba-Geigy AG (Registered) 4,520,209 5,967,568 0.5
Electrical Equipment 6,050 BBC Brown Boveri & Cie 5,016,227 6,182,368 0.5
Food & Beverage 270 Nestle AG 259,832 272,896 0.0
Pharmaceuticals 985 Roche Holding Genusschein AG 4,999,066 6,072,265 0.5
Total Investments in Switzerland 14,795,334 18,495,097 1.5
Turkey Beverages 121,312 Erciyas Biracilik Ve Malt Sanayii
A.S. (e) 119,860 186,200 0.0
Building Materials 984,640 Alarko Holdings A.S. 1,134,759 755,654 0.1
657,152 Cimentas Izmir Cimento Fabrikasi
T.A.S. 465,286 489,043 0.0
-------------- -------------- ------
1,600,045 1,244,697 0.1
Food & Household 53,856 Dardanel Onentas Gida A.S. (e) 103,984 75,148 0.0
Products
Insurance 4,749,000 Aksigorta A.S. 1,187,250 1,049,198 0.1
Retail Stores 699,312 Migros Turk A.S. 1,579,218 2,358,145 0.2
Steel 23,199,190 Izmir Demir Celik Sanayii A.S. 840,971 984,617 0.1
Total Investments in Turkey 5,431,328 5,898,005 0.5
United Aerospace 1,776,888 Rolls Royce PLC (Ordinary) 4,880,458 5,303,790 0.4
Kingdom
</TABLE>
58
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Automobile Parts 754,700 T & N PLC 1,956,674 2,019,030 0.2
Banking & Financial 935,700 Standard Chartered PLC (Ordinary) 4,406,200 5,221,922 0.4
Services
Beverages 1,762,600 Grand Metropolitan PLC (Ordinary) 11,332,223 11,081,981 0.9
Broadcast--Media 858,400 British Sky Broadcasting Group
PLC (e) 3,581,733 3,638,894 0.3
Building Materials 700,000 BAT Industries PLC 5,382,771 5,462,482 0.4
970,450 Tarmac PLC (Ordinary) 2,614,730 1,864,348 0.1
-------------- -------------- ------
7,997,501 7,326,830 0.5
Conglomerates 1,135,500 Hanson PLC (Ordinary) 4,383,962 4,313,279 0.3
Consumer--Goods 574,500 Vendome Luxury Group (Units) (c) 4,337,621 4,629,078 0.4
Electrical Equipment 495,900 The BICC Group PLC 2,642,947 2,633,654 0.2
1,813,800 General Electric Co., Ltd. PLC
(Ordinary) 8,780,326 9,215,265 0.7
-------------- -------------- ------
11,423,273 11,848,919 0.9
Food & Beverage 328,000 Tate & Lyle PLC (Ordinary) 2,080,911 2,348,653 0.2
Food Manufacturing 304,100 Unilever Capital Corp. 4,935,583 5,902,469 0.5
Foreign Pound 16,700,000 UK Treasury Gilt, 8.75% due 9/01/1997 27,598,324 27,252,040 2.2
Goverment Sterling
Obligations
Industrial--Other 1,797,600 Tomkins PLC 6,247,638 6,949,611 0.6
Insurance 1,024,200 Prudential Corp. PLC 4,936,971 5,545,077 0.4
Leisure & 1,036,800 Forte PLC 3,823,352 3,802,554 0.3
Entertainment 539,450 The Rank Organisation PLC (Ordinary) 3,367,445 3,755,686 0.3
-------------- -------------- ------
7,190,797 7,558,240 0.6
Metals & Mining 382,500 The RTZ Corp. PLC 4,706,085 4,879,617 0.4
Oil--Related 734,000 The Shell Transport & Trading Co. PLC 8,166,327 8,996,670 0.7
Services 2,579,300 BET PLC 4,556,484 5,323,701 0.4
Telecommunications 950,800 Racal Electronics PLC 3,217,515 4,068,332 0.3
Utilities 1,322,400 British Telecommunications PLC
(Ordinary) 8,165,110 8,282,821 0.7
Total Investments in the
United Kingdom 136,101,390 142,490,954 11.3
Total Investments in Western Europe 368,003,705 404,822,729 32.4
SHORT-TERM Face
SECURITIES Amount Issue
Commercial US$ 32,152,000 General Electric Capital Corp.,
Paper* 6.13% due 6/01/1995 32,152,000 32,152,000 2.6
Total Investments in Commercial Paper 32,152,000 32,152,000 2.6
Commercial Finance One Co., Ltd.:
Paper--Foreign* ThB 18,000,000 12.76% due 7/18/1995 715,332 715,768 0.1
120,000,000 12.66% due 8/09/1995 4,732,487 4,732,874 0.4
Siam City Bank Ltd.:
100,000,000 13% due 8/10/1995 4,045,984 4,058,776 0.3
30,000,000 11.92% due 8/16/1995 1,182,045 1,182,002 0.1
50,000,000 Thai Military Bank, Ltd.,
11.90% due 8/22/1995 1,966,222 1,965,951 0.2
Total Investments in
Commercial Paper--Foreign 12,642,070 12,655,371 1.1
</TABLE>
59
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
SHORT-TERM
SECURITIES Face Value Percent of
(concluded) Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Foreign Government C$ 16,600,000 Canadian Treasury Bill,
Obligations* 7.14% due 6/15/1995 $ 12,017,394 $ 12,085,295 1.0%
NZ$52,000,000 New Zealand Treasury Bill,
7.54% due 6/21/1995 32,965,906 34,377,549 2.7
Total Investments in
Foreign Government Obligations 44,983,300 46,462,844 3.7
US Government & United States Treasury Bills (h):
Agency Obligations* US$ 240,000 5.25% due 7/27/1995 238,040 237,894 0.0
400,000 5.59% due 7/27/1995 396,522 396,491 0.0
11,500,000 5.60% due 7/27/1995 11,399,822 11,399,111 0.9
5,000,000 5.625% due 7/27/1995 4,956,250 4,956,135 0.4
600,000 5.66% due 7/27/1995 594,717 594,736 0.0
300,000 5.68% due 7/27/1995 297,349 297,368 0.0
6,000,000 5.69% due 7/27/1995 5,946,893 5,947,362 0.5
Total Investments in
US Government & Agency Obligations 23,829,593 23,829,097 1.8
Total Investments in
Short-Term Securities 113,606,963 115,099,312 9.2
OPTIONS Number of Contracts/ Premiums
PURCHASED Face Amount Paid
Call Options 339,631 Topix 2nd Section++, expiring
Purchased July 1995 at YEN 2512.93 917,849 0 0.0
344,060 Topix 2nd Section++, expiring
August 1995 at YEN 2453.64 1,016,983 2 0.0
300,436 Topix 2nd Section++, expiring
September 1995 at YEN 2311.31 700,000 66 0.0
-------------- -------------- ------
2,634,832 68 0.0
Currency Put 25,000,000 German Deutschemark, expiring
Options Purchased August 1995 at DM 1.45 365,000 377,500 0.0
10,000,000 Japanese Yen, expiring June 1995
at YEN 100 302,000 0 0.0
65,000,000 Japanese Yen, expiring August 1995
at YEN 99 828,550 19,500 0.0
93,000,000 Japanese Yen, expiring January 1996
at YEN 86.15 2,555,800 1,674,000 0.1
-------------- -------------- ------
4,051,350 2,071,000 0.1
Total Options Purchased 6,686,182 2,071,068 0.1
Total Investments 1,209,980,701 1,233,753,324 98.6
OPTIONS Premiums
WRITTEN Received
Currency Call US$ 25,000,000 German Deutschemark, expiring
Options Written August 1995 at DM 1.282 (265,000) (65,000) 0.0
25,000,000 German Deutschemark, expiring
August 1995 at DM 1.433 (336,250) (927,500) (0.1)
50,000,000 Japanese Yen, expiring August 1995
at YEN 91.29 (632,500) (4,760,000) (0.4)
15,000,000 Japanese Yen, expiring August 1995
at YEN 91.38 (196,050) (1,728,000) (0.1)
43,000,000 Japanese Yen, expiring December 1995
at YEN 87 (685,119) (3,771,100) (0.3)
50,000,000 Japanese Yen, expiring January 1996
at YEN 81.75 (1,661,400) (2,485,000) (0.2)
-------------- -------------- ------
</TABLE>
60
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
(3,776,319) (13,736,600) (1.1)
Put Options Written 344,060 Topix 2nd Section++, expiring
August 1995 at YEN 2453.64 (714,584) (3,731,682) (0.3)
Currency Put 10,000,000 Japanese Yen, expiring June 1995
Options Written at YEN 108 (110,000) 0 (0.0)
Total Options Written (4,600,903) (17,468,282) (1.4)
Total Investments, Net of Options Written $1,205,379,798 1,216,285,042 97.2
==============
Variation Margin on Financial Futures Contracts** (2,258,537) (0.2)
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (13,086,342) (1.0)
Other Assets Less Liabilities 49,882,958 4.0
-------------- ------
Net Assets $1,250,823,121 100.0%
============== ======
</TABLE>
[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) Each unit consists of one ordinary 5p Vendome PLC and one
ordinary NPV Vendome SA.
(d) Global Depositary Receipt (GDR).
(e) Non-income producing security.
(f) Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately
$25,527,000, representing 2.0% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. 10/25/1994 $ 2,772,360 $ 2,295,668
Fomento Economico
Mexicano, S.A. de C.V.
(Femsa) (ADR) 11/18/1993 1,742,736 612,295
Hocheng Group Corp. 10/20/1994-11/04/1994 3,458,835 1,724,535
Mavesa S.A. (ADR) 10/30/1993-1/03/1994 1,004,375 394,625
Nedcor Ltd. 5/23/1995 8,296,650 8,803,668
Repola OY S 8/02/1993 4,412,103 5,466,889
Svedala Industry 8/02/1993 2,795,410 3,966,780
Usinas Siderurgicas de Minas
Gerais-Usiminas S.A. 10/05/1994-12/01/1994 3,226,000 2,262,500
Total $27,708,469 $25,526,960
=========== ===========
</TABLE>
(g) The rights may be exercised until June 26, 1995.
(h) Securities held as collateral in connection with open financial
futures contracts.
++All Topix 2nd Section OTCs are with Morgan Stanley & Co.
International Ltd. as counterparty.
*Commercial Paper, certain Foreign Government and US Government &
Agency Obligations are traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase
by the Fund.
**Financial futures contracts purchased as of May 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
<C> <S> <S> <S> <C>
263 Nikkei 225 CME June 1995 $ 20,467,975
757 Nikkei 225 SIMEX June 1995 69,208,870
252 Nikkei 225 SIMEX Sept. 1995 23,106,210
</TABLE>
Total Financial Futures Contracts Purchased
(Total Contract Price--$114,529,371) $112,783,055
============
Financial futures contracts sold as of May 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
<C> <S> <S> <S> <C>
142 FTSE 100 LIFFE June 1995 $ 18,740,814
Total Financial Futures Contracts Sold
(Total Contract Price--$18,643,250) $ 18,740,814
============
</TABLE>
***Forward foreign exchange contracts as of May 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Foreign Currency Expiration Unrealized Appreciation
Purchased Date (Depreciation) (Note 1c)
<S> <S> <C>
Bf 35,688,660 September 1995 $ 2,738
C$ 8,607,000 July 1995 (52,144)
Chf 11,163,000 July 1995 (231,507)
DM 30,090,000 July 1995 13,207
Pound 2,386,025 September 1995 (64,437)
Sterling
Nlg 42,109,295 July 1995 (193,789)
YEN 20,371,953,500 June 1995 888,353
Total (US$ Commitment--$309,606,293) $ 362,421
============
</TABLE>
<TABLE>
<CAPTION>
Foreign Currency Sold
<S> <S> <C>
Bf 112,000,000 September 1995 $ (33,115)
Chf 11,163,000 July 1995 385,203
DM 30,090,000 July 1995 (1,374,944)
Frf 49,565,100 July 1995 (175,707)
Pound 772,867 September 1995 8,429
Sterling
Nlg 59,965,404 July 1995 (1,477,572)
NZ$ 9,500,000 July 1995 41,012
YEN 20,371,953,500 June 1995 (9,461,435)
YEN 2,284,465,275 July 1995 (19,508)
YEN 816,270,000 August 1995 (1,341,126)
Total (US$ Commitment--$354,837,412) $(13,448,763)
------------
Total Unrealized Depreciation--Net on
Forward Foreign Exchange Contracts $(13,086,342)
============
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,203,294,519) (Note 1a) $1,231,682,256
Put options purchased, at value (cost--$6,686,182) (Notes 1a & 1c) 2,071,068
Foreign cash (Note 1b) 32,523,515
Cash 881,643
Receivables:
Securities sold $31,332,462
Dividends 5,160,213
Capital shares sold 3,885,521
Interest 1,436,327 41,814,523
-----------
Deferred organization expenses (Note 1f) 31,466
Prepaid registration fees and other assets (Note 1f) 92,310
--------------
Total assets 1,309,096,781
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1c) 13,086,342
Variation margin on stock index futures contracts (Note 1c) 2,258,537
Put options written, at value (premiums received--$4,600,903) (Notes 1a & 1c) 17,468,282
Payables:
Securities purchased 15,089,225
Forward foreign exchange contracts (Note 1c) 4,042,000
Capital shares redeemed 3,742,112
Distributor (Note 2) 947,569
Investment adviser (Note 2) 854,575 24,675,481
-----------
Accrued expenses 785,018
--------------
Total liabilities 58,273,660
--------------
Net Assets: Net assets $1,250,823,121
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number
Consist of: of shares authorized $ 726,731
Class B Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 9,438,920
Class C Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 255,657
Class D Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized 1,836,991
Paid-in capital in excess of par 1,327,449,843
Accumulated realized capital losses on investments and foreign currency
transactions--net (84,993,401)
Unrealized depreciation on investments and foreign currency transactions--net (3,891,620)
--------------
Net assets $1,250,823,121
==============
Net Asset Class A--Based on net assets of $74,477,854 and 7,267,309 shares of
Value: beneficial interest outstanding $ 10.25
==============
Class B--Based on net assets of $961,940,611 and 94,389,199 shares of
beneficial interest outstanding $ 10.19
==============
Class C--Based on net assets of $25,821,874 and 2,556,578 shares of
beneficial interest outstanding $ 10.10
==============
Class D--Based on net assets of $188,582,782 and 18,369,913 shares of
beneficial interest outstanding $ 10.27
==============
See Notes to Financial Statements.
</TABLE>
62
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $2,362,101 foreign withholding tax) $ 17,962,680
Income Interest and discount earned (net of $4,038 foreign withholding tax) 12,011,958
(Notes 1d --------------
& 1e): Total income 29,974,638
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 9,760,817
Investment advisory fees (Note 2) 9,162,743
Transfer agent fees--Class B (Note 2) 1,642,825
Custodian fees 1,291,399
Account maintenance fees--Class D (Note 2) 514,516
Printing and shareholder reports 394,211
Registration fees (Note 1f) 296,629
Transfer agent fees--Class D (Note 2) 280,859
Accounting services (Note 2) 236,221
Professional fees 108,669
Account maintenance and distribution fees--Class C (Note 2) 94,340
Transfer agent fees--Class A (Note 2) 58,376
Trustees' fees and expenses 39,596
Amortization of organization expenses (Note 1f) 25,430
Transfer agent fees--Class C (Note 2) 22,562
Pricing fees 7,198
Other 224,169
--------------
Total expenses 24,160,560
--------------
Investment income--net 5,814,078
--------------
Realized & Realized loss from:
Unrealized Investments--net $ (31,133,268)
Loss on Foreign currency transactions--net (26,368,930) (57,502,198)
Investments --------------
& Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (8,343,081)
Transactions Foreign currency transactions--net (22,484,545) (30,827,626)
- --Net (Notes -------------- --------------
1b, 1c, Net realized and unrealized loss on investments and foreign currency transactions (88,329,824)
1e & 3): --------------
Net Decrease in Net Assets Resulting from Operations $ (82,515,746)
==============
See Notes to Financial Statements.
</TABLE>
63
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Year Ended July 30, 1993++
Increase (Decrease) in Net Assets: May 31, 1995 to May 31, 1994
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 5,814,078 $ (163,554)
Realized gain (loss) on investments and foreign currency transactions--net (57,502,198) 36,397,551
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net (30,827,626) 26,936,006
-------------- --------------
Net increase (decrease) in net assets resulting from operations (82,515,746) 63,170,003
-------------- --------------
Dividends & Investment income--net:
Distributions Class A (599,105) --
to Share- Class B (3,723,247) --
holders Class C (112,393) --
(Note 1g): Class D (2,136,488) --
Realized gain on investments--net:
Class A (2,168,344) --
Class B (50,410,142) --
Class C (457,066) --
Class D (9,932,493) --
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (69,539,278) --
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 350,576,453 989,031,689
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 198,521,429 1,052,201,692
Beginning of period 1,052,301,692 100,000
-------------- --------------
End of period $1,250,823,121 $1,052,301,692
============== ==============
</TABLE>
[FN]
++Commencement of Operations.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
For the For the
Period Period
The following per share data and ratios have been derived October 21, For the July 30,
from information provided in the financial statements. 1994++ to Year Ended 1993++ to
May 31, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994++++
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.73 $ 11.44 $ 10.00
Operating --------- --------- ---------
Performance: Investment income (loss)--net .26 .02 (.02)
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net (1.05) (.69) 1.46
--------- --------- ---------
Total from investment operations (.79) (.67) 1.44
--------- --------- ---------
Less dividends and distributions:
Investment income--net (.15) (.04) --
</TABLE>
64
<PAGE>
<TABLE>
<S> <S> <C> <C> <C>
Realized gain on investments--net (.54) (.54) --
--------- --------- ---------
Total dividends and distributions (.69) (.58) --
--------- --------- ---------
Net asset value, end of period $ 10.25 $ 10.19 $ 11.44
========= ========= =========
Total Based on net asset value per share (6.78%)+++ (5.91%) 14.40%+++
Investment ========= ========= =========
Return:**
Ratios to Expenses, excluding account maintenance and distribution fees 1.23%* 1.13% 1.07%*
Average ========= ========= =========
Net Assets: Expenses 1.23%* 2.13% 2.07%*
========= ========= =========
Investment income--net 4.64%* .23% (.19)%*
========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 74,478 $ 961,941 $ 844,295
Data: ========= ========= =========
Portfolio turnover 63.95% 63.95% 50.63%
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
Period Period
The following per share data and ratios have been derived October 21, For the July 30,
from information provided in the financial statements. 1994++ to Year Ended 1993++ to
May 31, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994++++
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.62 $ 11.51 $ 10.00
Operating --------- --------- ---------
Performance: Investment income--net .24 .10 .04
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net (1.09) (.68) 1.47
--------- --------- ---------
Total from investment operations (.85) (.58) 1.51
--------- --------- ---------
Less dividends and distributions:
Investment income--net (.13) (.12) --
Realized gain on investments--net (.54) (.54) --
--------- --------- ---------
Total dividends and distributions (.67) (.66) --
--------- --------- ---------
Net asset value, end of period $ 10.10 $ 10.27 $ 11.51
========= ========= =========
Total Based on net asset value per share (7.36%)+++ (5.11%) 15.10%+++
Investment ========= ========= =========
Return:**
Ratios to Expenses, excluding account maintenance and distribution fees 1.30%* 1.09% 1.06%*
Average ========= ========= =========
Net Assets: Expenses 2.30%* 1.34% 1.31%*
========= ========= =========
Investment income--net 4.26%* .85% .55%*
========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 25,822 $ 188,583 $208,007
Data: ========= ========= =========
Portfolio turnover 63.95% 63.95% 50.63%
========= ========= =========
</TABLE>
[FN]
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
65
<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 Fund offers four classes
of shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of valuation.
In cases where securities are traded on more than one exchange,
the securities are valued on the exchange designated by or under
the authority of the Board of Directors as the primary market.
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. Options written are valued at the last sale
price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options
purchased are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the last bid price. Short-term securities are valued
at amortized cost, which approximates market value. Other invest-
ments, including futures contracts and related options, are stated
at market value. Securities and assets for which market quotations
are not available are valued at fair value as determined in good
faith by or under the direction of the Fund's Board of Trustees.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign cur-
rency transactions are the result of settling (realized) or valuing
(unrealized) receivables or payables expressed in foreign currencies
into US dollars. Realized and unrealized gains or losses from invest-
ments include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may engage in vari-
ous portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt, and cur-
rency markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
stock index futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities
or the intended purchase of securities. Futures contracts are
contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. 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.
* Foreign currency options and futures--The Fund may also
purchase or sell listed or over-the-counter foreign currency options,
foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts are
not entered on the Fund's records. However, the effect on opera-
tions is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
* Options--The Fund is authorized to write and purchase put and
call options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to
(or deducted from) the basis of the security acquired or deducted
from (or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
66
<PAGE>
Written and purchased options are non-income producing investments.
(d) 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.
(e) 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.
(f) 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.
(g) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles
require that certain differences between accumulated net invest-
ment loss for financial reporting and tax purposes, if permanent, be
reclassified to accumulated net realized capital losses. Accordingly,
current year's permanent book/tax differences of $757,155 have
been reclassified from accumulated net investment loss to accumu-
lated net realized capital losses. These reclassifications have no
effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which
is the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distrib-
utor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary
of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.75%, on an annual
basis, of the average daily value of the Fund's net assets. MLAM has
entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, 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 year ended May 31, 1995, MLAM
paid MLAM U.K. a fee of $1,278,923 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 mil-
lion 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.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued daily and
paid monthly at annual rates based upon the average daily net assets
of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing share-
holder and distribution-related services to Class B and Class C
shareholders.
For the year ended May 31, 1995, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 314 $ 5,403
Class D $67,957 $990,639
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended May 31, 1995, MLPF&S received contingent
deferred sales charges of $2,159,588 and $3,862 relating to trans-
actions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $139,691 in commissions on the
execution of portfolio security transactions for the Fund for the year
ended May 31, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1995 were $991,372,468 and $732,513,588,
respectively.
Net realized and unrealized gains (losses) as of May 31, 1995 were
as follows:
Realized Unrealized
Gains (Losses Gains (Losses)
Investments:
Long-term $(14,874,958) $ 26,895,388
Short-term 1,646,026 1,492,349
Stock index futures contracts (18,019,266) (1,843,880)
Options written 1,758,276 (3,017,098)
Options purchased (1,643,346) (2,634,764)
------------ ------------
Total Investments (31,133,268) 20,891,995
Currency transactions:
Options written 1,273,178 (9,850,281)
Options purchased (6,450,782) (1,980,350)
Forward foreign exchange contracts (26,447,274) (13,086,342)
Foreign currency transactions 5,255,948 133,358
------------ ------------
Total currency transactions (26,368,930) (24,783,615)
------------ ------------
Total $(57,502,198) $ (3,891,620)
============ ============
Transactions in call options written for the year ended May 31, 1995
were as follows:
Par Value
Covered by Premiums
Written Options Received
Outstanding call options written
at beginning of period $ 23,669,039 $ 826,781
Options written 314,612,462 6,923,527
Options exercised (647,000) (855,456)
Options closed (64,610,040) (563,524)
Options expired (65,024,461) (2,555,009)
------------ ------------
Outstanding call options written
at end of period $208,000,000 $ 3,776,319
============ ============
Transactions in put options written for the year ended May 31,
1995 were as follows:
Par Value
Covered by Premiums
Written Options Received
Outstanding put options written
at beginning of period $ 194,819 $ 205,795
Options written 53,350,880 1,322,685
Options closed (194,819) (205,794)
Options expired (43,006,820) (498,102)
------------ ------------
Outstanding put options written
at end of period $ 10,344,060 $ 824,584
============ ============
As of May 31, 1995, net unrealized appreciation for Federal income
tax purposes aggregated $21,310,918, of which $83,394,134 related
to appreciated securities and $62,083,216 related to depreciated
securities. At May 31, 1995, the aggregate cost of investments, for
Federal income tax purposes was $1,206,639,724.
68
<PAGE>
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest trans-
actions was $350,576,453 and $989,031,689 for the years ended
May 31, 1995 and May 31, 1994, respectively.
Transactions in shares of beneficial interest for each class were
as follows:
Class A Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 8,250,116 $ 90,125,806
Shares issued to shareholders in
reinvestment of dividends and
distributions 214,636 2,215,037
------------ ------------
Total issued 8,464,752 92,340,843
Shares redeemed (1,197,443) (12,452,266)
------------ ------------
Net increase 7,267,309 $ 79,888,577
============ ============
[FN]
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended May 31, 1995 Shares Amount
Shares sold 39,671,147 $441,827,803
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,695,329 48,408,841
------------ ------------
Total issued 44,366,476 490,236,644
Shares redeemed (23,278,562) (245,072,223)
Automatic conversion of shares (497,771) (5,021,412)
------------ ------------
Net increase 20,590,143 $240,143,009
============ ============
Class B Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
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.
Class C Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 2,764,893 $ 28,810,393
Shares issued to shareholders in
reinvestment of dividends and
distributions 49,952 510,509
------------ ------------
Total issued 2,814,845 29,320,902
Shares redeemed (258,267) (2,631,066)
------------ ------------
Net increase 2,556,578 $ 26,689,836
============ ============
[FN]
++Commencement of Operations.
Class D Shares for the Year Dollar
Ended May 31, 1995 Shares Amount
Shares sold 8,565,081 $ 95,498,843
Automatic conversion of shares 494,928 5,021,412
Shares issued to shareholders in
reinvestment of dividends and
distributions 979,800 10,140,928
------------ ------------
Total issued 10,039,809 110,661,183
Shares redeemed (9,738,345) (106,806,152)
------------ ------------
Net increase 301,464 $ 3,855,031
============ ============
Class D Shares for the Period Dollar
July 30, 1993++ to May 31, 1994 Shares Amount
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.
As a result of the Merrill Lynch Select Pricing SM System, Class A
Shares of the Fund outstanding prior to October 21, 1994 have been
redesignated to Class D Shares. There were 20,292,011 shares
redesignated to $219,466,427.
69
<PAGE>
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<PAGE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 3
Investment Restrictions.................................................. 7
Management of the Fund.................................................... 11
Trustees and Officers.................................................... 11
Compensation of Trustees................................................. 12
Advisory and Management Arrangements..................................... 13
Purchase of Shares........................................................ 15
Initial Sales Charge Alternatives--Class A and Class D Shares............ 16
Reduced Initial Sales Charges............................................ 17
Distribution Plans....................................................... 20
Limitations on the Payment of Deferred Sales Charges..................... 20
Redemption of Shares...................................................... 22
Deferred Sales Charges--Class B and Class C Shares....................... 22
Portfolio Transactions and Brokerage...................................... 23
Determination of Net Asset Value.......................................... 25
Shareholder Services...................................................... 26
Investment Account....................................................... 26
Automatic Investment Plans............................................... 27
Reinvestment of Dividends and Capital Gains Distributions................ 27
Systematic Withdrawal Plans--Class A and Class D Shares.................. 27
Exchange Privilege....................................................... 28
Taxes..................................................................... 41
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions........................................................... 44
Special Rules for Certain Foreign Currency Transactions.................. 44
Performance Data.......................................................... 45
General Information....................................................... 47
Description of Shares.................................................... 47
Computation of Offering Price Per Share.................................. 48
Independent Auditors..................................................... 49
Custodian................................................................ 49
Transfer Agent........................................................... 49
Legal Counsel............................................................ 49
Reports to Shareholders.................................................. 49
Additional Information................................................... 49
Independent Auditors' Report.............................................. 51
Financial Statements...................................................... 52
</TABLE>
Code #16748 -- 0995
LOGO MERRILL LYNCH
Merrill Lynch International
Equity Fund
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
September 27, 1995
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 year ended May 31, 1995 and 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, 1995.
Statement of Assets and Liabilities as of May 31, 1995.
Statement of Operations for the year ended May 31, 1995.
Statement of Changes in Net Assets for the year ended May 31, 1995 and
the period July 30, 1993 (commencement of operations) to May 31,
1994.
Financial Highlights for the year ended May 31, 1995 and 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, dated June 7, 1993.(a)
(b) --Certificate of Establishment and Designation of Class A Shares and
Class B Shares, dated June 11, 1993.(a)
(c) --Certificate of Amendment to Declaration of Trust and Establishment
and Designation of Classes, dated October 17, 1994.
2 --Amended and Restated By-Laws of Registrant.
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Amended and Restated Declaration of
Trust, as amended, Certificates 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. (d)
6(a) --Form of new Class A Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.(e)
(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)
(d) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(e)
(e) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(e)
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. (now known as Merrill Lynch Financial Data Services,
Inc.)(c)
(b) --Agreement relating to the use of the "Merrill Lynch" name.(c)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10 --None.
--Consent of Deloitte & Touche LLP, independent auditors for the
11 Registrant.
12 --None.
13 --Certificate of Merrill Lynch Investment Management, Inc.(a)
14 --None.
15(a) --Class A Distribution Plan of Registrant.(c)
(b) --Class B Distribution Plan of Registrant.(c)
(c) --Form of Class C Distribution Plan of Registrant.(e)
(d) --Form of Class D Distribution Plan of Registrant.(e)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(c)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares (formerly designated Class A Shares).(c)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Power of Attorney of Edward D. Zinbarg.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
(b) Reference is made to Article I, Article II (Sections 2.2, 2.3, 2.4 and
2.7), Article III (Sections 3.1 and 3.4), Article IV (Sections 4.1, 4.3 and
4.4), Article V (Sections 5.1, 5.2, 5.3 and 5.5), Article VI (Sections 6.2,
6.3, 6.4, 6.5, 6.7 and 6.8), Article VII (Section 7.1), Article VIII
(Sections 8.2 and 8.3), Article X (Sections 10.3, 10.4, 10.5, 10.6, 10.7
and 10.8), Article XI (Sections 11.3, 11.4 and 11.5) and Article XII
(Section 12.6) of the Registrant's Amended and Restated Declaration of
Trust filed as Exhibit 1(a) to the Registration Statement; the Instrument
of Establishment filed as Exhibit 1(b) to the Registration Statement; the
Certificate of Amendment to Declaration of Trust and Establishment and
Designation of Classes filed as Exhibit 1(c) to the Registration Statement;
and Article I, Article V, Article VI and Article VII of the Registrant's
Amended and Restated By-Laws filed as Exhibit 2 to the Registration
Statement.
(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.
(d) Filed as an Exhibit to Post-Effective Amendment No. 2 to the Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
(e) Filed as an Exhibit to Post-Effective Amendment No. 3 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, 1995*
- -------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per
share........................................................ 8,974
Class B shares of beneficial interest, par value $0.10 per
share....................................................... 101,459
Class C shares of beneficial interest, par value $0.10 per
share....................................................... 4,420
Class D shares of beneficial interest, par value $0.10 per
share....................................................... 14,296
</TABLE>
(footnote appears on next page)
C-2
<PAGE>
* The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest, as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of 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 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 Class A, Class B, Class C and Class D shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, 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
C-3
<PAGE>
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.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment Adviser"),
acts as investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings,
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc.; and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, 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., 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 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.
C-4
<PAGE>
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, FAM, Merrill Lynch Funds Distributor, Inc.
("MLFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, 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 Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
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, 1993, 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 paragraphs, and Messrs.
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
---- ------------------ ---------------------------------------
<C> <S> <C>
ML & Co. .............. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services..... General Partner General Partner of FAM
Arthur Zeikel.......... President President of FAM; President and Director of
Princeton Services; Director of MLFD;
Executive Vice President of ML & Co.;
Executive Vice President of Merrill Lynch
Terry K. Glenn......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators L.P.
Vincent R. Giordano.... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin...... Senior Vice President Senior Vice President of FAM
Norman R. Harvey....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
N. John Hewitt......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein..... Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary of
Princeton Services; Director of MLFD
Ronald M. Kloss........ Senior Vice President Senior Vice President and Controller of
and 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
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <S> <C>
Richard L. Reller..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Ronald L. Welburn..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman....... Senior Vice President Senior Vice President of 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 Milton Gate, 1 Moor Lane,
London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since June 1, 1993, 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 paragraphs:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION WITH MLAM U.K. VOCATION OR EMPLOYMENT
---- ----------------------- ---------------------------------------
<C> <S> <C>
Arthur Zeikel......... Director and 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........ Senior Managing Vice President of the Investment Adviser
Director
Terry K. Glenn........ 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 MLFDS; President of Princeton
Administrators L.P.
Adrian Holmes......... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand... Director Director of Merrill Lynch Global Asset
Management
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
Steven J. Yardley..... Director None
Carol Ann Langham..... Company Secretary None
Debra Anne Searle..... Assistant Company None
Secretary
</TABLE>
C-6
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc. and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc. and Merrill Lynch Senior Floating Rate 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. Aldrich,
Brady, Breen, Crook, Fatseas, Graczyk and Wasel is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -----------------------
<C> <S> <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 None
Assistant Treasurer
Mark A. DeSario....................... Vice President None
James J. 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
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.
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 its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
C-7
<PAGE>
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) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 26th day of September 1995.
Merrill Lynch International Equity
Fund
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
TITLE DATE
SIGNATURE
Arthur Zeikel*
- ------------------------------------- President and
(ARTHUR ZEIKEL) Trustee
(Principal Executive Officer)
Treasurer (Principal Financial
/s/ Gerald M. Richard and Accounting
Officer)
September 26,
- ------------------------------------- 1995
(GERALD M. RICHARD)
Donald Cecil*
- ------------------------------------- Trustee
(DONALD CECIL)
Edward H. Meyer*
- ------------------------------------- Trustee
(EDWARD H. MEYER)
Charles C. Reilly*
- ------------------------------------- Trustee
(CHARLES C. REILLY)
Richard R. West*
- ------------------------------------- Trustee
(RICHARD R. WEST)
Edward D. Zinbarg*
- ------------------------------------- Trustee
(EDWARD D. ZINBARG)
/s/ Gerald M. Richard September 26,
*By: ________________________________ 1995
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Amended and Restated Declaration of Trust, dated June 7, 1993.(a)
(b) --Certificate of Establishment and Designation of Class A Shares and
Class B Shares, dated June 11, 1993.(a)
(c) --Certificate of Amendment to Declaration of Trust and Establishment
and Designation of Classes, dated October 17, 1994.
2 --Amended and Restated By-Laws of Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
13 --Certificate of Merrill Lynch Investment Management, Inc.(a)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Power of Attorney of Edward D. Zinbarg.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
Ex-99.1(a)
AMENDED AND RESTATED DECLARATION OF TRUST
OF
MERRILL LYNCH SHORT-TERM U.S. TREASURY FUND
The undersigned, constituting a majority of the Trustees of
Merrill Lynch Short-Term U.S. Treasury Fund (the "Trust"), a
Massachusetts business trust, hereby certify that the Trustees of
the Trust have duly adopted the following amendment and
restatement of the Declaration of Trust of the Trust dated the
3rd day of January 1992 (the "Declaration of Trust") and that
such amendment and restatement has been approved by the sole
shareholder of the Trust:
ARTICLE I
The Trust
---------
1.1. Name. The name of the Trust shall be "Merrill Lynch
International Equity Fund", and so far as may be practicable the
Trustees shall, conduct the Trust's activities, execute all
documents and sue or be sued under that name, which name (and the
word "Trust" wherever hereinafter used) shall refer to the
Trustees as trustees, and not individually, and shall not refer
to the officers, agents, employees or Shareholders of the Trust.
However, should the Trustees determine that the use of such name
is not advisable, they may select such other name for the Trust
as they deem proper, and the Trust may hold its property and
conduct its activities under such other name. Any name change
shall become effective upon the execution by a majority of the
then Trustees of an instrument setting forth the new name. Any
such instrument shall have the status of an amendment to this
Declaration.
<PAGE>
1.2 Definitions. As used in this Declaration, the
-----------
following terms shall have the following meanings:
The terms "Affiliated-Person", "Assignment",
----------------- ----------
"Commission", "Interested Person", "Majority Shareholder
---------- ----------------- --------------------
Vote" (the 67% or more than 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may
be applicable) and "Principal Underwriter" shall have the
---------------------
meanings given them in the 1940 Act.
"Declaration" shall mean this Declaration as amended
-----------
from time to time. References in this Declaration to
"Declaration", "hereof", "herein" and "hereunder" shall be
----------- ------ ------ ---------
deemed to refer to the Declaration rather than the article
or section in which such words appear.
"Fundamental Policies" shall mean the investment
--------------------
restrictions set forth in the Prospectus and designated as
fundamental policies therein.
The "1940 Act" refers to the Investment Company Act of
--------
1940, as amended from time to time, and shall include the
rules and regulations and any relevant order of exemption
promulgated thereunder by the Commission.
"Person" shall mean and include individuals,
------
corporations, partnerships, trusts, associations, joint
ventures and other entities, whether or not legal entities,
and governments and agencies and political subdivisions
thereof.
"Prospectus" shall mean the currently effective
----------
Prospectus of the Trust under the Securities Act of 1933, as
amended, including the Statement of Additional Information
incorporated by reference therein.
" Shareholders" shall mean as of any particular time all
------------
holders of record of outstanding Shares at such time.
"Shares" shall mean the equal proportionate
------
transferable units of interest into which the beneficial
interest in the Trust shall be divided from time to time and
includes fractions of Shares as well as whole Shares. As
provided in Article VI hereof, the Trust may issue separate
classes of Shares; all references to Shares shall be deemed
to be Shares of a single class or all classes as the context
may require.
"Trustees" shall mean the signatories to this
--------
Declaration, so long as they shall continue in office in
accordance with the terms hereof, and all other persons who
at the time in question have been duly elected or appointed
2
<PAGE>
and have qualified as trustees in accordance with the
provisions hereof and are then in office, are herein
referred to as the "Trustees", and reference in this
Declaration to a Trustee or Trustees shall refer to such
person or persons in their capacity as trustees hereunder.
"Trust Property" shall mean as of any particular time
--------------
any and all property, real or personal, tangible or
intangible, which at such time is owned or held by or for
the account of the Trust or the Trustees.
ARTICLE II
Trustees
--------
2.1. Number and Qualification. The number of Trustees
------------------------
shall be fixed from time to time by written instrument signed by
a majority of the Trustees then in office, provided, however,
that the number of Trustees shall in no event be less than three
or more than fifteen (except prior to the first public offering
of Shares). Any vacancy created by an increase in Trustees may,
to the extent permitted by the 1940 Act, be filled by the
appointment of an individual having the qualifications described
in this Article made by a written instrument signed by a majority
of the Trustees then in office. Any such appointment shall not
become effective, however, until the individual named in the
written instrument of appointment shall have accepted in writing
such appointment and agreed in writing to be bound by the terms
of this Declaration. No reduction in the number of Trustees
shall have the effect of removing any Trustee from office prior
to the expiration of his term. Whenever a vacancy in the number
of Trustees shall occur, until such vacancy is filled as provided
in Section 2.4 hereof, the Trustees in office, regardless of
their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by
this Declaration. A Trustee shall be an individual at least 21
years of age who is not under legal disability. Trustees need
not own Shares.
2.2. Term of Office. Each Trustee shall (except in the
--------------
event of resignations or removals or vacancies pursuant to
Sections 2.3 or 2.4 hereof) hold office until his successor has
been elected and is qualified to serve as Trustee or until such
time as may otherwise be provided in the By-Laws adopted or
amended pursuant to Section 2.7 hereof.
2.3. Resignation and Removal. Any Trustee may resign his
-----------------------
trust (without need for prior or subsequent accounting) by an
instrument in writing signed by him and delivered or mailed to
the Chairman, if any, the President or the Secretary, and such
3
<PAGE>
resignation shall be effective upon such delivery, or at a later
date according to the terms of the instrument. Any of the
Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than the number
required by Section 2.1 hereof) with cause, by the action of
two-thirds of the remaining Trustees. Any Trustee may be removed
at any special meeting of the Shareholders by a vote of
two-thirds of the outstanding Shares. Upon the resignation or
removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining
Trustees shall require for the purpose of conveying to the Trust
or the remaining Trustees any Trust Property held in the name of
the resigning or removed Trustee. Upon the incapacity or death
of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees
shall require as provided in the preceding sentence.
2.4. Vacancies. The term of office of a Trustee shall
---------
terminate and a vacancy shall occur in the event of the death,
resignation, bankruptcy, adjudication of incompetence or other
incapacity to perform the duties of the office, or removal, of a
Trustee. No such vacancy or vacancies shall operate to annul
this Trust or to revoke any existing agency created pursuant to
the terms of this Declaration. In the case of a vacancy or
vacancies, the Trustees in office, regardless of their number,
shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by the
Declaration, and the Shareholders, acting at any meeting of
Shareholders held in accordance with Section 10.2 hereof, or, to
the extent permitted by the 1940 Act, a majority of the Trustees
continuing in office acting by written instrument or instruments,
may fill such vacancy, and any Trustee so elected by the Trustees
shall hold office as provided in this Declaration. A written
instrument certifying the existence of such vacancy signed by a
majority of the Trustees shall be conclusive evidence of the
existence of such vacancy.
2.5. Meetings. Meetings of the Trustees shall be held from
--------
time to time upon the call of the Chairman, if any, the
President, the Secretary or any two Trustees. Regular meetings
of the Trustees may be held without call or notice at a time and
place fixed by the By-Laws or by resolution of the Trustees.
Notice of any other meeting shall be mailed or otherwise given
not less than 48 hours before the meeting but may be waived in
writing by any Trustee either before or after such meeting. The
attendance of a Trustee at a meeting shall constitute a waiver of
notice of such meeting except where a Trustee attends a meeting
for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully
called or convened. The Trustees may act with or without a
meeting. A quorum for all meetings of the Trustees shall be a
majority of the Trustees. unless provided otherwise in this
4
<PAGE>
Declaration, any action of the Trustees may be taken at a meeting
by vote of a majority of the Trustees present (a quorum being
present) or without a meeting by written consent(s) of a majority
of the Trustees.
Any committee of the Trustees, including an executive
committee, if any, may act with or without a meeting. A quorum
for all meetings of any such committee shall be a majority of the
members thereof. Unless provided otherwise in this Declaration,
any action of any such committee may be taken at a meeting by
vote of a majority of the members present (a quorum being
present) or without a meeting by written consent of a majority of
the members.
With respect to actions of the Trustees and any committee of
the Trustees, Trustees who are Interested Persons of the Trust
within the meaning of Section 1.2 hereof or otherwise interested
in any action to be taken may be counted for quorum purposes
under this Section and shall be entitled to vote to the extent
permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting
of the Trustees or any committee thereof by means of a conference
telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other and
participation in a meeting pursuant to such communications
systems shall constitute presence in person at such meeting.
2.6. Officers. The Trustees shall annually elect a
--------
President, a Secretary and a Treasurer and may elect a Chairman.
The Trustees may elect or appoint or authorize the Chairman, if
any, or President to appoint such other officers or agents with
such powers as the Trustees may deem to be advisable. The
Chairman and President shall be and the Secretary and Treasurer
may, but need not, be a Trustee.
2.7. By-Laws. The Trustees may adopt and from time to time
-------
amend or repeal the By-Laws for the conduct of the business of
the Trust.
ARTICLE III
Powers of Trustees
------------------
3.1. General. The Trustees shall have exclusive and
-------
absolute control over the Trust Property and over the business of
the Trust to the same extent as if the Trustees were the sole
owners of the Trust Property and business in their own right, but
with such powers of delegation as may be permitted by this
Declaration. The Trustees may perform such acts as in their sole
discretion are proper for conducting the business of the Trust.
The enumeration of any specific power herein shall not be
5
<PAGE>
construed as limiting the aforesaid power. Such powers of the
Trustees may be exercised without order of or resort to any
court.
3.2. Investments. The Trustees shall have power, subject
-----------
to the Fundamental Policies, to:
(a) conduct, operate and carry on the business of an
investment company;
(b) subscribe for, invest in, reinvest in, purchase or
otherwise acquire, hold, pledge, sell, assign, transfer, ex-
change, distribute or otherwise deal in or dispose of nego-
tiable or non-negotiable instruments, obligations, evidences
of indebtedness, certificates of deposit or indebtedness,
commercial paper, repurchase agreements, reverse repurchase
agreements, options, futures contracts, options on futures
contracts and other investments, including, without limita-
tion, those issued, guaranteed or sponsored by any state,
territory or possession of the United States and the
District of Columbia and their political subdivisions,
agencies and instrumentalities, or by the United States
Government or its agencies or instrumentalities, or
international instrumentalities, or by any bank, savings
institution, corporation or other business entity organized
under the laws of the United States and, to the extent
provided in the Prospectus and Registration Statement and
not prohibited by the Fundamental Policies, organized under
foreign laws; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and
all such investments of every kind and description,
including, without limitation, the right to consent and
otherwise act with respect thereto, with power to designate
one or more persons, firms, associations or corporations to
exercise any of said rights, powers and privileges in
respect of any of said instruments; and the Trustees shall
be deemed to have the foregoing powers with respect to any
additional securities in which the Trust may invest should
the investment policies set forth in the Prospectus and
Registration Statement or the Fundamental Policies be
amended.
The Trustees shall not be limited to investing in
obligations maturing before the possible termination of the
Trust, nor shall the Trustees be limited by any law limiting the
investments which may be made by fiduciaries.
3.3. Legal Title. Legal Title to all the Trust Property
-----------
shall be vested in the Trustees as joint tenants except that the
Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the
Trustees, or in the name of the Trust, or in the name of any
6
<PAGE>
other Person as nominee, on such terms as the Trustees may
determine, provided that the interest of the Trust therein is
appropriately protected.
The right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who may
hereafter become a Trustee upon his due election and
qualification. Upon the resignation, removal or death of a
Trustee he shall automatically cease to have any right, title or
interest in any of the Trust Property, and the right, title and
interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing
documents have been executed and delivered.
3.4. Issuance and Repurchase of Securities. The Trustees
-------------------------------------
shall have the power to issue, sell, repurchase, redeem, retire,
cancel, acquire, hold, resell, reissue, dispose of, transfer, and
otherwise deal in, Shares, including shares in fractional
denominations, and, subject to the more detailed provisions set
forth in Articles VIII and IX, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the
laws of the Commonwealth of Massachusetts governing business
corporations.
3.5. Borrow Money. Subject to the Fundamental Policies,
------------
the Trustees shall have power to borrow money or otherwise obtain
credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the Trust,
including the lending of portfolio securities, and to endorse,
guarantee, or undertake the performance of any obligation,
contract or engagement of any other person, firm, association or
corporation.
3.6. Delegation; Committees. The Trustees shall have
----------------------
power, consistent with their continuing exclusive authority over
the management of the Trust and the Trust Property, to delegate
from time to time to such of their number or to officers,
employees or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or
the names of the Trustees or otherwise as the Trustees may deem
expedient, to the same extent as such delegation is permitted to
directors of a Massachusetts business corporation and is
permitted by the 1940 Act.
3.7. Collection and Payment. The Trustees shall have power
----------------------
to collect all property due to the Trust; to pay all claims
including taxes, against the Trust Property; to prosecute, defend
compromise or abandon any claim relating to the Trust Property;
to foreclose any security interest securing any obligation(s), by
7
<PAGE>
virtue of which any property is owed to the Trust; and to enter
into releases, agreements and other instruments.
3.8. Expenses. The Trustees shall have power to incur and
--------
pay any expenses which in the opinion of the Trustees are
necessary or incidental to carry out any of the purposes of this
Declaration, and to pay reasonable compensation from the funds of
the Trust to themselves as Trustees. The Trustees shall fix the
compensation of all officers, employees and Trustees. The
Trustees may pay themselves such compensation for special
services, including legal, underwriting, syndicating and
brokerage services, as they in good faith may deem reasonable and
reimbursement for expenses reasonably incurred by themselves on
behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the
--------------------
power to: (a) employ or contract with such Persons as the
Trustees may deem desirable for the transaction of the business
of the Trust; (b) enter into joint ventures, partnerships and any
other combinations or associations; (c) purchase, and pay for out
of Trust Property, insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the
Trust against all claims arising by reason of holding any such
position or by reason of any action taken or omitted by any such
Person in such capacity, whether or not constituting negligence,
or whether or not the Trust would have the power to indemnify
such Person against such liability; (d) establish pension,
profit-sharing, share purchase, and other retirement, incentive
and benefit plans for any Trustees, officers, employees and
agents of the Trust; (e) make donations, irrespective of benefit
to the Trust, for charitable, religious, educational, scientific,
civic or similar purposes; (f) to the extent permitted by law,
indemnify any Person with whom the Trust has dealings, including
any advisor, administrator, manager, distributor and selected
dealers, to such extent as the Trustees shall determine; (g)
guarantee indebtedness or contractual obligations of others; (h)
determine and change the fiscal year of the Trust and the method
by which its accounts shall be kept; and (i) adopt a seal for the
Trust, but the absence of such seal shall not impair the validity
of any instrument executed on behalf of the Trust.
3.10. Further Powers. The Trustees shall have power to
--------------
conduct the business of the Trust and carry on its operations in
any and all of its branches and maintain offices both within and
without the Commonwealth of Massachusetts, in any and all states
of the United States of America, in the District of Columbia, and
in any and all commonwealths, territories, dependencies,
colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do
all such other things and execute all such instruments as they
deem necessary, proper or desirable in order to promote the
8
<PAGE>
interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall
be conclusive. In construing the provisions of this Declaration,
the presumption shall be in favor of a grant of power to the
Trustees. The Trustees will not be required to obtain any court
order to deal with the Trust Property.
ARTICLE IV
Management and Distribution Arrangements
----------------------------------------
4.1. Management Arrangements. Subject to a Majority
-----------------------
Shareholder Vote, as required by the 1940 Act, the Trustees may
in their discretion from time to time enter into advisory or
management contracts whereby the other party to such contract
shall undertake to furnish the Trustees such advisory and
management services as the Trustees shall from time to time
consider desirable and all upon such terms and conditions as the
Trustees may in their discretion determine. Notwithstanding any
provisions of this Declaration, the Trustees may authorize any
adviser or manager (subject to such general or specific
instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio
securities of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations
of any such adviser or manager (and all without further action by
the Trustees). Any such purchases, sales, loans and exchanges
shall be deemed to have been authorized by all of the-Trustees.
4.2. Distribution Arrangements. The Trustees may in their
-------------------------
discretion from time to time enter into a contract(s), providing
for the sale of the Shares of the Trust to net the Trust not less
than the par value per share, whereby the Trust may either agree
to sell the Shares to the other party to the contracts) or
appoint such other party its sales agent for such Shares. In
either case, the contracts) shall be on such terms and
conditions as the Trustees may in their discretion determine not
inconsistent with the provisions of this Article IV or the
By-Laws; and such contracts) may also provide for the repurchase
or sale of Shares by such other party as principal or as agent of
the Trust and may provide that such other party may enter into
selected dealer agreements with registered securities dealers to
further the purpose of the distribution or repurchase of the
Shares.
4.3. Parties to Contract. Any contract of the character
-------------------
described in Sections 4.1 and 4.2 of this Article IV or in
Article VII hereof may be entered into with any corporation,
9
<PAGE>
firm, trust or association, although one or more of the Trustees
or officers of the Trust may be an officer, director, Trustee,
shareholder, or member of such other party to the contract, and
no such contract shall be invalidated or rendered voidable by
reason of the existence of any such relationship, nor shall any
person holding such relationship be liable merely by reason of
such relationship for any loss or expense to the Trust under or
by reason of said contract or accountable for any profit realized
directly or indirectly therefrom, provided that the contract when
entered into was reasonable and fair and not inconsistent with
the provisions of this Article IV or the By-Laws. The same
person (including a firm, corporation, trust, or association) may
be the other party to contracts entered into pursuant to Sections
4.1 and 4.2 above or Article VII, and any individual may be
financially interested or otherwise affiliated with persons who
are parties to any or all of the contracts mentioned in this
Section 4.3.
4.4. Provisions and Amendments. Any contract entered into
-------------------------
pursuant to Sections 4.1 and 4.2 of this Article IV shall be
consistent with and subject to the requirements of Section 15 of
the 1940 Act with respect to its continuance in effect, its
termination, and the method of authorization and approval of such
contract or renewal thereof, and no amendment to any contract,
entered into pursuant to Section 4.1 shall be effective unless
assented to by a Majority Shareholder Vote.
ARTICLE V
Limitations of Liability of Shareholders,
Trustees and others
-----------------------------------------
5.1. No Personal Liability of Shareholders, Trustees, etc.
----------------------------------------------------
No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. No Trustee, officer,
employee or agent of the Trust shall be subject to any personal
liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising from his bad faith, willful
misfeasance, gross negligence or reckless disregard of his duty
to such Person; and all such Persons shall look solely to the
Trust Property for satisfaction of claims of any nature arising
in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust is
made a party to any suit or proceeding to enforce any such
liability, he shall not on account thereof be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities
to which such Shareholder may become subject by reason of his
10
<PAGE>
being or having been a Shareholder and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred
by him in connection with any such claim or liability. The
rights accruing to a Shareholder under this Section 5.1 shall not
exclude any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right
of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided
herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer,
------------------------------
employee or agent of the Trust shall be liable to the Trust, its
shareholders, or to any Shareholder, Trustee, officer, employee,
or agent thereof for any action or failure to act (including
without limitation the failure to compel in any way any former or
acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties.
5.3. Mandatory Indemnification. 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 payments in connection with
11
<PAGE>
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.
5.4. No Bond Required of Trustees. No Trustee shall, as
----------------------------
such, be obligated to give any bond or surety or other security
for the performance of any of his duties hereunder.
5.5. No Duty of Investigation; Notice in Trust Instruments,
------------------------------------------------------
etc. No purchaser, lender, transfer agent or other person
---
dealing with the Trustees or any officer, employee or agent of
the Trust shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or
on the order of the Trustees or of said officer, employee or
agent. Every obligation, contract, instrument, certificate,
Share, other security of the Trust or undertaking, and every
other act or thing whatsoever executed in connection with the
Trust shall be conclusively taken to have been executed or done
by the executors thereof only in their capacity as Trustees under
this Declaration or in their capacity as officers, employees or
agents of the Trust. Every written obligation, contract,
instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees or by any officers,
employees or agents of the Trust, in their capacity as such,
shall contain an appropriate recital to the effect that the
Shareholders, Trustees, officers, employees and agents of the
Trust shall not personally be bound by or liable thereunder, nor
shall resort be had to their private property for the
satisfaction of any obligation or claim thereunder, and
appropriate references shall be made therein to the Declaration,
and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate
to impose personal liability on any of the Trustees,
Shareholders, officers, employees or agents of the Trust. The
Trustees may maintain insurance for the protection of the Trust
Property, its Shareholders, Trustees, officers, employees and
agents in such amount as the Trustees shall deem adequate to
cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.
5.6. Reliance on Experts, etc. Each Trustee and officer or
------------------------
employee of the Trust shall, in the performance of his duties, be
fully and completely justified and protected with regard to any
act or any failure to act resulting from reliance in good faith
upon the books of account or other records of the Trust, upon an
opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by any investment adviser,
distributor, selected dealers, accountants, appraisers or other
experts or consultants elected with reasonable care by the
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Trustees, officers or employees of the Trust, regardless of
whether such counsel or expert may also be a Trustee.
ARTICLE VI
Shares of-Beneficial Interest
-----------------------------
6.1. Beneficial Interest. The interest of the
-------------------
beneficiaries hereunder shall be divided into transferable shares
of beneficial interest, par value $0.10 per share. The number of
such shares of beneficial interest authorized hereunder is
unlimited. The Trustees, in their discretion without a vote of
the Shareholders, may divide the shares of beneficial interest
into classes. In such event, each class shall represent
interests in the Trust Property and have identical voting,
dividend, liquidation and other rights and the same terms and
conditions except that expenses related directly or indirectly to
the shares of a class may be borne solely by such class (as shall
be determined by the Trustees) and, as provided in Section 10.1,
a class may have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class. The
bearing of such expenses solely by a class of Shares shall be
appropriately reflected (in the manner determined by the
Trustees) in the net asset value, dividend and liquidation rights
of the Shares of such class. The division of the Shares into
classes and the terms and conditions pursuant to which the Shares
of the classes will be issued must be made in compliance with the
1940 Act. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares
or a split of Shares, shall be fully paid and nonassessable.
6.2. Rights of Shareholders. The ownership of the Trust
----------------------
Property of every description and the right to conduct any
business hereinbefore described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and
they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can
they be called upon to share or assume any losses of the Trust or
suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the
rights in this Declaration specifically set forth. The Shares
shall not entitle the holder to preference, preemptive, appraisal
(except for rights of appraisal specified in Section 11.4),
conversion or exchange rights, except as the Trustees may
determine with respect to any class of Shares.
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6.3. Trust Only. It is the intention of the Trustees to
----------
create only the relationship of Trustee and beneficiary between
the Trustees and each Shareholder from time to time. It is not
the intention of the Trustees to create a general Partnership,
limited partnership, joint stock association, corporation,
bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners
or members of a joint stock association.
6.4. Issuance of Shares. The Trustees, in their
------------------
discretion, may from time to time without a vote of the
Shareholders issue Shares, in addition to the then issued and
outstanding Shares and Shares held in the treasury, to such party
or parties and for such amount not less than par value and type
of consideration, including cash or property, at such time or
times, and on such terms as the Trustees may deem best, and may
in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares. The Trustees
may from time to time divide or combine the Shares into a greater
or lesser number without thereby changing the proportionate
beneficial interests in the Trust. Contributions to the Trust
may be accepted for, and Shares shall be redeemed as, whole
Shares and/or 1/1,000ths of a Share or multiples thereof.
6.5. Register of Shares. A register shall be kept at the
------------------
Trust or a transfer agent duly appointed by the Trustees under
the direction of the Trustees which shall contain the names and
addresses of the Shareholders and the number of Shares held by
them respectively and a record of all transfers thereof. Such
register shall be conclusive as to who are the holders of the
Shares and who shall be entitled to receive dividends or
distributions or otherwise to exercise or enjoy the rights of
Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or distribution, nor to have notice given
to him as herein provided, until he has given his address to a
transfer agent or such other officer or agent of the Trustees as
shall keep the said register for entry thereon. It is not
contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the
issuance of share certificates and promulgate appropriate rules
and regulations as to their use.
6.6. Transfer Agent and Registrar. The Trustees shall have
----------------------------
power to employ a transfer agent or transfer agents, and a
registrar or registrars. The transfer agent or transfer agents
may keep the said register and record therein the original issues
and transfers, if any, of the said Shares. Any such transfer
agent and registrar shall perform the duties usually performed by
14
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transfer agents and registrars of certificates of stock in a
corporation, except as modified by the Trustees.
6.7. Transfer of Shares. Shares shall be transferable on
------------------
the records of the Trust only by the record holder thereof or by
his agent thereto duly authorized in writing, upon delivery to
the Trustees or a transfer agent of the Trust of a duly executed
instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other
matters as may reasonably be required. Upon such delivery the
transfer shall be recorded on the register of the Trust. Until
such record is made, the Shareholder of record shall be deemed to
be the holder of such Shares for all purposes hereof and neither
the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
Any person becoming entitled to any Shares in consequence of
the death, bankruptcy, or incompetence of any Shareholder, or
otherwise by operation of law, shall be recorded on the register
of Shares as the holder of such Shares upon production of the
proper evidence thereof to the Trustees or a transfer agent of
the Trust, but until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all
purposes hereof and neither the Trustees nor any transfer agent
or registrar nor any officer or agent of the Trust shall be
affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
6.8. Notices. Any and all notices to which any Shareholder
-------
hereunder may be entitled and any and all communications shall be
deemed duly served or given if mailed, postage prepaid, addressed
to any Shareholder of record at his last known address as
recorded on the register of the Trust.
ARTICLE VII
Custodian
---------
7.1. Appointment and Duties. The Trust shall at all times
----------------------
employ one or more custodians, meeting the qualifications for
custodians for portfolio securities of investment companies
contained in the 1940 Act, as custodian with authority as its
agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the By-Laws of the
Trust and the 1940 Act:
(1) to receive and hold the securities owned by the
Trust and deliver the same upon written order;
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(2) to receive and receipt for any moneys due to the
Trust and deposit the same in its own banking department or
elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books
and accounts of the Trust and furnish clerical and
accounting services; and
(5) if authorized to do so by the Trustees, to compute
the net income of the Trust;
all upon such basis of compensation as may be agreed upon between
the Trustees and the custodian.
The Trustees may also authorize the custodian to employ one
or more sub-custodians from time to time to perform such of the
acts and services of the custodian and upon such terms and
conditions as may be agreed upon between the custodian and such
sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall meet the qualifications for
custodians contained in the 1940 Act.
7.2. Central Certificate System. Subject to such rules,
--------------------------
regulations and orders as the Commission may adopt, the Trustees
may direct the custodian to deposit all or any part of the
securities owned by the Trust in a system for the central
handling of securities established by a national securities
exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934 or such
other person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all
securities of any particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical
delivery of such securities, provided that all such deposits
shall be subject to withdrawal only upon the order of the Trust.
ARTICLE VIII
Redemption
----------
8.1. Redemptions. All outstanding Shares may be redeemed
-----------
at the option of the holders hereof, upon and subject to the
terms and conditions provided in this Article VIII. The Trust
shall, upon application of any Shareholder or pursuant to
authorization from any Shareholder, redeem or repurchase from
such Shareholder outstanding Shares for an amount per share
determined by the application of a formula adopted for such
purpose by resolution of the Trustees (which formula shall be
16
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consistent with the 1940 Act); provided that (a) such amount per
share shall not exceed the cash equivalent of the proportionate
interest of each share in the assets of the Trust at the time of
the repurchase or redemption and (b) if so authorized by the
Trustees, the Trust may, at any time and from time to time,
charge fees for effecting such redemption, at such rates as the
Trustees may establish, as and to the extent permitted under the
1940 Act, and may, at any time and from time to time, pursuant to
such Act, suspend such right of redemption. The procedures for
effecting redemption shall be as set forth in the Prospectus from
time to time.
8.2. Redemption of Shares: Disclosure of Holding. If the
-------------------------------------------
Trustees shall, at any time and in good faith, be of the opinion
that direct or indirect ownership of Shares or other securities
of the Trust has or may become concentrated in any person to an
extent which would disqualify the Trust as a regulated investment
company under the Internal Revenue Code, then the Trustees shall
have the power by lot or other means deemed equitable by them (i)
to call for redemption a number, or principal amount, of Shares
or other securities of the Trust sufficient, in the opinion of
the Trustees, to maintain or bring the direct or indirect
ownership of Shares or other securities of the Trust into
conformity with the requirements for such qualification and (ii)
to refuse to transfer or issue Shares or other securities of the
Trust to any Person whose acquisition of the Shares or other
securities of the Trust in question would in the opinion of the
Trustees result in such disqualification. The redemption shall
be effected at a redemption price determined in accordance with
Section 8.1.
The holders of Shares or other securities of the Trust shall
upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other
securities of the Trust as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code, or to comply
with the requirements of any other taxing authority.
8.3. Redemptions of Accounts of Less than $1,000. Due to
-------------------------------------------
the relatively high cost of maintaining investment accounts of
less than $1,000, the Trustees shall have the power to redeem
shares at a redemption price determined in accordance with
Section 8.1 if at any time the total investment in such account
does not have a value of at least $1,000; provided, however, that
the Trustees may not exercise such power if the Prospectus does
not describe such power. In the event the Trustees determine to
exercise their power to redeem Shares provided in this section
8.3, Shareholders shall be notified that the value of their
account is less than $1,000 and allowed 60 days to make an
additional investment before redemption is processed.
17
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ARTICLE IX
Determination of Net Asset Value,
Net Income and Distributions
---------------------------------
9.1. Net Asset Value. The net asset value of each
---------------
outstanding Share of the Trust shall be determined at such time
or times on such days as the Trustees may determine, in
accordance with the 1940 Act. The method of determination of net
asset value of Shares of each class shall be determined by the
Trustees and shall be as set forth in the Prospectus and
Registration Statement with any expenses being borne solely by a
class of Shares being reflected in the net asset value of such
Shares. The power and duty to make the daily calculations may be
delegated by the Trustees to the adviser, administrator, manager,
custodian, transfer agent or such other person as the Trustees
may determine. The Trustees may suspend the daily determination
of net asset value to the extent permitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall
-----------------------------
from time to time distribute ratably among the Shareholders such
proportion of the net profits, surplus (including
paid-in-surplus) capital, or assets held by the Trustees as they
deem proper with any expenses being borne solely by a class of
Shares being reflected in the net profits or other assets being
distributed to such class. Such distribution may be made in cash
or property (including without limitation any type of obligations
of the Trust or any assets thereof), and the Trustees may
distribute ratably among the Shareholders additional Shares
issuable hereunder in such manner, at such times, and on such
terms as the Trustees may deem proper. Such distributions may be
among the Shareholders of record at the time of declaring a
distribution or among the Shareholders of record at such later
date as the Trustees shall determine. The Trustees may always
retain from the net profits such amounts as they may deem
necessary to pay the debts or expenses of the Trust or to meet
obligations of the Trust, or as they deem desirable to use in the
conduct of its affairs or to retain for future requirements or
extensions of the business. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend
payout plans or related plans as the Trustees shall deem
appropriate.
Inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation thereof
on the books, the above provisions shall be interpreted to give
the Trustees the power in their discretion to distribute for any
fiscal year as ordinary dividends and as capital gains
distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
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9.3. Power to Modify Foregoing-Procedures. Notwithstanding
------------------------------------
any of the foregoing provisions of this Article IX, the Trustees
may prescribe, in their absolute discretion, such other bases and
times for determining the per share net asset value of the
Trust's Shares or net income, or the declaration and payment of
dividends and distributions as they deem necessary or desirable
or to enable the Trust to comply with any provision of the 1940
Act, including any rule or regulation adopted pursuant to the
1940 Act by the Commission or any securities association
registered under the Securities Exchange Act of 1934, all as in
effect now or hereafter amended or modified.
ARTICLE X
Shareholders
------------
10.1. Voting Powers. The Shareholders shall have power to
-------------
vote (i) for the removal of Trustees as provided in section 2.3,
(ii) with respect to any advisory or management contract as
provided in Section 4. 1, (iii) with respect to the amendment of
this Declaration as may be provided in Section 11.3, (iv) with
respect to such additional matters relating to the Trust as may
be required or authorized by the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law or by this
Declaration or the By-Laws of the Trust, and (v) with respect to
such additional matters relating to the Trust as may be properly
submitted for Shareholder approval. If the Shares shall be
divided into classes as provided in Article VI hereof, the Shares
of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class with exclusive
voting rights with respect to matters related to expenses being
borne solely by such class, or expenses being borne solely by a
class into which such class automatically converts. Each whole
Share shall be entitled to one vote as to any matter on which it
is entitled to vote and each Fractional Share shall be entitled
to a proportionate fractional vote, except that Shares held in
the treasury of the Trust as of the record date, as determined in
accordance with the By-Laws, shall not be voted. The By-Laws may
include further provisions for Shareholders' votes and meetings
and related matters.
10.2. Meetings of Shareholders. Special meetings of the
------------------------
Shareholders may be called at any time by a majority of the
Trustees and shall be called by any Trustee upon written request
of Shareholders holding in the aggregate not less than 10% of the
outstanding Shares having voting rights, such request specifying
the purpose or purposes for which such meeting is to be called.
Any such meeting shall be held within or without the Commonwealth
of Massachusetts on such day and at such time as the Trustees
shall designate. The holders of one-third of the outstanding
Shares present in person or by proxy shall constitute a quorum
19
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for the transaction of any business, except as may otherwise be
required by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or
the BY-Laws of the Trust. If a quorum is present at a meeting,
the affirmative vote of a majority of the Shares represented at
the meeting constitutes the action of the Shareholders unless the
1940 Act, the laws of the Commonwealth of Massachusetts or other
applicable law, the Declaration or the By-Laws of the Trust
requires a greater number of affirmative votes. If the Shares
shall be divided into classes with a class having exclusive
voting rights with respect to certain matters, the aforesaid
quorum and voting requirements with respect to action to be taken
by the Shareholders of the class on such matters shall be
Applicable only to the Shares of such class.
10.3. Notice of Meetings. Notice of all meetings of the
------------------
Shareholders, stating the time, place and purposes of the
meeting, shall be given by the Trustees by mail to each
Shareholder at his registered address, mailed at least 10 days
and not more than 60 days before the meeting. Only the business
stated in the notice of the meeting shall be considered at such
meeting. Any adjourned meeting may be held as adjourned without
further notice.
10.4. Record Date for Meetings. For the purpose of
------------------------
determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or
for the purposes of any other action, the Trustees may from time
to time close the transfer books for such period, not exceeding
30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 60 days
prior to the date of any meeting of Shareholders or daily
dividends or other action as a record date for the determination
of the Persons to be treated as Shareholders of record for such
purposes, except for dividend payments which shall be governed by
Section 9.2 hereof.
10.5. Proxies, etc. At any meeting of Shareholders, any
------------
holder of Shares entitled to vote thereat may vote by proxy,
provided that no proxy shall be voted at any meeting unless it
shall have been placed on file with the Secretary, or with such
other officer or agent of the Trust as the Secretary may direct,
for verification prior to the time at which such vote shall be
taken. Pursuant to a resolution of a majority of the Trustees,
proxies may be solicited in the name of one or more Trustees or
one or more of the officers of the Trust. Only Shareholders of
record shall be entitled to vote. When any Share is held jointly
by several persons, any one of them may vote at any meeting in
Person or by proxy in respect of such Share, but if more than one
Of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to
any vote to be cast, such vote shall not be received in respect
20
<PAGE>
of such Share. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise, and the burden of proving invalidity shall
rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or
to the legal control of any other person as regards the charge or
management of such Share, he may vote by his guardian or such
other person appointed or having such control, and such vote may
be given in person or by proxy.
10.6. Reports. The Trustees shall cause to be prepared at
-------
least annually a report of operations containing a balance sheet
and statement of income and undistributed income of the Trust
prepared in conformity with generally accepted accounting
principles and an opinion of an independent public accountant on
such financial statements. Copies of such reports shall be
mailed to all Shareholders of record within the time required by
the 1940 Act. The Trustees shall, in addition, furnish to the
Shareholders at least semiannually interim reports containing an
unaudited balance sheet of the Trust as of the end of such period
and an unaudited statement of income and surplus for the period
from the beginning of the current fiscal year to the end of such
period.
10.7. Inspection of Records. The records of the Trust
---------------------
shall be open to inspection by Shareholders to the same extent as
is permitted shareholders of a Massachusetts business
corporation.
10.8. Shareholder Action By Written Consent. Any action
-------------------------------------
which may be taken by Shareholders may be taken without a meeting
if a majority of Shareholders entitled to vote on the matter (or
such larger proportion thereof as shall be required by any
express provision of this Declaration) consent to the action in
writing and the written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for
all purposes as a vote taken at a meeting of Shareholders.
21
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ARTICLE XI
Duration; Termination of Trust;
Amendment; Mergers, Etc.
-------------------------------
11.1. Duration. Subject to possible termination in
--------
accordance with the provisions of Section 11.2 hereof, the Trust
created hereby shall continue without limitation of time.
11.2. Termination of Trust.
--------------------
(a) The Trust may be terminated by the (i) affirmative vote
of the holders of not less than two-thirds of the Shares at any
meeting of Shareholders or (ii) if such termination has been
approved by the affirmative vote of at least two-thirds of the
Trustees, in which case the affirmative vote of the holders of
not less than a majority of such Shares or (iii) by an instrument
in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than
two-thirds of such Shares. Upon the termination of the Trust,
(i) The Trust shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs
of the Trust and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust shall
have been wound up, including the power to fulfill or discharge
the contracts of the Trust, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any
part of the remaining Trust Property to one or more persons at
public or private sale for consideration which may consist in
whole or in part of cash, securities or other property of any
kind, discharge or pay its liabilities, and do all other acts
appropriate to liquidate its business; provided that any sale,
conveyance, assignment, exchange, transfer or other disposition
of all or substantially all the Trust Property shall require
approval of the principal terms of the transaction and the nature
and amount of the consideration by vote or consent of the holders
of a majority of the Shares entitled to vote.
(iii) After paying or adequately providing for the
Payment of all liabilities, and upon receipt of such releases,
indemnities and refunding agreements, as they deem necessary for
their protection, the Trustees may distribute the remaining Trust
Property, in cash or in kind or partly each, among the
Shareholders of each class, according to their respective rights
taking into account the proper allocation of expenses being borne
solely by any class of Shares.
22
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(b) After termination of the Trust and distribution to the
Shareholders as herein provided, a majority of the Trustees shall
execute and lodge among the records of the Trust an instrument in
writing setting forth the fact of such termination, and the
Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the rights and interests of
all Shareholders shall thereupon cease.
11.3. Amendment Procedure.
-------------------
(a) Except as provided in paragraph (b) of this
Section 11.3, this Declaration may be amended by a vote of a
majority of the Shares at a meeting of Shareholders or by an
instrument in writing, without a meeting, signed by a majority of
the Trustees and consented to by the holders of not less than a
majority of such Shares. The Trustees may also amend this
Declaration without the vote or consent of Shareholders (i) to
change the name of the Trust, (ii) to supply any omission, or
cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, (iii) if they deem it necessary to
conform this Declaration to the requirements of applicable
Federal or state laws or regulations or the requirements of the
Internal Revenue Code, or to eliminate or reduce any Federal,
state or local taxes which are or may be payable by the Trust or
the Shareholders, but the Trustees shall not be liable for
failing to do so, or (iv) for any other purpose which does not
adversely affect the rights of any Shareholder with respect to
which the amendment is or purports to be applicable.
(b) No amendment may be made, under Section 11.3(a)
above, which would change any rights with respect to any Shares
of the Trust by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any
voting rights pertaining thereto, except with the vote or consent
of the holders of two-thirds of the Shares of the Trust so
affected outstanding and entitled to vote. Nothing contained in
this Declaration shall permit the amendment of this Declaration
to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the
Trust or to permit assessments upon Shareholders.
(c) A certification in recordable form signed by a
majority of the Trustees or by the Secretary or any Assistant
Secretary of the Trust setting forth an amendment and reciting
that it was duly adopted by the Shareholders or by the Trustees
as aforesaid or a copy of the Declaration, as amended, in
recordable form, and executed by a majority of the Trustees or
certified by the Secretary or any Assistant Secretary of the
Trust, shall be conclusive evidence of such amendment when lodged
among the records of the Trust.
23
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Notwithstanding any other provision hereof, until such time
as a Registration Statement under the Securities Act of 1933, as
amended, covering the first public offering of Shares of the
Trust shall have become effective, this Declaration may be
terminated or amended in any respect by the affirmative vote of a
majority of the Trustees or by an instrument signed by a majority
of the Trustees.
11.4. Merger, Consolidation and Sale of Assets.
----------------------------------------
Notwithstanding any other provisions of this Declaration or the
By-Laws of the Trust, a favorable vote of the holders of at least
two-thirds of the outstanding Shares of the Trust entitled to be
voted on the matter shall be required to approve, adopt or
authorize (i) a merger or consolidation or share exchange of the
Trust with any other entity, or (ii) a sale or exchange of all or
substantially all of the assets of the Trust (other than in the
regular course of its investment activities), unless such action
has previously been approved, adopted or authorized by the
affirmative vote of at least two-thirds of the total number of
Trustees fixed in accordance with this Declaration, in which case
the affirmative vote of the holders of a majority of the
outstanding Shares of the Trust entitled to vote thereon shall be
required. In respect of any such merger, consolidation, sale or
exchange of assets, any Shareholder shall be entitled to rights
of appraisal of his Shares to the same extent as a shareholder of
a Massachusetts business corporation in respect of a merger,
consolidation, sale or exchange of assets of a Massachusetts
business corporation, and such rights shall be his exclusive
remedy in respect of his dissent from any such action.
11.5. Incorporation. With the approval of the holders of a
-------------
majority of the Shares, the Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws
of any jurisdiction or any other trust, partnership, association
or other organization to take over all of the Trust Property or
to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer
the Trust Property to any such corporation, trust, association or
organization in exchange for the Shares or securities thereof or
otherwise, and to lend money to, subscribe for the Shares or
securities of, and enter into any contracts with any such corpo-
ration, trust, partnership, association or organization, or any
corporation, partnership, trust, association or organization in
which the Trust holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation
between the Trust or any successor thereto and any such corpora-
tion, trust, partnership, association or other organization if
and to the extent permitted by law, as provided under the law
then in effect. Nothing contained herein shall be construed as
requiring approval of Shareholders for the Trustees to organize
or assist in organizing one or more corporations, trusts,
partnerships, associations or other organizations and selling,
24
<PAGE>
conveying or transferring a portion of the Trust Property to such
organizations or entities.
ARTICLE XII
Miscellaneous
-------------
12.1. Filing. This Declaration, any amendment hereto or
------
any Certificate of Designation shall be filed in the office of
the Secretary of the Commonwealth of Massachusetts and in such
other places as may be required under the laws of Massachusetts
and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be
accompanied by a certificate signed and acknowledged by a Trustee
or the Secretary or any Assistant Secretary stating that such
action was duly taken in a manner provided herein. unless an
amendment or certificate or certificate of Designation sets forth
some later time for the effectiveness thereof, such amendment or
certificate or Certificate of Designation shall be effective upon
its filing. A restated Declaration, containing the original
Declaration and all amendments theretofore made, may be executed
from time to time by a majority of the Trustees and shall, upon
filing with the Secretary of the Commonwealth of Massachusetts,
be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the original Declaration
and the various amendments thereto.
12.2. Resident Agent. The Trust shall maintain a resident
--------------
agent in the Commonwealth of Massachusetts, which agent shall
initially be CT Corporation System, 2 Oliver Street, Boston,
Massachusetts 02109. The Trustees may designate a successor
resident agent, provided, however, that such appointment shall
not become effective until written notice thereof is delivered to
the office of the Secretary of the Commonwealth.
12.3. Governing Law. This Declaration is executed by the
-------------
Trustees and delivered in the Commonwealth of Massachusetts and
with reference to the laws thereof, and the rights of all parties
and the validity and construction of every provision hereof shall
be subject to and construed according to the laws of said State
and reference shall be specifically made to the business
corporation law of the Commonwealth of Massachusetts as to the
construction of matters not specifically covered herein or as to
which an ambiguity exists.
12.4. Counterparts. This Declaration may be simultaneously
------------
executed in several counterparts, each of which shall be deemed
to be an original, and such counterparts, together, shall
constitute one and the same instrument, which shall be
sufficiently evidenced by any such original counterpart.
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12.5. Reliance by Third Parties. Any certificate executed
-------------------------
by an individual who, according to the records of the Trust, or
of any recording office in which this Declaration may be
recorded, appears to be a Trustee hereunder, or Secretary or
Assistant Secretary of the Trust, certifying to: (a) the number
or identity of Trustees or Shareholders, (b) the due
authorization of the execution of any instrument or writing, (c)
the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written
instrument satisfies the requirements of this Declaration, (e)
the form of any By-Laws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any
fact or facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so
certified in favor of any person dealing with the Trustees and
their successors.
12.6. Provisions in Conflict With Law or Regulations.
----------------------------------------------
(a) The provisions of this Declaration are severable,
and if the Trustees shall determine, with the advice of counsel,
that any of such provisions is in conflict with the 1940 Act, the
regulated investment company provisions of the Internal Revenue
Code, or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a
part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of
this Declaration or render invalid or improper any action taken
or omitted prior to such determination.
(b) If any provision of this Declaration shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in
any other jurisdiction or any other provision of this Declaration
in any jurisdiction.
26
<PAGE>
The principal office of the Trust is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
IN WITNESS WHEREOF, the undersigned, constituting a majority
of the Trustees, have signed this certificate and have caused a
duplicate original to be lodged among the records of the Trust as
required by Article XI, Section 11.3(c) of the Declaration of
Trust as of the 7th day of June 1993.
/s/ Philip L. Kirstein /s/ Michael J. Hennewinkel
---------------------- ---------------------------
Philip L. Kirstein Michael J. Hennewinkel
79 West Shore Drive 7 Lookout Lane
Pennington, New Jersey 08534 Washington Crossing,
Pennsylvania 18977
/s/ Robert E. Putney, III
-------------------------
Robert E. Putney, III
12131 Taylor Court
Lawrenceville, New Jersey 08648
27
<PAGE>
Ex-99.1(b)
MERRILL LYNCH INTERNATIONAL EQUITY FUND
Establishment and Designation
of
Class A Shares and Class B Shares of
Beneficial Interest of the Trust
The undersigned, being a majority of the Trustees of Merrill
Lynch International Equity Fund, a Massachusetts business trust
(the "Trust"), acting pursuant to Section 6.1 of the Declaration
of Trust, dated January 3, 1992, as amended and restated on June 8,
1993 (the "Declaration"), of the Trust, do hereby divide the
shares of beneficial interest of the Trust, par value $.10 per
share ("Shares"), to create two classes of Shares, within the
meaning of said Section 6.1, as follows:
1. The two classes of Shares are designated "Class A
Shares" and "Class B Shares", respectively.
2. Class A Shares and Class B Shares shall be entitled to
all of the rights and preferences accorded to Shares
under the Declaration.
3. The purchase price of Class A Shares and Class B
Shares, the method of determination of net asset value
of Class A Shares and Class B Shares, the price, terms
and manner of redemption of Class A Shares and Class B
Shares, and the relative dividend rights of holders of
Class A Shares and Class B Shares shall be established
by the Trustees of the Trust in accordance with the
provisions of the Declaration and shall be set forth in
the currently effective prospectus and statement of
additional information of the Trust, as amended from
time to time, under the Securities Act of 1933, as
amended.
<PAGE>
IN WITNESS WHEREOF, the undersigned, have signed this
insturment and have caused a duplicate original to be lodged
among the records of the Trust this 11th day of June 1993.
/s/ Philip L. Kirstein /s/ Michael J. Hennewinkel
---------------------- --------------------------
Philip L. Kirstein Michael J. Hennewinkel
79 West Shore Drive 7 Lookout Lane
Pennington, New Jersey 08534 Washington Crossing,
Pennsylvania 18977
/s/ Robert E. Putney III
------------------------
Robert E. Putney, III
12131 Taylor Court
Lawrenceville, New Jersey 08648
The Declaration of Trust establishing the Trust, 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
Comonwealth 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 or otherwise in connection with the affairs of the Trust but
the "Trust Property" only shall be liable.
2
<PAGE>
Ex-99.1(c)
MERRILL LYNCH INTERNATIONAL EQUITY FUND
Certification Of Amendment
To Declaration Of Trust
and
Establishment and Designation of Classes
The undersigned, constituting a majority of the Trustees of
Merrill Lynch International Equity Fund (the "Trust"), a
Massachusetts business trust, hereby certify that the Trustees of
the Trust have duly adopted the following amendments, as approved
by a majority of the shareholders of the Trust, to the Trust's
Declaration of Trust.
VOTED: That Sections 6.1 and 6.2 of Article VI of the
Declaration of Trust be, and they hereby are, amended
in their entirety to read as follows:
6.1 Beneficial Interest. The interest of the
-------------------
beneficiaries hereunder shall be divided into transferable shares
of beneficial interest, par value $0.10 per share. The number of
such shares of beneficial interest authorized hereunder is
unlimited. The Trustees, in their discretion, without a vote of
the Shareholders, may divide the shares of beneficial interest
into classes. In such event, each class shall represent
interests in the Trust property and have identical voting,
dividend, liquidation and other rights and the same terms and
conditions except that expenses related directly or indirectly to
the distribution of the shares of a class may be borne solely by
such class (as shall be determined by the Trustees) and, as
provided in Section 10.1, a class may have exclusive voting
rights with respect to matters relating to the expenses being
borne solely by such class. The bearing of such expenses solely
by a class of Shares shall be appropriately reflected (in the
manner determined by the Trustees) in the net asset value,
dividend and liquidation rights of the Shares of such class. The
Trustees may provide that shares of a class will be exchanged for
shares of another class without any act or deed on the part of
the holder of shares of the class being exchanged, whether or not
shares of such class are issued and outstanding, all on terms and
conditions as the Trustees may specify. The Trustees may
redesignate a class or series of shares of beneficial interest or
a portion of a class or series of shares of beneficial interest
whether or not shares of such class or series are issued and
outstanding, provided that such redesignation does not
substantially adversely affect the preference, conversion or
<PAGE>
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of
such issued and outstanding shares of beneficial interest. The
division of the Shares into classes and the terms and conditions
pursuant to which the Shares of the classes will be issued must
be made in compliance with the 1940 Act. All Shares issued
hereunder including, without limitation, Shares issued in
connection with a dividend in Shares or a split of Shares, shall
be fully paid and nonassessable.
6.2. Rights of Shareholders. The ownership of the Trust
----------------------
Property of every description and the right to conduct any
business hereinbefore described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and
they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can
they be called upon to share or assume any losses of the Trust or
suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the
rights in this Declaration specifically set forth. The Shares
shall not entitle the holder to preference, preemptive,
appraisal, conversion or exchange rights (except for rights of
appraisal specified in Section 11.4 and except as may be
specified by the Trustees in connection with the division of
shares into classes or the redesignation of classes or portions
of classes in accordance with Section 6.1).
VOTED: That Section 10.1 of Article X of the Declaration of
Trust be, and it hereby is, amended in its entirety to
read as follows:
10.1. Voting Powers. The Shareholders shall have power to
-------------
vote (i) for the removal of Trustees as provided in Section 2.3;
(ii) with respect to any advisory or management contract as
provided in Section 4.1; (iii) with respect to the amendment of
this Declaration as provided in Section 11.3; (iv) with respect
to such additional matters relating to the Trust as may be
required or authorized by the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law or by this
Declaration or the By-Laws of the Trust; and (v) with respect to
such additional matters relating to the Trust as may be properly
submitted for Shareholder approval. If the Shares of a Series
shall be divided into classes as provided in Article VI hereof,
the Shares of each class shall have identical voting rights
except that the Trustees, in their discretion, may provide a
class with exclusive voting rights with respect to matters
related to expenses being borne solely by such class whether or
not shares of such class are issued and outstanding.
2
<PAGE>
The undersigned, being a majority of the Trustees of the
Trust, acting pursuant to Section 6.1 of the Declaration of
Trust, do hereby divide the shares of beneficial interest of each
series of the Trust to create four classes of shares, within the
meaning of said Section 6.1, as follows:
1. The four classes of shares are designated "Class A
Shares," "Class B Shares," "Class C Shares," and "Class
D Shares."
2. Class A Shares, Class B Shares, Class C Shares and
Class D Shares shall be entitled to all of the rights
and preferences accorded to Shares under the
Declaration of Trust.
3. The purchase price, the method of determination of net
asset value, the price, terms and manner of redemption,
and the relative dividend rights of holders of Class A
Shares, Class B Shares, Class C Shares and Class D
Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the
Declaration of Trust and shall be set forth in the
currently effective prospectus and statement of
additional information of the Trust relating to each
series of the Trust, as amended from time to time,
contained in the Trust's registration statement under
the Securities Act of 1933, as amended.
4. Class A Shares, Class B Shares, Class C Shares and
Class D Shares shall vote together as a single class
except that shares of a class may vote separately on
matters affecting only that class and shares of a class
not affected by a matter will not vote on that matter.
5. A class of shares of any series of the Trust may be
terminated by the Trustees by written notice to the
Shareholders of the class.
3
<PAGE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND
CERTIFICATE
The undersigned hereby certifies that he is the Secretary of
Merrill Lynch International Equity Fund, an unincorporated
business trust organized and existing under the laws of the
Commonwealth of Massachusetts (the "Trust"), that annexed hereto
is the Certificate of Designation dated October , 1994,
amending the Declaration of Trust of the Trust. which Certificate
has been adopted by the Board of Trustees of the Trust in a
manner provided in the Trust's Declaration of Trust.
Dated this 17th day of October, 1994.
/s/ Michael J. Hennewinkel
--------------------------
Michael J. Hennewinkel
Secretary
4
<PAGE>
Ex-99.2
[Revised July 1995]
MERRILL LYNCH INTERNATIONAL EQUITY FUND
AMENDED AND RESTATED BY-LAWS
----------------------------
These Amended and Restated By-Laws (the "By-Laws") are made and adopted
pursuant to Section 2.7 of the Declaration of Trust establishing MERRILL LYNCH
INTERNATIONAL EQUITY FUND, dated January 3, 1992, as from time to time amended
(hereinafter called the "Declaration"). All words and terms capitalized in
these By-Laws shall have the meaning or meanings set forth for such words or
terms in the Declaration.
ARTICLE I
---------
Shareholder Meetings
--------------------
Section 1.1. Chairman. The Chairman, if any, shall act as chairman at
--------
all meetings of the Shareholders; in his absence, the President shall act as
chairman; and in the absence of the Chairman and President, the Trustee or
Trustees present at each meeting may elect a temporary chairman for the meeting,
who may be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either in person or
---------------
by duly executed proxy and each full share represented at the meeting shall have
one vote, all as provided in Article X of the Declaration. No proxy shall be
valid after eleven (11) months from the date of its execution, unless a longer
period is expressly stated in such proxy.
<PAGE>
Section 1.3. Closing of Transfer Books and Fixing Record Dates. For the
-------------------------------------------------
purpose of determining the Shareholders who are entitled to notice of or to vote
or act at any meeting, including any adjournment thereof, or who are entitled to
participate in any dividends, or for any other proper purpose, the Trustees may
from time to time close the transfer books or fix a record date in the manner
provided in Section 10.4 of the Declaration. If the Trustees do not prior to any
meeting of Shareholders so fix a record date or close the transfer books, then
the date of mailing notice of the meeting or the date upon which the dividend
resolution is adopted, as the case may be, shall be the record date.
Section 1.4. Inspectors of Election. In advance of any meeting of
----------------------
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election
of the meeting. The number of Inspectors shall be either one or three. If
appointed at the meeting on the request of one or more Shareholders or proxies,
a majority of Shares present shall determine whether one or three Inspectors
are to be appointed, but failure to allow such determination by the
Shareholders shall not affect the validity of the appointment of Inspectors of
Election. In case any person appointed as Inspector fails to appear or fails
or refuses to act, the vacancy
2
<PAGE>
may be filled by appointment made by the Trustees in advance of the convening of
the meeting or at the meeting by the person acting as chairman. The Inspectors
of Election shall determine the number of Shares outstanding, the Shares
represented at the meeting; the existence of a quorum, the authenticity,
validity and effect of proxies, shall receive votes, ballots or consents, shall
hear and determine all challenges and questions in any way arising in connection
with the right to vote, shall count and tabulate all votes or consents,
determine the results, and do such other acts as may be proper to conduct the
election or vote with fairness to all Shareholders. If there are three
Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On request
of the Chairman, if any, of the meeting, or of any Shareholder or his proxy, the
Inspectors of Election shall make a report in writing of any challenge or
question or matter determined by them and shall execute a certificate of any
facts found by them.
Section 1.5. Records at Shareholder Meetings. At each meeting of the
-------------------------------
Shareholders there shall be open for inspection the minutes of the last
previous Shareholder Meeting of the Trust and a list of the Shareholders of the
Trust, certified to be true and correct by the Secretary or other proper agent
of the Trust, as of the record date of the meeting or the date of closing of
transfer books, as the case may be. Such list of Shareholders shall contain
the name of each Shareholder in alphabetical order
3
<PAGE>
and the address of and number of Shares owned by such Shareholder. Shareholders
shall have such other rights and procedures of inspection of the books and
records of the Trust as are granted to shareholders of a Massachusetts business
corporation.
ARTICLE II
----------
Trustees
--------
Section 2.1. Annual and Regular Meetings. The Trustees shall hold an
---------------------------
annual meeting for the election of officers and the transaction of other
business which may come before such meeting, on such date as shall be fixed by
the Trustees from time to time. Regular meetings of the Trustees may be held
without call or notice at such place or places and times as the Trustees may by
resolution provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the Trustees shall be
----------------
held upon the call of the Chairman, if any, the President, the Secretary or any
two Trustees, at such time, on such day, and at such place as shall be
designated in the notice of the meeting.
Section 2.3. Notice. Notice of a meeting shall be given by mail or by
------
telegram (which term shall include a cablegram) or delivered personally. If
notice is given by mail, it shall be mailed not later than 48 hours preceding
the meeting and if given by telegram or personally, such telegram shall be sent
or delivery made not later than 48 hours preceding the meeting.
4
<PAGE>
Notice by telephone shall constitute personal delivery for these purposes.
Notice of a meeting of Trustees may be waived before or after any meeting by
signed written waiver. Neither the business to be transacted at, nor the purpose
of, any meeting of the Board of Trustees need be stated in the notice or waiver
of notice of such meeting, and no notice need be given of action proposed to be
taken by unanimous written consent. The attendance of a Trustee at a meeting
shall constitute a waiver of notice of such meeting except where a Trustee
attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully called or
convened.
Section 2.4. Chairman; Records. The Chairman, if any, shall act as
-----------------
chairman at all meetings of the Trustees; in his absence the President shall
act as chairman; and, in the absence of the Chairman and the President, the
Trustees present shall elect one of their number to act as temporary chairman.
The results of all actions taken at a meeting of the Trustees, or by unanimous
written consent of the Trustees, shall be recorded by the Secretary.
Section 2.5. Retirement. Notwithstanding the provisions of Article II,
----------
Section 2.2 of the Declaration, each Trustee's term of office shall expire as of
December 31 of the year in which such Trustee reaches seventy-two years of age.
5
<PAGE>
ARTICLE III
-----------
Officers
--------
Section 3.1. Officers of the Trust. The officers of the Trust shall
---------------------
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including Vice-Presidents, as may be
elected by the Trustees, or in the case of assistant officers, as may be
appointed by the President. Any two or more of the offices may be held by the
same person, except that the same person may not be both President and
Secretary. The Trustees may designate a Vice-President as an Executive
Vice-President and may designate the order in which the other Vice-Presidents
may act. The Chairman and the President shall be Trustees, but no other
officer of the Trust need be a Trustee.
Section 3.2. Election and Tenure. At the initial organizational meeting
-------------------
and thereafter at each annual meeting of the Trustees, the Trustees shall elect
the Chairman, if any, President, Secretary, Treasurer and such other officers
as the Trustees shall deem necessary or appropriate in order to carry out the
business of the Trust. Such officers shall hold office until the next annual
meeting of the Trustees and until their successors have been duly elected and
qualified. The Trustees may fill any vacancy in office or add any additional
officers at any time.
Section 3.3. Removal of Officers. Any officer may be removed at any
-------------------
time, with or without cause, by action of a
6
<PAGE>
majority of the Trustees. This provision shall not prevent the making of a
contract of employment for a definite term with any officer and shall have no
effect upon any cause of action which any officer may have as a result of
removal in breach of a contract of employment. Any officer may resign at any
time by notice in writing signed by such officer and delivered or mailed to the
Chairman, if any, President, or Secretary, and such resignation shall take
effect immediately upon receipt by the Chairman, if any, President, or
Secretary, or at a later date according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be required by the
----------------
Trustees to be bonded for the faithful performance of his duties in such amount
and with such sureties as the Trustees may determine.
Section 3.5. Chairman, President, and Vice-Presidents. The Chairman, if
----------------------------------------
any, shall, if present, preside at all meetings of the Shareholders and of the
Trustees and shall exercise and perform such other powers and duties as may
from time to time be assigned to him by the Trustees. Subject to such
supervisory powers, if any, as may be given by the Trustees to the Chairman, if
any, the President shall be the chief executive officer of the Trust and,
subject to the control of the Trustees, shall have general supervision,
direction and control of the business of the Trust and of its employees and
shall exercise such general powers of management as are usually vested in the
office of president of a corporation. In the absence of the Chairman, if any,
the
7
<PAGE>
President shall preside at all meetings of the Shareholders and of the
Trustees. The President shall be, ex-officio, a member of all standing
committees, except as otherwise provided in the resolutions or instruments
creating any such committees. Subject to direction of the Trustees, the
Chairman, if any, and the President shall each have power in the name and on
behalf of the Trust to execute any and all loan documents, contracts,
agreements, deeds, mortgages, and other instruments in writing, and to employ
and discharge employees and agents of the Trust. Unless otherwise directed by
the Trustees, the Chairman, if any, and the President shall each have full
authority and power, on behalf of all of the Trustees, to attend and to act and
to vote, on behalf of the Trust at any meetings of business organizations in
which the Trust holds an interest, or to confer such powers upon any other
persons, by executing any proxies duly authorizing such persons. The Chairman,
if any, and the President shall have such further authorities and duties as the
Trustees shall from time to time determine. In the absence or disability of
the President, the Vice-Presidents in order of their rank as fixed by the
Trustees or, if more than one and not ranked, the Vice President designated by
the Trustees, shall perform all of the duties of the President, and when so
acting shall have all the powers of and be subject to all of the restrictions
upon the President. Subject to the direction of the Trustees, and of the
President, each Vice-President shall have the power in the name and on behalf
of the Trust to execute any and all loan documents,
8
<PAGE>
contracts, agreements, deeds, mortgages and other instruments in writing, and,
in addition, shall have such other duties and powers as shall be designated from
time to time by the Trustees or by the President.
Section 3.6. Secretary. The Secretary shall keep the minutes of all
---------
meetings of, and record all votes of, Shareholders, Trustees and the
Executive Committee, if any. He shall be custodian of the seal of the Trust, if
any, and he (and any other person so authorized by the Trustees) shall affix the
seal or, if permitted, a facsimile thereof, to any instrument executed by the
Trust which would be sealed by a Massachusetts corporation executing the same or
a similar instrument and shall attest the seal and the signature or signatures
of the officer or officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident to such office
in a Massachusetts business corporation, and shall have such other authorities
and duties as the Trustees shall from time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by the Trustees,
---------
the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and of
the President all powers and duties normally incident to his office. He may
endorse for deposit or collection all notes, checks and other instruments
payable to the Trust or to its order. He shall
9
<PAGE>
deposit all funds of the Trust in such depositories as the Trustees shall
designate. He shall be responsible for such disbursement of the funds of the
Trust as may be ordered by the Trustees or the President. He shall keep accurate
account of the books of the Trust's transactions which shall be the property of
the Trust, and which together with all other property of the Trust in his
possession, shall be subject at all times to the inspection and control of the
Trustees. Unless the Trustees shall otherwise determine, the Treasurer shall be
the principal accounting officer of the Trust and shall also be the principal
financial officer of the Trust. He shall have such other duties and authorities
as the Trustees shall from time to time determine. Notwithstanding anything to
the contrary herein contained, the Trustees may authorize any adviser,
administrator, manager or transfer agent to maintain bank accounts and deposit
and disburse funds of the Trust.
Section 3.8. Other Officers and Duties. The Trustees may elect such
-------------------------
other officers and assistant officers as they shall from time to time determine
to be necessary or desirable in order to conduct the business of the Trust. In
addition, the President may appoint such assistant officers as he shall from
time to time determine to be necessary or desirable in order to conduct the
business of the Trust. Assistant officers shall act generally in the absence of
the officer whom they assist and shall assist that officer in the duties of his
office. Each officer, employee and agent of the Trust shall have such other
duties and authority
10
<PAGE>
as may be conferred upon him by the Trustees or delegated to him by the
President.
ARTICLE IV
----------
Miscellaneous
-------------
Section 4.1. Custodians. In accordance with Section 7.l of the
----------
Declaration, the funds of the Trust shall be deposited with such custodian or
custodians as the Trustees shall designate and shall be drawn out on checks,
drafts or other orders signed by such officer, officers, agent or agents
(including any adviser, administrator or manager), as the Trustees may from
time to time authorize.
Section 4.2. Signatures. All contracts and other instruments shall be
----------
executed on behalf of the Trust by such officer, officers, agent or agents, as
provided in these By-Laws or as the Trustees may from time to time by resolution
provide.
Section 4.3. Seal. The seal of the Trust, if any, may be affixed to any
----
document, and the seal and its attestation may be lithographed, engraved or
otherwise printed on any document with the same force and effect as if it had
been imprinted and attested manually in the same manner and with the same
effect as if done by a Massachusetts business corporation.
11
<PAGE>
ARTICLE V
---------
Share Certificates and Share Transfers
--------------------------------------
Section 5.1. Share Certificates. Each holder of Shares of the Trust
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Trustees, representing the number of Shares
owned by him, provided, however, that certificates for fractional Shares shall
not be delivered in any case. The certificates representing Shares shall be
signed by or in the name of the Trust by the President or a Vice-President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer and sealed with the seal of the Trust. Any or all of the signatures or
the seal on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate shall be issued, it may be issued by the Trust
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 5.2. Transfer Agents, Registrars and the Like. As provided in
----------------------------------------
Section 6.6 of the Declaration, the Trustees shall have authority to employ and
compensate such transfer agents and registrars with respect to the Shares of
the Trust as the Trustees shall deem necessary or desirable and may require all
certificates for Shares to bear the signature or signatures of any of them. In
addition, the Trustees shall have power to
12
<PAGE>
employ and compensate such dividend disbursing agents, warrant agents and agents
for the reinvestment of dividends as they shall deem necessary or desirable. Any
of such agents shall have such power and authority as is delegated to any of
them by the Trustees.
Section 5.3. Transfer of Shares. The Shares of the Trust shall be
------------------
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper documentation as provided in Section 6.7
of the Declaration, and on surrender of the certificate or certificates, if
issued, for such Shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The Trust, or its
transfer agents, shall be authorized to refuse any transfer unless and until
presentation of such evidence as may be reasonably required to show that the
requested transfer is proper.
Section 5.4. Registered Shareholders. The Trust may deem and treat the
-----------------------
holder of record of any Share as the absolute owner thereof for all purposes
and shall not be required to take any notice of any right or claim of right of
any other person.
Section 5.5. Regulations. The Trustees may make such additional rules
-----------
and regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the issue, transfer and registration of certificates for Shares of
the Trust.
13
<PAGE>
Section 5.6. Lost, Destroyed or Mutilated Certificates. The holder of
-----------------------------------------
any certificate representing Shares of the Trust shall immediately notify the
Trust of any loss, destruction or mutilation of such certificate, and the Trust
may issue a new certificate in the place of any certificate theretofore issued
by it which the owner thereof shall allege to have been lost or destroyed or
which shall have been mutilated, and the Trustees may, in their discretion,
require such owner or his legal representatives to give the Trust a bond in such
sum, limited or unlimited, and in such form and with such surety or sureties, as
the Trustees in their absolute discretion shall determine, to indemnify the
Trust against any claim that may be made against it on account of the alleged
loss or destruction of any such certificate, or issuance of a new certificate.
Anything herein to the contrary notwithstanding, the Trustees in their absolute
discretion, may refuse to issue any such new certificates, except pursuant to
legal proceedings under the laws of the Commonwealth of Massachusetts.
ARTICLE VI
----------
Advancement of Indemnification Moneys
-------------------------------------
Section 6.1. Conditions to Advancement. Insofar as the conditional
-------------------------
advancing of indemnification moneys to Trustees, officers, employees or agents
of the Trust pursuant to Section 5.3 of the Declaration for actions based upon
the Investment Company Act of 1940, as amended, may be concerned, such payments
14
<PAGE>
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 Trust 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 Trust
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 Trust'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.
ARTICLE VII
-----------
Amendment of By-Laws
--------------------
Section 7.1. Amendment and Repeal of By-Laws. In accordance with Section
-------------------------------
2.7 of the Declaration, the Trustees shall have the power to alter, amend or
repeal the By-Laws or adopt new By-Laws at any time. Action by the Trustees with
respect to the By-Laws shall be taken by an affirmative vote of a majority of
15
<PAGE>
the Trustees. The Trustees shall in no event adopt By-Laws which are in conflict
with the Declaration, and any apparent inconsistency shall be construed in favor
of the related provisions in the Declaration.
The Declaration establishing Merrill Lynch International Equity Fund, a
copy of which, together with all amendments thereto, 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 Merrill Lynch
International Equity 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 or otherwise in connection with the affairs of said Merrill Lynch
International Equity Fund but the "Trust Property" only shall be liable.
16
<PAGE>
Ex-99.13
CERTIFICATE OF SOLE SHAREHOLDER
Merrill Lynch Investment Management, Inc. (doing business as
Merrill Lynch Asset Management ("MLAM")), the holder of 5,000
Class A shares of beneficial interest, par value $0.10 per share,
and 5,000 Class B shares of beneficial interest, par value $0.10
per share, of Merrill Lynch International Equity Fund (the
"Fund"), a Massachusetts business trust, does hereby confirm to
the Fund its representation that it purchased such shares for
investment purposes, with no present intention of redeeming or
reselling any portion thereof, and does further agree that if it
redeems any portion of such shares prior to the amortization of
the Fund's organizational expenses, the proceeds thereof will be
reduced by the proportionate amount of unamortized organizational
expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time
of redemption. MLAM further agrees that in the event such shares
are sold or otherwise transferred to any other party, that prior
to such sale or transfer MLAM will obtain on behalf of the Fund
an agreement from such other party to comply with the foregoing
as to the reduction of redemption proceeds and to obtain a
similar agreement from any transferee of such party.
MERRILL LYNCH ASSET MANAGEMENT
By:/s/ Philip L. Kirstein
------------------------
Title:
Dated: July 14, 1993
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 1205379798
<INVESTMENTS-AT-VALUE> 1216285042
<RECEIVABLES> 41814523
<ASSETS-OTHER> 33528934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1291628499
<PAYABLE-FOR-SECURITIES> 15089225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25716153
<TOTAL-LIABILITIES> 40805378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1339708142
<SHARES-COMMON-STOCK> 7267309
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (84993401)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3891620)
<NET-ASSETS> 74477854
<DIVIDEND-INCOME> 17962680
<INTEREST-INCOME> 12011958
<OTHER-INCOME> 0
<EXPENSES-NET> 24160560
<NET-INVESTMENT-INCOME> 5814078
<REALIZED-GAINS-CURRENT> (57502198)
<APPREC-INCREASE-CURRENT> (30827626)
<NET-CHANGE-FROM-OPS> (82515746)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 599105
<DISTRIBUTIONS-OF-GAINS> 2168344
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8250116
<NUMBER-OF-SHARES-REDEEMED> 1197443
<SHARES-REINVESTED> 214636
<NET-CHANGE-IN-ASSETS> 198521429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 36233997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9162743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24160560
<AVERAGE-NET-ASSETS> 49944355
<PER-SHARE-NAV-BEGIN> 11.73
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> (1.05)
<PER-SHARE-DIVIDEND> .15
<PER-SHARE-DISTRIBUTIONS> .54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.25
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 1205379798
<INVESTMENTS-AT-VALUE> 1216285042
<RECEIVABLES> 41814523
<ASSETS-OTHER> 33528934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1291628499
<PAYABLE-FOR-SECURITIES> 15089225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25716153
<TOTAL-LIABILITIES> 40805378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1339708142
<SHARES-COMMON-STOCK> 94389199
<SHARES-COMMON-PRIOR> 73799056
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (84993401)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3891620)
<NET-ASSETS> 961940611
<DIVIDEND-INCOME> 17962680
<INTEREST-INCOME> 12011958
<OTHER-INCOME> 0
<EXPENSES-NET> 24160560
<NET-INVESTMENT-INCOME> 5814078
<REALIZED-GAINS-CURRENT> (57502198)
<APPREC-INCREASE-CURRENT> (30827626)
<NET-CHANGE-FROM-OPS> (82515746)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3723247
<DISTRIBUTIONS-OF-GAINS> 50410142
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39671147
<NUMBER-OF-SHARES-REDEEMED> 23776333
<SHARES-REINVESTED> 4695329
<NET-CHANGE-IN-ASSETS> 198521429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 36233997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9162743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24160560
<AVERAGE-NET-ASSETS> 976081642
<PER-SHARE-NAV-BEGIN> 11.44
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (.69)
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.19
<EXPENSE-RATIO> 2.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 1205379798
<INVESTMENTS-AT-VALUE> 1216285042
<RECEIVABLES> 41814523
<ASSETS-OTHER> 33528934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1291628499
<PAYABLE-FOR-SECURITIES> 15089225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25716153
<TOTAL-LIABILITIES> 40805378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1339708142
<SHARES-COMMON-STOCK> 2556578
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (84993401)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3891620)
<NET-ASSETS> 25821874
<DIVIDEND-INCOME> 17962680
<INTEREST-INCOME> 12011958
<OTHER-INCOME> 0
<EXPENSES-NET> 24160560
<NET-INVESTMENT-INCOME> 5814078
<REALIZED-GAINS-CURRENT> (57502198)
<APPREC-INCREASE-CURRENT> (30827626)
<NET-CHANGE-FROM-OPS> (82515746)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 112393
<DISTRIBUTIONS-OF-GAINS> 457066
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2764893
<NUMBER-OF-SHARES-REDEEMED> 258267
<SHARES-REINVESTED> 49952
<NET-CHANGE-IN-ASSETS> 198521429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 36233997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9162743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24160560
<AVERAGE-NET-ASSETS> 15510886
<PER-SHARE-NAV-BEGIN> 11.62
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> (1.09)
<PER-SHARE-DIVIDEND> .13
<PER-SHARE-DISTRIBUTIONS> .54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.10
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 1205379798
<INVESTMENTS-AT-VALUE> 1216285042
<RECEIVABLES> 41814523
<ASSETS-OTHER> 33528934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1291628499
<PAYABLE-FOR-SECURITIES> 15089225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25716153
<TOTAL-LIABILITIES> 40805378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1339708142
<SHARES-COMMON-STOCK> 18369913
<SHARES-COMMON-PRIOR> 18068449
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (84993401)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3891620)
<NET-ASSETS> 188582782
<DIVIDEND-INCOME> 17962680
<INTEREST-INCOME> 12011958
<OTHER-INCOME> 0
<EXPENSES-NET> 24160560
<NET-INVESTMENT-INCOME> 5814078
<REALIZED-GAINS-CURRENT> (57502198)
<APPREC-INCREASE-CURRENT> (30827626)
<NET-CHANGE-FROM-OPS> (82515746)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2136488
<DISTRIBUTIONS-OF-GAINS> 9932493
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9060009
<NUMBER-OF-SHARES-REDEEMED> 9738345
<SHARES-REINVESTED> 979800
<NET-CHANGE-IN-ASSETS> 198521429
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 36233997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9162743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24160560
<AVERAGE-NET-ASSETS> 205806321
<PER-SHARE-NAV-BEGIN> 11.51
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> (.68)
<PER-SHARE-DIVIDEND> .12
<PER-SHARE-DISTRIBUTIONS> .54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch International Equity Fund:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-44917 of our report dated July 18, 1995, 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 26, 1995
<PAGE>
EXHIBIT 99.16(A)
International Equity - Class A
10/21/94 - 5/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 12.38
---------
Divided by Net Asset Value 11.73
---------
Equals Shares Purchased 80.775 85.251
Plus Shares Acquired through
Dividend Reinvestment 5.397 5.696
--------- ---------
Equals Shares Held at 5/31/95 86.173 90.948
Multiplied by Net Asset Value at 5/31/95 10.25 10.25
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 5/31/95 883.27 932.21
Divided by $1,000 (P) 0.8833 0.9322
Subtract 1 -0.1167 -0.0678
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -11.67%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -6.78%
=========
ERV divided by P 0.8833
Raise to the power of 1.6441
Equals 0.8154
Subtract 1 -0.1846
Expressed as a percentage equals the
Average Annualized Total Return -18.46%
=========
</TABLE>
*Does not include sales charge for the period.
<PAGE>
EXHIBIT 99.16(C)
International Equity - Class C
10/21/94 - 5/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 11.62 11.62
--------- ---------
Equals Shares Purchased 86.059 86.059
Plus Shares Acquired through
Dividend Reinvestment 5.668 5.668
--------- ---------
Equals Shares Held at 5/31/95 91.727 91.727
Multiplied by Net Asset Value at 5/31/95 10.10 10.10
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 926.44 926.44
Less deferred sales charge (8.65) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 5/31/95 917.79 926.44
--------- ---------
Divided by $1,000 (P) 0.9178 0.9264
Subtract 1 -0.0822 -0.0736
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -8.22%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period -7.36%
=========
ERV divided by P 0.9178
Raise to the power of 1.6441
Equals 0.8684
Subtract 1 -0.1316
Expressed as a percentage equals the
Average Annualized Total Return -13.16%
=========
</TABLE>
*Does not include sales charge for the period.
<PAGE>
EXHIBIT 99.18
POWER OF ATTORNEY
I, Edward D. Zinbarg, hereby authorize Arthur Zeikel, Terry K. Glenn,
Gerald M. Richard, Mark B. Goldfus, Robert Harris or Michael J. Hennewinkel, or
any of them, as attorney-in-fact, to sign on my behalf any amendments to the
Registration Statement for each of the following registered investment companies
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission: Emerging Tigers Fund, Inc.; Merrill Lynch Americas Income
Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill Lynch
Dragon Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global Allocation Fund,
Inc.; Merrill Lynch Global Bond Fund for Investment and Retirement; Merrill
Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill
Lynch Healthcare Fund, Inc.; Merrill Lynch International Equity Fund; Merrill
Lynch Latin America Fund, Inc.; Merrill Lynch Middle East/Africa Fund, Inc.;
Merrill Lynch Pacific Fund, Inc.; Merrill Lynch Short-Term Global Income Fund,
Inc.; Merrill Lynch Technology Fund, Inc.; and Worldwide DollarVest Fund, Inc.
Dated: February 21, 1995 /s/ Edward D. Zinbarg
----------------------------------
Edward D. Zinbarg
(Director of each above referenced
Maryland corporation and Trustee
of each above referenced
Massachusetts business trust)
