<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999
SECURITIES ACT FILE NO. -
INVESTMENT COMPANY ACT FILE NO. 811-6521
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
[ ] PRE-EFFECTIVE AMENDMENT NO. [ ] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH INTERNATIONAL EQUITY FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
------------------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
------------------------
TERRY K. GLENN
MERRILL LYNCH INTERNATIONAL EQUITY FUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NY 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
FRANK P. BRUNO, ESQ
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, Par
Value $0.10 per share.
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
TO BE HELD ON JANUARY 20, 2000
TO THE SHAREHOLDERS OF
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Meeting") of Merrill Lynch Consults International Portfolio ("Consults
International Portfolio") will be held at the offices of Merrill Lynch Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on January 20,
2000 at 9:00 a.m., Eastern Time, for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan") providing for the acquisition of substantially
all of the assets, and assumption of substantially all of the liabilities,
of Consults International Portfolio by Merrill Lynch International Equity
Fund ("International Equity Fund"), solely in exchange for an equal
aggregate value of newly-issued Class C shares of International Equity Fund
(the "Reorganization"). The Agreement and Plan also provides for
distribution of such shares of International Equity Fund to shareholders of
Consults International Portfolio in liquidation of Consults International
Portfolio. A vote in favor of this proposal will constitute a vote in favor
of the liquidation of Consults International Portfolio and the termination
of its existence as a business trust under Massachusetts law and its
registration under the Investment Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
If the proposed Reorganization is approved by the shareholders of Consults
International Portfolio at the Meeting and effected by Consults International
Portfolio, any shareholder (i) who files with Consults International Portfolio,
before the taking of the vote on the approval of such Agreement and Plan,
written objection to the proposed Reorganization stating that he or she intends
to demand payment for his or her shares if the Reorganization takes place and
(ii) whose shares are not voted in favor of such Agreement and Plan has or may
have the right to demand in writing from International Equity Fund, within
twenty days after the date of mailing to him or her of notice in writing that
the Reorganization has become effective, payment for his or her shares and an
appraisal of the value thereof. International Equity Fund and any such
shareholders shall in such cases have the rights and duties and shall follow the
procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts. In the event that any shareholder elects to
exercise his or her statutory right of appraisal under Massachusetts law, it is
the present intention of International Equity Fund to petition a court of
competent jurisdiction to determine whether such right of appraisal has been
superseded by the provisions of Rule 22c-1 under the Investment Company Act of
1940, as amended.
The Board of Trustees of Consults International Portfolio has fixed the
close of business on November 30, 1999 as the record date for the determination
of shareholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the shareholders of Consults International Portfolio
entitled to vote at the Meeting will be available and open to the examination of
any shareholders of Consults International Portfolio for any purpose germane to
the Meeting during ordinary business hours from and after January 6, 2000 at the
offices of Consults International Portfolio, 800 Scudders Mill Road, Plainsboro,
New Jersey.
<PAGE> 3
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETING IN PERSON ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED FOR
THAT PURPOSE. The enclosed proxy is being solicited on behalf of the Board of
Trustees of Consults International Portfolio.
By Order of the Board of Trustees,
ROBERT HARRIS
Secretary
Plainsboro, New Jersey
Dated: [ , 1999]
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED
OCTOBER , 1999
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------------------
SPECIAL MEETING OF SHAREHOLDERS OF
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
------------------------
JANUARY 20, 2000
This Proxy Statement and Prospectus (this "Proxy Statement and Prospectus")
is furnished in connection with the solicitation of proxies on behalf of the
Board of Trustees of Merrill Lynch Consults International Portfolio, a
Massachusetts business trust ("Consults International Portfolio"), for use at
the Special Meeting of Shareholders of Consults International Portfolio (the
"Meeting"). The Meeting has been called to approve or disapprove the proposed
Agreement and Plan of Reorganization (the "Agreement and Plan") between Consults
International Portfolio and Merrill Lynch International Equity Fund, a
Massachusetts business trust ("International Equity Fund"), pursuant to which
International Equity Fund will acquire substantially all of the assets, and
assume substantially all of the liabilities, of Consults International Portfolio
solely in exchange for an equal aggregate value of newly-issued Class C shares
of International Equity Fund (the "Reorganization"). Immediately upon the
receipt by International Equity Fund of the assets of Consults International
Portfolio and the assumption by International Equity Fund of the liabilities of
Consults International Portfolio, and as part of the Reorganization, Consults
International Portfolio will distribute the shares of International Equity Fund
received in the Reorganization to the shareholders of Consults International
Portfolio. Thereafter, and also as part of the Reorganization, Consults
International Portfolio will terminate its registration under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and will
terminate its existence as a business trust in accordance with the laws of the
Commonwealth of Massachusetts.
Holders of shares of Consults International Portfolio will receive Class C
shares of International Equity Fund, which will be subject to the same
distribution fees and account maintenance fees (the "Corresponding Shares"), as
the shares of Consults International Portfolio. The aggregate net asset value of
the Corresponding Shares to be issued in the Reorganization to the shareholders
of Consults International Portfolio will equal the aggregate net asset value of
the outstanding shares of Consults International Portfolio, as set forth in the
Agreement and Plan. Consults International Portfolio and International Equity
Fund sometimes are referred to herein collectively as the "Funds" and
individually as a "Fund," as the context requires. International Equity Fund
following the Reorganization is sometimes referred to herein as the "Combined
Fund" or "Pro Forma International Equity Fund."
This Proxy Statement and Prospectus serves as a prospectus of International
Equity Fund under the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the issuance of the Corresponding Shares by International
Equity Fund to Consults International Portfolio pursuant to the terms of the
Reorganization.
Both Consults International Portfolio and International Equity Fund are
diversified, open-end management investment companies registered under the
Investment Company Act. International Equity Fund seeks to provide shareholders
with capital appreciation and secondarily, income by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. International Equity Fund seeks to invest in a diversified
portfolio consisting of equity securities of companies from a variety of
countries, including those in emerging markets, and except for unusual
circumstances will at all times be invested in securities from at least three
different countries other than the United States. Consults International
Portfolio seeks to provide shareholders with the highest total investment return
that is consistent with prudent risk through investment in a diversified
international portfolio of equity securities, other than United States equity
securities. Consults International Portfolio seeks to invest primarily in a
diversified portfolio of equity securities of companies located outside the
United States that Fund management believes are undervalued or have good
prospects for earnings growth. There can be no assurance that, after the
Reorganization, International Equity Fund will achieve its investment objective.
The current prospectus relating to International Equity Fund, dated
September 29, 1999, as supplemented (the "International Equity Fund
Prospectus"), accompanies this Proxy Statement and Prospectus and is
incorporated herein by reference. The Annual Report to Shareholders of
International Equity Fund for the year ended May 31, 1999 also accompanies this
Proxy Statement and Prospectus. A statement of additional information relating
to International Equity Fund, dated September 29, 1999 (the "International
Equity Fund Statement"), a prospectus of Consults International Portfolio, dated
February 27, 1999, as supplemented (the "Consults International Portfolio
Prospectus")(which prospectus is also incorporated herein by reference) and a
statement of additional information relating to Consults International
Portfolio, dated February 27, 1999 (the "Consults International Portfolio
Statement"), have been filed with the Securities and Exchange Commission (the
"Commission"). Such documents may be obtained,
<PAGE> 5
without charge, by writing either Consults International Portfolio or
International Equity Fund at the address above, or by calling 1-800-MER-FUND.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Proxy Statement and Prospectus sets forth concisely the information
about International Equity Fund that shareholders of Consults International
Portfolio should know before considering the Reorganization and should be
retained for future reference. Consults International Portfolio has authorized
the solicitation of proxies in connection with the Reorganization solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
A statement of additional information relating to the Reorganization (the
"Statement of Additional Information"), including pro forma financial statements
of Consults International Portfolio and International Equity Fund giving effect
to the consummation of the Reorganization, is on file with the Commission. The
Statement of Additional Information is available from International Equity Fund
without charge, upon request by calling the toll free telephone number set forth
above or by writing International Equity Fund at its principal executive
offices. The Statement of Additional Information, dated [ , 1999] is
incorporated by reference into this Proxy Statement and Prospectus.
The Commission maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information, the International Equity Fund Prospectus,
the Consults International Portfolio Prospectus, the International Equity Fund
Statement, the Consults International Portfolio Statement, other material
incorporated by reference and other information regarding the Funds.
The address of the principal executive offices of both Consults
International Portfolio and International Equity Fund is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
------------------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS [ , 1999.]
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................ 2
SUMMARY..................................................... 3
The Reorganization..................................... 3
Fee Tables............................................. 5
The Funds.............................................. 7
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 13
COMPARISON OF THE FUNDS..................................... 18
Financial Highlights................................... 18
Management............................................. 19
Purchase, Redemption and Exchange of Shares............ 22
Performance............................................ 24
Shareholder Rights..................................... 25
Dividends.............................................. 26
Tax Information........................................ 26
Portfolio Transactions................................. 26
Portfolio Turnover..................................... 26
Additional Information................................. 26
THE REORGANIZATION.......................................... 28
General................................................ 28
Procedure.............................................. 28
Terms of the Agreement and Plan........................ 29
Potential Benefits to Shareholders as a Result of the
Reorganization........................................ 30
Tax Consequences of the Reorganization................. 31
Capitalization......................................... 32
INFORMATION CONCERNING THE MEETING.......................... 32
Date, Time and Place of Meeting........................ 32
Solicitation, Revocation and Use of Proxies............ 33
Record Date and Outstanding Shares..................... 33
Security Ownership of Certain Beneficial Owners and
Management of Consults International Portfolio and
International Equity Fund............................. 33
Voting Rights and Required Vote........................ 33
ADDITIONAL INFORMATION...................................... 34
LEGAL PROCEEDINGS........................................... 34
LEGAL OPINIONS.............................................. 35
EXPERTS..................................................... 35
SHAREHOLDER PROPOSALS....................................... 35
</TABLE>
<PAGE> 7
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Trustees of Consults
International Portfolio for use at the Meeting to be held at the offices of
Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey on January 20, 2000, at 9:00 a.m., Eastern Time. The
mailing address for Consults International Portfolio is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy
Statement and Prospectus is December , 1999.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of Consults International Portfolio at the address indicated above
or by voting in person at the Meeting. All properly executed proxies received
prior to the Meeting will be voted at the Meeting in accordance with the
instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, properly executed proxies will be voted
"FOR" the proposal to approve the Agreement and Plan.
The Board of Trustees of Consults International Portfolio has fixed the
close of business on November 30, 1999 as the record date for the determination
of shareholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof. Approval of the Agreement and Plan will require the
affirmative vote of Consults International Portfolio shareholders representing
not less than two-thirds of the total number of votes entitled to be cast
thereon. Shareholders will vote as a single class on the proposal to approve the
Agreement and Plan. Properly executed proxies that are returned but that are
marked "abstain" or with respect to which a broker-dealer has declined to vote
on any proposal ("broker non-votes") are counted for purposes of determining the
presence or absence of a quorum for the transaction of business. Each share of
Consults International Portfolio is entitled to one vote. See "Information
Concerning the Meeting."
The Board of Trustees of Consults International Portfolio currently knows
of no business other than that discussed above that will be presented for
consideration at the Meeting. If any other matter is properly presented, it is
the intention of the persons named in the enclosed proxy to vote in accordance
with their best judgment.
2
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated by
reference) and is qualified in its entirety by reference to the more complete
information contained in this Proxy Statement and Prospectus and in the
Agreement and Plan, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets, and
assumption of substantially all of the liabilities, of Consults International
Portfolio by International Equity Fund solely in exchange for an equal aggregate
value of Corresponding Shares and the subsequent distribution of such
Corresponding Shares to the shareholders of Consults International Portfolio;
and (ii) the subsequent termination of Consults International Portfolio's
existence as a business trust and its deregistration as an investment company.
THE REORGANIZATION
At a meeting of the Board of Trustees of Consults International Portfolio
held on October 26, 1999, the Board of Trustees of Consults International
Portfolio unanimously approved a proposal that International Equity Fund acquire
substantially all of the assets, and assume substantially all of the
liabilities, of Consults International Portfolio solely in exchange for an equal
aggregate value of Corresponding Shares to be distributed to the shareholders of
Consults International Portfolio.
Based upon their evaluation of all relevant information, the Trustees of
Consults International Portfolio have determined that the Reorganization will
potentially benefit the shareholders of Consults International Portfolio.
Specifically, after the Reorganization, Consults International Portfolio
shareholders will remain invested in an open-end fund with a diversified
international portfolio of equity securities that pays, on a pro forma basis, an
advisory fee to MLAM, the investment adviser of International Equity Fund and an
affiliate of Merrill Lynch (Suisse) Investment Management S.A. ("MLSIM"), the
investment adviser of Consults International Portfolio, at the same effective
annual rate as that currently paid by Consults International Portfolio to MLSIM
and by International Equity Fund to MLAM. Moreover, since the net assets of
International Equity Fund as of September 30, 1999 were $240,343,015 and will
increase by approximately $37,688,155 (the net asset value of Consults
International Portfolio as of such date) as a result of the Reorganization,
Consults International Portfolio shareholders are likely to benefit from reduced
overall operating expenses (on a pro forma basis) as a result of certain
economies of scale expected after the Reorganization. In particular, the
Combined Fund will not pay the administrative fee that Consults International
Portfolio currently pays to Princeton Administrators L.P. (the "Administrator")
under the Administration Agreement (as defined herein). See "Summary -- Fee
Tables"; "The Reorganization -- Potential Benefits to Shareholders as a Result
of the Reorganization and "-- Comparison of the Funds -- Management and
Administration Fees."
The Board of Trustees of Consults International Portfolio, including all of
the Trustees who are not "interested persons," as defined in the Investment
Company Act, has determined that the Reorganization is in the best interests of
Consults International Portfolio. In addition, since the Corresponding Shares
will be issued at net asset value in exchange for the net assets of Consults
International Portfolio having a value equal to the aggregate net asset value of
the shares of Consults International Portfolio outstanding as of the Valuation
Time (as defined herein), the net asset value per share of International Equity
Fund should remain virtually unchanged solely as a result of the Reorganization.
Thus, the Reorganization should not result in dilution of net asset value of
International Equity Fund immediately following consummation of the
Reorganization. However, as a result of the Reorganization, a shareholder of
Consults International Portfolio would hold a smaller percentage of ownership in
International Equity Fund than he or she did in Consults International Portfolio
prior to the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approvals are
obtained, provided that Consults International Portfolio and International
Equity Fund have obtained prior to that time either a favorable private letter
ruling from the Internal Revenue
3
<PAGE> 9
Service (the "IRS") concerning the tax consequences of the Reorganization as set
forth in the Agreement and Plan or an opinion of counsel to the same effect. The
Agreement and Plan may be terminated, and the Reorganization abandoned, whether
before or after the requisite approval by the shareholders of Consults
International Portfolio, at any time prior to the Exchange Date (as defined
herein), (i) by mutual consent of the Boards of Trustees of Consults
International Portfolio and International Equity Fund; (ii) by the Board of
Trustees of Consults International Portfolio if any condition to Consults
International Portfolio's obligations has not been fulfilled or waived by such
Board; or (iii) by the Board of Trustees of International Equity Fund if any
condition to International Equity Fund's obligations has not been fulfilled or
waived by such Board.
4
<PAGE> 10
FEE TABLES
ACTUAL AND PRO FORMA FEE TABLE FOR SHAREHOLDERS OF CONSULTS INTERNATIONAL
PORTFOLIO, CLASS C SHAREHOLDERS OF INTERNATIONAL EQUITY FUND AND THE CLASS C
SHAREHOLDERS OF PRO FORMA INTERNATIONAL
EQUITY FUND AS OF SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
--------------------------------------- PRO FORMA
INTERNATIONAL INTERNATIONAL
CONSULTS INTERNATIONAL EQUITY FUND EQUITY FUND
PORTFOLIO(b) CLASS C CLASS C(b)
---------------------- ------------- -------------
<S> <C> <C> <C>
SHAREHOLDER FEES:
(fees paid directly from your investment)(a):
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price)................................... None None None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is
lower)................................... None 1.00%(c) 1.00%(c)
Maximum Sales Charge (Load) Imposed on
Dividend Reinvestments................... None None None
Redemption Fee.............................. None None None
Exchange Fee................................ None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets):
Investment Advisory Fee/Management Fee(d)... 0.75% 0.75% 0.75%
Distribution and/or Service 12b-1 Fees(e)... 1.00% 1.00% 1.00%
Other Expenses:
Other (including transfer agency fees)(f)... 0.87% 0.61% 0.58%
Administrative Fees(f)...................... 0.25% N/A N/A
---- ---- ----
Total Other Expenses........................ 1.12% 0.61% 0.58%
---- ---- ----
Total Fund Operating Expenses................. 2.87% 2.36% 2.33%
==== ==== ====
</TABLE>
- ---------------
(a) Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") may
charge clients a processing fee (currently $5.35) when a client buys or
redeems shares. This fee is currently waived for clients of the Merrill
Lynch Consults(R) Service and of the Merrill Lynch Strategic Portfolio
Advisor(SM) Service.
(b) Each client of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio Advisor(SM) Service is charged an annual fee of
up to 3% (charged on a quarterly basis) of the value of the client's
portfolio. This fee is not charged on the portion of the client's assets
maintained in Consults International Portfolio (or the Combined Fund after
the Reorganization). A client investing directly in Consults International
Portfolio (or the Combined Fund after the Reorganization) is not subject to
the 3% charge at any time while the assets remain invested in Consults
International Portfolio or the Combined Fund, as the case may be.
(c) Some investors may qualify for reductions in the sales charge (load). The
deferred sales charge applicable to Class C shares will be waived with
respect to (i) Corresponding Shares issued to shareholders of Consults
International Portfolio in the Reorganization and (ii) Class C shares of
the Combined Fund issued to clients participating in the Merrill Lynch
Consults(R) Service or the Merrill Lynch Strategic Portfolio Advisor(SM)
Service.
(d) See "Comparison of the Funds -- Management."
(e) The Funds call the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Proxy Statement and
Prospectus and in other materials of the Funds. If you hold Class C shares
of International Equity Fund for a long time, it may cost you more in
distribution (12b-1) fees than the maximum sales charge that you would have
paid if you held one of the other
5
<PAGE> 11
classes of shares of International Equity Fund. See "Comparison of the
Funds -- Purchase, Redemption and Exchange of Shares."
(f) Consults International Portfolio pays its transfer agent $11.00 per
shareholder account. International Equity Fund pays its transfer agent
$14.00 for each Class C shareholder account. The Funds reimburse their
respective transfer agent's out-of-pocket expenses. The Funds also pay a
$0.20 monthly closed account charge, which is assessed upon all accounts
that close during the year. This fee begins the month following the month
the account is closed and ends at the end of the calendar year. In
addition, International Equity Fund pays a 0.10% fee for certain accounts
that participate in the Merrill Lynch Mutual Fund Advisor (MFA(SM))
program. For the fiscal years ended October 31, 1998 and May 31, 1999,
Consults International Portfolio and International Equity Fund paid their
respective transfer agents fees totaling $34,506 and $914,022,
respectively. See "Comparison of the Funds -- Additional
Information -- Transfer Agent." In addition to fees received under its
Administration Agreement with Consults International Portfolio, the
Administrator provides accounting services to Consults International
Portfolio at its cost. For the fiscal year ended October 31, 1998, Consults
International Portfolio reimbursed its administrator $150,624 for these
accounting services. MLAM provides accounting services to International
Equity Fund at its cost. For the fiscal year ended May 31, 1999,
International Equity Fund reimbursed MLAM $192,999 for these accounting
services.
These examples are intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds.
EXAMPLES:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $10,000
investment and assuming (1) the Total Fund Operating
Expenses set forth on page for the relevant Fund, (2) a
5% annual return throughout the periods and (3) redemption
at the end of the period (including any applicable
contingent deferred sales charges):*
Consults International Portfolio....................... $290 $889 $1,513 $3,195
International Equity Fund (Class C shares)............. $339 $736 $1,260 $2,696
Pro Forma International Equity Fund+ (Class C
shares).............................................. $336 $727 $1,245 $2,666
An investor would pay the following expenses on the same
$10,000 investment assuming no redemption at the end of
the period:
Consults International Portfolio....................... $290 $889 $1,513 $3,195
International Equity Fund (Class C shares)............. $239 $736 $1,260 $2,696
Pro Forma International Equity Fund+ (Class C
shares).............................................. $236 $727 $1,245 $2,666
</TABLE>
- ---------------
* The contingent deferred sales charge will not apply to Corresponding Shares
issued in the Reorganization or to Class C shares of the Combined Fund issued
after the Reorganization to clients participating in the Merrill Lynch
Consults(R) Service or the Merrill Lynch Strategic Portfolio Adviser(SM)
Service.
+ Assuming the Reorganization had taken place on September 30, 1999.
The foregoing Fee Tables are intended to assist investors in understanding
the costs and expenses that a Consults International Portfolio or International
Equity Fund shareholder bears directly or indirectly as compared to the costs
and expenses that would be borne by such investors on a pro forma basis taking
into account the consummation of the Reorganization. The Examples set forth
above assume reinvestment of all dividends and distributions and utilize a 5%
annual rate of return as mandated by Commission regulations. THE EXAMPLES 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 EXAMPLES. See "Summary," "The
Reorganization -- Potential Benefits to Shareholders as a Result of the
Reorganization," "Comparison of the Funds -- Management," " -- Purchase,
Redemption and Exchange of Shares."
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<PAGE> 12
THE FUNDS
BUSINESS OF CONSULTS
INTERNATIONAL
PORTFOLIO................ Consults International Portfolio is an
unincorporated business trust organized on June
26, 1992 under the laws of the Commonwealth of
Massachusetts. It commenced operations on
September 14, 1992. Consults International
Portfolio is a diversified, open-end management
investment company.
As of September 30, 1999, Consults International
Portfolio had net assets of $37,688,155.
BUSINESS OF INTERNATIONAL
EQUITY FUND................ International Equity Fund is an unincorporated
business trust organized on January 3, 1992 under
the laws of the Commonwealth of Massachusetts. The
Class C shares of International Equity Fund
commenced operations on October 21, 1994.
International Equity Fund is a diversified,
open-end management investment company.
As of September 30, 1999, International Equity
Fund had net assets of $240,343,015.
COMPARISON OF THE FUNDS.... Investment Objectives
Consults International Portfolio seeks to provide
shareholders with the highest total investment
return that is consistent with prudent risk
through investment in a diversified international
portfolio of equity securities, other than United
States equity securities. In other words, Consults
International Portfolio tries to choose
investments that will provide high current income
and that will increase in value, without undue
risk. International Equity Fund seeks to provide
shareholders with capital appreciation and
secondarily, income by investing in a diversified
portfolio of equity securities of issuers located
in countries other than the United States.
Investment Policies
General. Both Funds invest in a diversified
portfolio primarily consisting of equity
securities of non-U.S companies. Equity securities
consist of common stock, preferred stock,
securities convertible into common stock, and
derivative securities, including options and
futures and other instruments, the values of which
are indexed or linked to the market values of
other equity securities or indices of equity
securities.
Each Fund normally invests at least 65% of its
total assets in equity securities of companies
located in at least three countries other than the
United States. Consults International Portfolio
expects to invest at least 50% of its assets in
securities of companies located in Western Europe
and the Far East. Consults International Portfolio
may also invest in capital markets throughout the
world (except in the United States). Although
management of Consults International Portfolio
anticipates that it will invest primarily in the
securities of developed countries, it may also
invest in companies in emerging markets.
International Equity Fund may also invest in
equity securities of companies throughout the
world. There are no limits on the geographic
allocation of International Equity Fund's
investments. Although neither Fund has a limit on
the amount of assets it may invest in emerging
markets, it can be expected
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<PAGE> 13
that International Equity Fund will typically
invest in companies in emerging markets to a
greater extent than Consults International
Portfolio. International Equity Fund's management,
however, anticipates that a substantial portion of
the Fund's investments will be in companies
located in the developed countries of Europe and
the Far East.
In selecting securities, Consults International
Portfolio emphasizes those securities that Fund
management believes to be undervalued or have good
prospects for earnings growth. A company's stock
is considered to be undervalued when the stock's
current price is less than Fund management
believes a share of the company is worth. Fund
management will use a flexible investment approach
and will vary its policies as to geographic and
industry diversification based on its assessment
of international economic and market trends. Its
evaluation could include the condition and growth
potential of various economies and securities
markets, currency and taxation considerations and
other financial, social, national and political
factors.
International Equity Fund chooses investments
using a "top down" investment style. This means
that International Equity Fund chooses investments
primarily based on views of general economic and
financial trends rather than on individual
companies. International Equity Fund seeks to
achieve gains principally by allocating its
investments to equity markets that will benefit
from the economic and financial trends perceived
by Fund management and therefore outperform other
equity markets. International Equity Fund's
management believes such allocation decisions can
play a more important role in investment results
than other factors. International Equity Fund
attempts to identify equity markets with the best
potential to outperform other equity markets based
on analysis of economic factors such as inflation,
commodity prices, the direction of interest rates
and currency movements, estimates of growth in
industrial output and profits, and government
fiscal policies. International Equity Fund's
management also uses market technical analysis.
International Equity Fund chooses individual
securities that will benefit from the economic
circumstances anticipated by Fund management or
that are representative of a particular equity
market. Unlike Consults International Portfolio,
which places particular emphasis on those
securities that its management believes to be
undervalued or have good prospects for earnings
growth, International Equity Fund does not depend
heavily on security selection techniques involving
fundamental analysis of individual companies.
Debt Securities. Both Funds may invest in debt
securities. International Equity Fund has the
ability to invest up to 35% of its assets in
non-convertible debt securities. International
Equity Fund's investment in non-convertible debt
securities will generally be longer-term
securities with the potential for capital
appreciation through changes in interest rates,
exchange rates or the general perception of the
creditworthiness of issuers in certain countries.
International Equity Fund may also invest in
non-convertible debt securities for income, but
this will not be a focus of the Fund's
investments. Both Funds may invest in debt
securities that are rated below investment grade,
which are commonly known as "junk bonds." Junk
bonds are high risk investments that may increase
the
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<PAGE> 14
chances of a Fund losing both income and
principal. Junk bonds are generally less liquid
and experience more price volatility than higher-
rated fixed income securities. International
Equity Fund has not invested in such securities to
a significant extent. Consults International
Portfolio does not intend to, and has not in the
past invested in, such securities.
Derivatives. Both Funds may invest in
derivatives, including indexed and inverse
securities, options, futures and currency forward
contracts. Derivatives are financial instruments
whose value is derived from another security, a
commodity (such as oil or gold) or an index such
as the Standard & Poor's 500 Index. International
Equity Fund may use indexed and inverse securities
for hedging purposes only while Consults
International Portfolio may use indexed and
inverse securities to seek enhanced returns, hedge
other positions, or vary portfolio leverage with
greater efficiency than would otherwise be
possible under certain market conditions. Both
Funds may purchase and sell options, futures and
forward currency contracts for hedging purposes.
In addition, both Funds may write (sell) options
on securities to earn income.
International Equity Fund is authorized to enter
into equity swap agreements, which are
over-the-counter contracts in which one party
agrees to make periodic payments based on the
change in market value of a specified equity
security, basket of equity securities or equity
index in return for periodic payments based on a
fixed or variable interest rate or the change in
market value of a different equity security,
basket of equity securities or equity index. Swap
agreements may be used to obtain exposure to an
equity or market without owning or taking physical
custody of securities in circumstances in which
direct investment is restricted by local law or is
otherwise impractical. International Equity Fund
will enter into an equity swap transaction only
if, immediately following the time the Fund enters
into the transaction, the aggregate notional
principal amount of equity swap transactions to
which International Equity Fund is a party would
not exceed 5% of the Fund's net assets. Consults
International Portfolio may not enter into equity
swap agreements. Consults International Portfolio,
however, may hedge portfolio positions through
currency swaps, which are transactions in which
one currency is simultaneously bought in exchange
for a second currency on a spot basis and sold in
exchange for the second currency on a forward
basis.
Other Policies. Both Funds may invest in
repurchase agreements and engage in securities
lending. Each Fund may also invest up to 15% of
its assets in illiquid securities. As a temporary
measure for defensive purposes or to provide for
redemptions, Consults International Portfolio may
hold cash or cash equivalents (in U.S. dollars or
foreign currencies) and short term securities,
including, without limitation, money market
securities. International Equity Fund will
normally invest a portion of its portfolio in U.S.
dollars or short term interest bearing U.S.
dollar-denominated securities to provide for
possible redemptions. Unlike Consults
International Portfolio, which may hold cash or
cash equivalents in both U.S. dollars and foreign
currencies, International Equity Fund's
investments in cash or short term securities will
generally be denominated in U.S. dollars.
Investments in short term securities can be sold
easily and have limited risk of loss but earn only
limited returns.
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<PAGE> 15
Therefore, when a Fund holds these investments,
the Fund may not achieve its investment objective.
Both Funds are diversified within the meaning of
the Investment Company Act. Accordingly, as a
fundamental restriction, with respect to 75% of
its assets, each Fund may invest no more than 5%
of its assets in the securities of any one issuer
and may not purchase more than 10% of the
outstanding voting securities of any one company.
In addition, both Funds have a fundamental policy
prohibiting concentration in any one industry.
That is, neither Fund may 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, its agencies and
instrumentalities).
International Equity Fund believes that the
securities currently held in the portfolio of
Consults International Portfolio are consistent
with the investment objective and policies of
International Equity Fund and are not prohibited
by the investment restrictions of International
Equity Fund.
International Equity Fund has no plan or intention
to sell or otherwise dispose of any of the assets
of Consults International Portfolio acquired in
the Reorganization, except for dispositions made
in the ordinary course of business.
Risk Factors
For a discussion of the risks of investing in each
Fund, see "Risk Factors and Special
Considerations."
Other
Advisory and Administration Arrangements and
Fees. MLAM serves as the investment adviser for
International Equity Fund and MLSIM serves as the
investment adviser for Consults International
Portfolio pursuant to separate investment advisory
agreements (each an "Investment Advisory
Agreement"). MLAM is responsible for the
management of International Equity Fund's
investment portfolio and for providing
administrative services to such Fund. MLSIM is
responsible for the management of Consults
International Portfolio's investment portfolio and
the Administrator provides administrative services
to such Fund. Except for the administrative
services that MLAM also provides to International
Equity Fund and certain other minor differences,
the Investment Advisory Agreements are
substantially similar.
Pursuant to the separate Investment Advisory
Agreements between each Fund and its investment
adviser, each Fund pays its investment adviser a
monthly fee at the annual rate of 0.75% of such
Fund's average daily net assets. The pro forma
effective fee rate of the Combined Fund after
taking into account the completion of the
Reorganization would be 0.75% of the Combined
Fund's average daily net assets.
MLAM has retained Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K.") as sub-adviser to
provide investment advisory services to MLAM with
respect to International Equity Fund. Pursuant to
a sub-advisory agreement between MLAM and MLAM
U.K., MLAM pays MLAM U.K. a fee in an amount to be
determined from time to
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<PAGE> 16
time by MLAM and MLAM U.K. but in no event in
excess of the amount MLAM actually receives for
providing services to International Equity Fund
pursuant to the Investment Advisory Agreement
between MLAM and International Equity Fund.
MLSIM has retained MLAM U.K. and Fund Asset
Management, L.P. ("FAM") as sub-advisers to
Consults International Portfolio. MLAM U.K.
provides day-to-day investment advice for Consults
International Portfolio and FAM provides
investment advisory services with respect to the
management of the Fund's cash position. Prior to
September 1999, both MLAM U.K. and FAM managed
Consults International Portfolio's daily cash
position and MLSIM provided investment advisory
services with respect to its day-to-day
operations. Pursuant to sub-advisory agreements
between MLSIM and each of MLAM U.K. and FAM, MLSIM
pays MLAM U.K. and FAM a fee for providing
investment advisory services to MLSIM with respect
to Consults International Portfolio, in an amount
to be determined from time to time by MLSIM and
MLAM U.K. or FAM, as the case may be, but in no
event in excess of the amount MLSIM actually
receives for providing services to Consults
International Portfolio pursuant to the Investment
Advisory Agreement between MLSIM and Consults
International Portfolio.
Clive D. Lang serves as Portfolio Manager for both
Funds. Mr. Lang has been the Portfolio Manager of
International Equity Fund since April 1998 and of
Consults International Portfolio since September
1999. Mr. Lang has been associated with MLAM U.K.
since 1997, and prior to that was the Chief
Investment Officer of Panagora Asset Management
Limited.
The Administrator acts as Consults International
Portfolio's administrator under the terms of an
administration agreement between the Administrator
and Consults International Portfolio (the
"Administration Agreement"). Under the
Administration Agreement, Consults International
Portfolio pays the Administrator a monthly fee
equal to 0.25% of the Fund's average daily net
assets. In addition, accounting services are
provided to Consults International Portfolio by
the Administrator and the Fund reimburses the
Administrator for its costs in connection with
such services on a semi-annual basis. Upon
completion of the Reorganization, the Combined
Fund will not pay the administrative fees that
Consults International Portfolio currently pays to
the Administrator under the Administration
Agreement. MLAM will continue to perform
administrative services for the Combined Fund
under the Investment Advisory Agreement between
MLAM and International Equity Fund at no
additional cost.
MLAM, MLSIM, MLAM U.K., FAM and the Administrator
are all affiliates of each other.
Class Structure. Consults International Portfolio
offers one class of shares. International Equity
Fund offers four classes of shares under the
Merrill Lynch Select Pricing(SM) System. See
"Comparison of the Funds -- Purchase, Redemption
and Exchange of Shares."
Overall Expense Ratio. The overall operating
expenses, as a percent of net assets, as of
September 30, 1999 was 2.87% for Consults
International Portfolio and 2.36% for
International Equity Fund Class C shares.
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<PAGE> 17
If the Reorganization had taken place on that
date, the overall operating expenses, as a percent
of net assets, for Class C shares of Pro Forma
International Equity Fund would have been 2.33% as
of such date.
Purchase of Shares. Shares of International
Equity Fund are offered continuously for sale to
the public. Shares of Consults International
Portfolio are offered continuously for sale to
clients of the Merrill Lynch Consults(R) Service
and Merrill Lynch Strategic Portfolio Advisor(SM)
Service. Such services will continue to be
available to holders of Corresponding Shares upon
completion of the Reorganization. For more
information regarding the purchase of shares of
the Funds and the Merrill Lynch Consults(R)
Service and Merrill Lynch Strategic Portfolio
Advisor(SM) Service, see "Comparison of the
Funds -- Purchase, Redemption and Exchange of
Shares."
Redemption of Shares. The redemption procedures
for shares of International Equity Fund are
substantially the same as the redemption
procedures for shares of Consults International
Portfolio. See "Comparison of the
Funds -- Purchase, Redemption and Exchange of
Shares -- Redemption of Shares."
Dividends. Consults International Portfolio's
policies with respect to dividends are
substantially the same as those of International
Equity Fund. See "Comparison of the
Funds -- Dividends."
Net Asset Value. Each of Consults International
Portfolio and International Equity Fund determines
the net asset value of its shares (or each class
of its shares in the case of International Equity
Fund) once daily Monday through Friday after the
close of business on the New York Stock Exchange
(the "NYSE") (generally, 4:00 p.m. Eastern Time),
on each day during which the NYSE is open for
trading. Both Funds compute net asset value per
share in the same manner. See "Comparison of the
Funds -- Additional Information -- Net Asset
Value."
Tax Considerations. Consults International
Portfolio and International Equity Fund jointly
have requested a private letter ruling from the
IRS with respect to the Reorganization to the
effect that, among other things, neither Consults
International Portfolio nor International Equity
Fund will recognize gain or loss on the
transaction, and Consults International Portfolio
shareholders will not recognize gain or loss on
the exchange of their shares of Consults
International Portfolio for Corresponding Shares.
The completion of the Reorganization is subject to
the receipt of such ruling or an opinion of
counsel to the same effect. The Reorganization
will not affect the status of International Equity
Fund as a regulated investment company. See "The
Reorganization -- Tax Consequences of the
Reorganization."
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<PAGE> 18
RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in International
Equity Fund are substantially the same as those associated with an investment in
Consults International Portfolio. A discussion of certain principal risks of
investing in the Funds is set forth below. See "Investment Risks" in each of the
International Equity Fund Prospectus and Consults International Portfolio
Prospectus and "Investment Objectives and Policies" in each of the International
Equity Fund Statement and Consults International Portfolio Statement for a more
detailed discussion of investment risks associated with an investment in the
Funds.
STOCK MARKET AND SELECTION RISK
Stock market risk is the risk that the stock markets in one or more
countries in which a Fund invests will go up or down in value, including the
possibility that the markets will go down sharply and unpredictably. Selection
risk is the risk that the investments that Fund management selects will
underperform stock market indexes or other funds with similar investment
objectives and investment strategies.
FOREIGN MARKET RISK
Since each Fund invests in securities of issuers located outside the United
States, it offers the potential for more diversification than an investment only
in the United States. This is because securities traded on foreign markets have
often (though not always) performed differently than securities in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that a Fund will lose money. In
particular, each Fund is subject to the risk that because there are generally
fewer investors on foreign exchanges and a smaller number of shares traded each
day, it may be difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up and down more
than the prices of securities traded in the United States. These risks are
magnified for investments in emerging markets.
FOREIGN ECONOMY RISK
The economies of certain foreign markets often do not compare favorably
with the economy of the United States with respect to such issues as growth of
gross national product, reinvestment of capital, resources and balance of
payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Funds' ability to
purchase or sell foreign securities or transfer the Funds' assets or income back
into the United States, or otherwise adversely affect the Funds' operations.
Other foreign market risks include the imposition of foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK
Securities in which the Funds invest are usually denominated or quoted in
currencies other than the U.S. dollar. Changes in foreign currency exchange
rates affect the value of each Fund's portfolio. Generally, when the U.S. dollar
rises in value against a foreign currency, a security denominated in that
currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for
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<PAGE> 19
U.S. investors while a weak U.S. dollar will increase those returns. The Funds,
however, may (but are not required to) engage in currency hedging to offset this
risk.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS
Many foreign governments supervise and regulate stock exchanges, brokers
and the sale of securities less than the United States does. Some countries may
not have investor protection laws comparable to those of the United States. For
example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for Fund management to
completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces the
amount a Fund can earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES
The Funds generally hold their foreign securities and cash in foreign banks
and securities depositories. Some foreign banks and securities depositories may
be recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight of their operations. Also, the laws of
certain countries may put limits on each Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Funds to buy, sell and
hold securities in certain foreign markets than in the United States. The
increased expense of investing in foreign markets reduces the amount the Funds
can earn on their investments and typically results in a higher operating
expense ratio for the Funds than investment companies invested only in the
United States.
SETTLEMENT RISK
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Funds to carry out transactions. If the
Funds cannot settle or are delayed in settling a purchase of securities, they
may miss attractive investment opportunities and certain of their assets may be
uninvested with no return earned thereon for some period. If the Funds cannot
settle or are delayed in settling a sale of securities, they may lose money if
the value of the security then declines or, if they have contracted to sell the
security to another party, the Funds could be liable to that party for any
losses incurred.
Transactions effected on behalf of Consults International Portfolio by
MLSIM may be subject to Swiss federal transactional taxes of 0.15%. This is not
the case with respect to International Equity Fund. In addition, shareholders of
either Fund may be subject to the imposition of foreign taxes on income from
foreign jurisdictions in which such Fund invests.
EMERGING MARKETS RISK
Each Fund may invest in emerging market securities, although it can be
expected that International Equity Fund will typically invest in securities of
emerging market countries to a greater extent than Consults International
Portfolio. The risks of foreign investments are usually much greater for
emerging markets. Investment in emerging markets may be considered speculative.
Emerging markets include those in countries defined as emerging or developing by
the World Bank, the International Finance Corporation, or the United Nations.
Emerging markets are riskier because they develop unevenly and may never fully
develop. They are more likely to experience hyperinflation and currency
devaluations, which adversely affect returns to U.S.
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<PAGE> 20
investors. In addition, the securities markets in many of these countries have
far lower trading volumes and less liquidity than developed markets. Since these
markets are so small, they may be more likely to suffer sharp and frequent price
changes or long term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price to
earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU")
Certain European countries have entered into EMU in an effort to, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these countries. EMU established a single
European currency (the "euro"), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants by
July 1, 2002. Certain securities (beginning with government and corporate bonds)
were redenominated in the euro, and are listed, trade and make dividend and
other payments only in euros. Although EMU is generally expected to have a
beneficial effect, it could negatively affect a Fund in a number of situations,
including as follows:
- If the transition to euro, or EMU as a whole, does not continue to
proceed as planned, a Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and other
disruptions of the markets could occur.
- Withdrawal from EMU by a participating country could also have a negative
effect on a Fund's investments, for example if securities redenominated
in euros are transferred back into that country's national currency.
Risks associated with certain types of securities in which a Fund may
invest include:
CONVERTIBLE SECURITIES
Both Funds may invest in convertible securities. Convertible securities are
generally debt securities or preferred stocks that may be converted into common
stock. Convertible securities typically pay current income as either interest
(debt security convertibles) or dividends (preferred stocks). A convertible
security's value usually reflects both the stream of current income payments and
the value of the underlying common stock. The market value of a convertible
security performs like that of regular debt securities; that is, if market
interest rates rise, the value of a convertible security usually falls. Since it
is convertible into common stock, the convertible security also has the same
types of market and issuer risk as the underlying common stock.
DERIVATIVES
Derivatives allow the Funds to increase or decrease their risk exposure
more quickly and efficiently than other types of instruments. Derivatives are
volatile and involve significant risks, including:
Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to a Fund.
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments
or trading strategies that relatively small market movements may result in
large changes in the value of an investment. Certain
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<PAGE> 21
investments or trading strategies that involve leverage can result in
losses that greatly exceed the amount originally invested.
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is then worth.
The Funds may use derivatives for hedging purposes including anticipatory
hedges. The Funds may also use written options to earn income. Hedging is a
strategy in which a Fund uses a derivative to offset the risk that other Fund
holdings may decrease in value. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different manner than
anticipated by a Fund or if the cost of the derivative outweighs the benefit of
the hedge. Hedging also involves the risk that changes in the value of the
derivative will not match those of the holdings being hedged as expected by a
Fund, in which case any losses on the holdings being hedged may not be reduced.
This risk is known as "correlation risk." There can be no assurance that a
Fund's hedging strategy will reduce risk or that hedging transactions will be
either available or cost effective. The Funds are not required to use hedging
and may choose not to do so.
INDEXED AND INVERSE SECURITIES
Both Funds may invest in securities the potential return of which is based
on the change in particular measurements of value or interest rate (an "index").
In particular, the Funds may invest in securities the values of which are
indexed to the market values of equity securities, indices of equity securities,
currencies or currency units. As an illustration, the Funds may invest in a debt
security that pays interest and returns principal based on the change in the
value of an equity securities index or a basket of equity securities, or based
on the relative changes of two equity securities indices. In addition, the Funds
may invest in securities whose potential return is inversely related to the
change in an index (that is, a security whose value will move in the opposite
direction of changes in the index). For example, the Funds may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If a Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Funds believe that indexed securities may provide portfolio management
flexibility that permits the Funds, to the extent permitted under their
prospectuses, to seek enhanced returns, hedge other portfolio positions or vary
the degree of portfolio leverage with greater efficiency than would otherwise be
possible under certain market conditions. International Equity Fund may invest
in indexed and inverse securities for hedging purposes only while Consults
International Portfolio may use indexed and inverse securities to seek enhanced
returns, hedge other positions or vary portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
When used for hedging purposes, indexed and inverse securities involve
correlation risk.
SWAP AGREEMENTS
International Equity Fund may enter into equity swap agreements while
Consults International Portfolio may not. Consults International Portfolio,
however, may hedge portfolio positions through currency swaps. Swap agreements
involve the risk that the party with whom the Fund has entered into the swap
will default on its obligation to pay the Fund and the risk that the Fund will
not be able to meet its obligations to pay the other party to the agreement.
DEBT SECURITIES
Both Funds may invest in debt securities. Debt securities, such as bonds,
involve credit risk. This is the risk that the borrower will not make timely
payments of principal and interest. The degree of credit risk depends on the
issuer's financial condition and on the terms of the bonds. These securities are
also subject to
16
<PAGE> 22
interest rate risk. This is the risk that the value of the security may fall
when interest rates rise. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest
rates than the market price of shorter term securities.
SOVEREIGN DEBT
International Equity Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt are subject to the risk that a government entity may delay or
refuse to pay interest or repay principal on its sovereign debt. Some of the
reasons may include cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a governmental entity defaults,
it may ask for more time in which to pay or for further loans. There is no legal
process for collecting sovereign debt that a government does not pay or
bankruptcy proceeding by which all or part of sovereign debt that a governmental
entity has not repaid may be collected.
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS
Each Fund may enter into certain types of repurchase agreements or purchase
and sale contracts. Under a repurchase agreement, the seller agrees to
repurchase a security (typically a security issued or guaranteed by the U.S.
Government) at a mutually agreed upon time and price. This insulates a Fund from
changes in the market value of the security during the period, except for
currency fluctuations. A purchase and sale contract is similar to a repurchase
agreement, but purchase and sale contracts provide that the purchaser receives
any interest on the security paid during the period. If the seller fails to
repurchase the security in either situation and the market value declines, a
Fund may lose money.
BORROWING AND LEVERAGE
Each Fund may borrow for temporary emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of Fund
shares and in the yield on a Fund's portfolio. Borrowing will cost the Fund
interest expense and other fees. The cost of borrowing may reduce the Fund's
return. Certain securities that a Fund buys may create leverage including, for
example, options.
SECURITIES LENDING
Each Fund may lend securities to financial institutions, which provide
government securities as collateral. Securities lending involves the risk that
the borrower may fail to return the securities in a timely manner or at all. As
a result, a Fund may lose money and there may be a delay in recovering the
loaned securities. A Fund could also lose money if it does not recover the
securities and the value of the collateral falls. These events could trigger
adverse tax consequences to the Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its assets in illiquid securities that it
cannot easily resell within seven days at current value or that have contractual
or legal restrictions on resale. If a Fund buys illiquid securities it may be
unable to quickly resell them or may be able to sell them only at a price below
current value.
RESTRICTED SECURITIES
Restricted securities have contractual or legal restrictions on their
resale. They include private placement securities that a Fund buys directly from
the issuer. Private placement and other restricted securities may not be listed
on an exchange and may have no active trading market. Restricted securities may
be illiquid. A Fund may get only limited information about the issuer, so it may
be less able to predict a loss. In addition, if Fund management receives
material adverse non-public information about the issuer, the Fund will not be
able to sell the security.
17
<PAGE> 23
RULE 144A SECURITIES
Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not to the general public. Rule 144A
securities may have an active trading market, but carry the risk that the active
trading market may not continue.
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
International Equity Fund
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements by Deloitte &
Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in International Equity Fund's financial statements.
<TABLE>
<CAPTION>
CLASS C SHARES
----------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MAY 31, OCTOBER 21, 1994+
----------------------------------------------- TO
1999++ 1998++ 1997++ 1996++ MAY 31, 1995
------ -------- -------- ------- -----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $9.49 $ 12.26 $ 11.65 $ 10.10 $ 11.62
------ ------- ------- ------- -----------------
Investment income (loss) -- net.......................... .03 +++ +++ .05 .24
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net.................... (.19) (1.02) 1.08 1.50 (1.09)
------ ------- ------- ------- -----------------
Total from investment operations......................... (.16) (1.02) 1.08 1.55 (.85)
------ ------- ------- ------- -----------------
Less dividends and distributions:
Investment income -- net................................ -- -- (.14) -- (.13)
In excess of investment income -- net................... -- -- (.01) -- --
Realized gain on investments -- net..................... -- (.92) (.32) -- (.54)
In excess of realized gain on investments -- net........ (.30) (.83) -- -- --
------ ------- ------- ------- -----------------
Total dividends and distributions........................ (.30) (1.75) (.47) -- (.67)
------ ------- ------- ------- -----------------
Net asset value, end of period........................... $9.03 $ 9.49 $ 12.26 $ 11.65 $ 10.10
====== ======= ======= ======= =================
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... (1.50%) (6.96%) 9.71% 15.35% (7.36%)#
====== ======= ======= ======= =================
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. 2.40% 2.21% 2.15% 2.09% 2.30%*
====== ======= ======= ======= =================
Investment income (loss) -- net.......................... .40% (.01%) .04% .45% 4.26%*
====== ======= ======= ======= =================
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $6,328 $14,717 $24,774 $46,985 $ 25,822
====== ======= ======= ======= =================
Portfolio turnover....................................... 132.43% 107.50% 60.56% 71.86% 63.95%
====== ======= ======= ======= =================
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
18
<PAGE> 24
CONSULTS INTERNATIONAL PORTFOLIO
The financial information in the table below, except for the six month
period ended April 30, 1999 which is unaudited and has been provided by
Princeton Administrators, L.P., has been audited in conjunction with the annual
audits of the financial statements of Consults International Portfolio by Ernst
& Young LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in Consults International Portfolio's financial statements:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ---------------------------------------------------
APRIL 30, 1999 1998+ 1997+ 1996+ 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................... $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
------- ------- -------- -------- -------- --------
Investment income (loss) -- net........................ (.10) .05 .10 (.05) (.05) (.12)
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net.................. .95 (.40) .97 .76 (.18) 1.26
------- ------- -------- -------- -------- --------
Total from investment operations....................... .85 (.35) 1.07 .71 (.23) 1.14
------- ------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net............................... (.19) (.18) -- -- -- --
In excess of investment income -- net.................. -- (.11) (.44) (.44) -- --
Realized gain on investments -- net.................... -- (.46) (.35) (.46) (.32) (.05)
------- ------- -------- -------- -------- --------
Total dividends and distributions...................... (.19) (.75) (.79) (.90) (.32) (.05)
------- ------- -------- -------- -------- --------
Net asset value, end of period......................... $ 11.93 $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83
TOTAL INVESTMENT RETURN:
Based on net asset value per share..................... 7.63%# (2.79%) 9.26% 5.93% (1.68%) 9.74%
======= ======= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... 2.86%* 2.70% 2.44% 2.37% 2.35% 2.27%
======= ======= ======== ======== ======== ========
Investment income (loss) -- net........................ (1.68%)* .39% .84% (.42%) (.41%) (.56%)
======= ======= ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $45,695 $60,442 $107,951 $174,921 $197,077 $272,487
======= ======= ======== ======== ======== ========
Portfolio turnover..................................... 29.93% 48.78% 28.62% 38.16% 17.31% 24.64%
======= ======= ======== ======== ======== ========
</TABLE>
- ---------------
+ Based on average shares outstanding.
* Annualized.
# Aggregate total investment return.
MANAGEMENT
Board of Trustees. The Board of Trustees of each of International Equity
Fund and Consults International Portfolio consists of seven individuals, five of
whom are not "interested persons" as defined in the Investment Company Act. Two
individuals, Arthur Zeikel and Terry K. Glenn, serve on both Boards. After the
Reorganization, the Board of Trustees of International Equity Fund will serve as
the Board of Trustees of the Combined Fund. The Board of Trustees of each Fund
is responsible for the overall supervision of the operation of such Fund and
performs the various duties imposed on the directors or trustees of investment
companies by the Investment Company Act. See "Management of the Fund -- Trustees
and Officers" in each of the International Equity Fund Statement and Consults
International Portfolio Statement.
The Trustees of International Equity Fund are:
TERRY K. GLENN(59)-(1)(2) -- President of International Equity Fund since
1999; President of Consults International Portfolio since 1999; Executive Vice
President of MLAM and FAM (which terms as used herein include their corporate
predecessors) since 1983; President of Princeton Funds Distributor, Inc.
19
<PAGE> 25
since 1986 and Director thereof since 1991; Executive Vice President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
President of the Administrator since 1988.
DONALD CECIL(72)-(2)(3) -- Special Limited Partner of Cumberland Associates
(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(72)-(2)(3) -- 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), Harman International Industries, Inc. and Ethan Allen
Interiors, Inc.
CHARLES C. REILLY(68)-(2)(3) -- Self-employed financial consultant since
1990; President and Chief Investment Officer of Verus Capital, Inc. from 1979 to
1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to
1990; Adjunct Professor, Columbia University Graduate School of Business from
1990 to 1991; Adjunct Professor, Wharton School, University of Pennsylvania from
1989 to 1990; Partner, Small Cities Cable Television from 1986 to 1997.
RICHARD R. WEST(61)-(2)(3) -- Professor of Finance since 1984, Dean from
1984 to 1993 and currently Dean Emeritus of New York University Leonard N. Stern
School of Business Administration; Director of Bowne & Co., Inc. (financial
printers), Vornado Realty Trust, Inc. (real estate holding company), Vornado
Operating Company, Inc. and Alexander's, Inc. (real estate company).
ARTHUR ZEIKEL(67)-(1)(2) -- Trustee of Consults International Portfolio
since ; Chairman of MLAM, and FAM from 1997 to 1999 and President
thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999 and
Director thereof from 1993 to 1999 and President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to
1999.
EDWARD D. ZINBARG(64)-(2)(3) -- 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.
- ---------------
(1) Interested person, as defined by the Investment Company Act, of each of the
Funds.
(2) Such Trustee is a trustee, director or officer of certain other investment
companies for which MLAM or FAM acts as the investment adviser or manager.
(3) Member of International Equity Fund's Audit and Nominating Committee (the
"Committee"), which is responsible for the selection of the independent
auditors and the selection and nomination of non-interested Trustees.
Compensation of Trustees. International Equity Fund pays each
non-interested Trustee who is not an interested person of the Fund (an
"Independent Trustee") a fee of $3,500 per year plus $500 per Board meeting
attended. International Equity Fund also compensates each member of the
Committee, which consists of the Independent Trustees, at a rate of $500 per
Committee meeting attended and pays the Chairman of the Committee an additional
fee of $250 per Committee meeting attended. In addition, International Equity
Fund reimburses each Independent Trustee for his out-of-pocket expenses relating
to attendance at Board and Committee meetings. The following table shows the
compensation earned by the Independent Trustees for the fiscal year ended May
31, 1999 and the aggregate compensation paid to them
20
<PAGE> 26
from all registered investment companies advised by MLAM and FAM
("MLAM/FAM-Advised Funds"), for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT BENEFITS FROM INTERNATIONAL
COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL EQUITY FUND AND
FROM INTERNATIONAL INTERNATIONAL EQUITY BENEFITS UPON OTHER MLAM/FAM
NAME OF INDEPENDENT TRUSTEE EQUITY FUND FUND EXPENSES RETIREMENT ADVISED FUNDS(1)
--------------------------- ------------------ -------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Donald Cecil.................... $8,500 None None $277,808
Edward H. Meyer................. $7,000 None None $214,558
Charles C. Reilly............... $7,500 None None $362,858
Richard R. West................. $7,500 None None $346,125
Edward D. Zinbarg............... $7,500 None None $133,959
</TABLE>
- ---------------
(1) The Trustees serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Meyer (34 registered investment companies consisting of 34 portfolios); Mr.
Reilly (59 registered investment companies consisting of 72 portfolios); Mr.
West (61 registered investment companies consisting of 85 portfolios); and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
Advisory and Administration Arrangements and Fees. MLAM serves as the
investment adviser of International Equity Fund and MLSIM serves as the
investment adviser of Consults International Portfolio pursuant to separate
investment agreements (each previously defined as an "Investment Advisory
Agreement"). MLAM is responsible for the management of International Equity
Fund's investment portfolio and for providing administrative services to such
Fund. MLSIM is responsible for the management of Consults International
Portfolio's investment portfolio and the Administrator provides administrative
services to such Fund. Except for the administrative services that MLAM also
provides to International Equity Fund and certain other minor differences, the
Investment Advisory Agreements are substantially similar.
Pursuant to the separate Investment Advisory Agreements between each Fund
and its investment adviser, each Fund pays its investment adviser a monthly fee
at the annual rate of 0.75% of such Fund's average daily net assets. The pro
forma effective fee rate of the Combined Fund after taking into account the
completion of the Reorganization would be 0.75% of the Combined Fund's average
daily net assets.
MLAM has retained MLAM U.K. as sub-adviser to provide investment advisory
services to MLAM with respect to International Equity Fund. Pursuant to a
sub-advisory agreement between MLAM and MLAM U.K. with respect to International
Equity Fund, MLAM pays MLAM U.K. a fee in an amount to be determined from time
to time by MLAM and MLAM U.K. but in no event in excess of the amount MLAM
actually receives for providing services to International Equity Fund pursuant
to the Investment Advisory Agreement between MLAM and International Equity Fund.
MLSIM has retained MLAM U.K. and FAM as sub-advisers to Consults
International Portfolio. MLAM U.K. provides day-to-day investment advice for
Consults International Portfolio and FAM provides investment advisory services
with respect to the management of the Fund's cash position. Prior to September
1999, both MLAM U.K. and FAM managed Consults International Portfolio's daily
cash position and MLSIM provided investment advisory services with respect to
its day-to-day operations. Pursuant to sub-advisory agreements between MLSIM and
each of MLAM U.K. and FAM, MLSIM pays MLAM U.K. and FAM a fee for providing
investment advisory services to MLSIM with respect to Consults International
Portfolio, in an amount to be determined from time to time by MLSIM and MLAM
U.K. or FAM, as the case may be, but in no event in excess of the amount MLSIM
actually receives for providing services to Consults International Portfolio
pursuant to the Investment Advisory Agreement between MLSIM and Consults
International Portfolio.
The address of MLAM and FAM is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536. The address of MLSIM is 18 Rue De Contamines, 1211 Geneva 3,
Switzerland. The address of MLAM U.K. is 55 King William Street, P.O. Box 18135,
London EC4R 9LA, England. See "Management of the Fund --
21
<PAGE> 27
Advisory and Administration Arrangements and Fees" in each of the International
Equity Fund Statement and Consults International Portfolio Statement.
Clive D. Lang serves as Portfolio Manager for both Funds. Mr. Lang has been
the Portfolio Manager of International Equity Fund since April 1998 and of
Consults International Portfolio since September 1999. Mr. Lang has been
associated with MLAM U.K. since 1997, and prior to that was the Chief Investment
Officer of Panagora Asset Management Limited.
In addition to investment advisory and management services, MLAM provides
certain administrative services to International Equity Fund. Such
administrative services includes the provision of office space, facilities,
equipment and necessary personnel for management of the Fund. MLAM does not
receive additional compensation for such administrative services under the
Investment Advisory Agreement between MLAM and International Equity Fund. The
Administrator acts as Consults International Portfolio's administrator under the
terms of the Administration Agreement. The Administrator performs or arranges
for the performance of certain administrative services (i.e., services other
than investment advice and related portfolio activities) necessary for the
operation of Consults International Portfolio, including maintaining the books
and records of the Fund, preparing reports and other documents required by
United States federal, state and other applicable laws and regulations to
maintain the registration of the Fund and its shares, and providing the Fund
with administrative office facilities. Under the Administration Agreement,
Consults International Portfolio pays the Administrator a monthly fee at an
annual rate of 0.25% of the Fund's average daily net assets. In addition,
accounting services are provided to Consults International Portfolio by the
Administrator and to International Equity Fund by MLAM and each Fund reimburses
the Administrator or MLAM, as the case may be, for its costs in connection with
such services. After the Reorganization, MLAM will continue to perform
administrative services for the Combined Fund under the Investment Advisory
Agreement between MLAM and International Equity Fund at no additional cost.
If the Reorganization had taken place on September 30, 1999, as of such
date, on a pro forma combined basis, the total operating expenses of Class C
shares of International Equity Fund, as a percent of net assets, would have been
less than the current operating expenses for Consults International Portfolio.
In particular, the Combined Fund would not pay the administrative fees that
Consults International Portfolio currently pays to the Administrator under the
Administration Agreement. In addition, certain fixed costs, such as costs of
printing shareholder reports and proxy statements, legal expenses, audit fees,
registration fees, mailing costs and other expenses would be spread across a
larger asset base, thereby lowering the expense ratio borne by Consults
International Portfolio shareholders. Fund management believe that the
Reorganization is in the best interest of both International Equity Fund and
Consults International Portfolio shareholders. See "The Reorganization --
Potential Benefits to Shareholders as a Result of the Reorganization" and
"Summary -- Fee Tables."
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Purchase of Shares. Consults International Portfolio offers one class of
shares. Shares of Consults International Portfolio are offered for sale to
clients of the Merrill Lynch Consults(R) Service and Merrill Lynch Strategic
Portfolio Advisor(SM) Service. Merrill Lynch Consults(R) Service offers to
assist clients in selecting and retaining, from a roster of managers, one or
more professional portfolio managers who generally emphasize investment in
United States securities. Merrill Lynch Strategic Portfolio Advisor(SM) Service
provides business and individual clients with a comprehensive package of
consulting, investment and account services. Consults International Portfolio
shareholders do not pay a sales charge when they buy or sell shares of the Fund,
but they pay distribution fees of 0.75% and account maintenance fees of 0.25%
each year under a distribution plan that the Fund has adopted under Rule 12b-1
under the Investment Company Act. Upon completion of the Reorganization, the
services provided under the Merrill Lynch Consults(R) Service and the Merrill
Lynch Strategic Portfolio Advisor(SM) Service will continue to be available to
holders of Corresponding Shares. In addition, clients of such services will be
eligible to purchase additional Class C shares of the Combined Fund with the
contingent deferred sales charge applicable thereto being waived.
22
<PAGE> 28
International Equity Fund offers four classes of shares, each with its own
sales charge and expense structure. Each such share class represents an
ownership interest in the same investment portfolio. The table below summarizes
key features of the Merrill Lynch Select Pricing(SM) System. For more
information on the Merrill Lynch Select Pricing(SM) System, see the
International Equity Fund Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability? LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH MERRILL THROUGH MERRILL THROUGH MERRILL
- Current Class A LYNCH. LIMITED LYNCH. LIMITED LYNCH. LIMITED
shareholders AVAILABILITY THROUGH AVAILABILITY THROUGH AVAILABILITY THROUGH
- Certain Retirement OTHER SECURITIES OTHER SECURITIES OTHER SECURITIES
Plans DEALERS. DEALERS. DEALERS.
- Participants of
certain Merrill
Lynch-sponsored
programs
- Certain affiliates
of Merrill Lynch
- ---------------------------------------------------------------------------------------------------------------
Initial Sales Charge? YES. PAYABLE AT TIME NO. ENTIRE PURCHASE NO. ENTIRE PURCHASE YES. PAYABLE AT TIME
OF PURCHASE. LOWER PRICE IS INVESTED IN PRICE IS INVESTED IN OF PURCHASE. LOWER
SALES CHARGES SHARES OF THE FUND. SHARES OF THE FUND. SALES CHARGES
AVAILABLE FOR LARGER AVAILABLE FOR LARGER
INVESTMENTS. NO INVESTMENTS.
INITIAL SALES CHARGE
FOR PURCHASES OVER
$1 MILLION.
- ---------------------------------------------------------------------------------------------------------------
Deferred Sales Charge? NO. (MAY BE CHARGED YES. PAYABLE IF YOU YES. PAYABLE IF YOU NO. (MAY BE CHARGED
FOR PURCHASES OVER REDEEM WITHIN FOUR REDEEM WITHIN ONE FOR PURCHASES OVER
$1 MILLION THAT ARE YEARS OF PURCHASE. YEAR OF PURCHASE. $1 MILLION THAT ARE
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
- ---------------------------------------------------------------------------------------------------------------
Account Maintenance NO. 0.25% ACCOUNT 0.25% ACCOUNT 0.25% ACCOUNT
and Distribution Fees? MAINTENANCE FEE. MAINTENANCE FEE. MAINTENANCE FEE. NO
0.75% DISTRIBUTION 0.75% DISTRIBUTION DISTRIBUTION FEE.
FEE. FEE.
- ---------------------------------------------------------------------------------------------------------------
Conversion to Class D NO. YES, AUTOMATICALLY NO. NO.
shares? AFTER APPROXIMATELY
8 YEARS.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
If you purchase Class C shares of International Equity Fund, you will not
pay an initial sales charge at the time of purchase. Class C shareholders of
International Equity Fund will pay distribution fees of 0.75% and account
maintenance fees of 0.25% each year under distribution plans that the Fund has
adopted under Rule 12b-1. Because these fees are paid out of International
Equity Fund's assets on an ongoing basis, over time these fees increase the cost
of your investment and may cost you more than paying an initial sales charge.
The deferred sales charge applicable to Class C shares of International
Equity Fund will be waived for Corresponding Shares issued to shareholders of
Consults International Portfolio in the Reorganization as well as for
International Equity Fund shares acquired through subsequent purchases by
holders that are clients of the Merrill Lynch Consults(R) Service and Merrill
Lynch Strategic Portfolio Advisor(SM) Service.
The minimum initial investment for International Equity Fund is $1,000 for
all accounts except that certain Merrill Lynch fee-based programs have a minimum
of $250 and retirement plans have a minimum of $100. The minimums for initial
investments and additional purchases in International Equity Fund may be waived
under certain circumstances. The minimum investment for additional purchases in
International Equity Fund is generally $50, except that retirement plans have a
minimum additional purchase of $1 and certain programs, such as automatic
investment plans, may have higher minimums. The minimum initial
23
<PAGE> 29
investment for Consults International Portfolio is $5,000 for all accounts. The
minimum investment for additional purchases in Consults International Portfolio
is $1,000.
If you want to purchase shares in either Fund, the price of your shares is
based on the next calculation of net asset value after your order is placed. Any
purchase orders placed prior to the close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern Time) will be priced at the net asset
value determined that day. Purchase orders placed after that time will be priced
at the net asset value determined on the next business day. A Fund may reject
any order to buy shares and may suspend the sale of shares at any time. Merrill
Lynch may charge a processing fee to confirm a purchase. This fee is currently
$5.35. It is currently waived for clients of the Merrill Lynch Consults(R)
Service and of the Merrill Lynch Strategic Portfolio Advisor(SM) Service.
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc., serves as distributor to both Funds.
Redemption of Shares. If you want to redeem shares in either Fund, the
price of your shares is based on the next calculation of net asset value after
your order is placed. For your redemption request to be priced at the net asset
value on the day of your request, you must submit your request to your dealer
prior to that day's close of business on the New York Stock Exchange (generally
4:00 p.m. Eastern Time). Any redemption request placed after that time will be
priced at the net asset value at the close of business on the next business day.
Dealers must submit redemption requests to the Fund not more than thirty minutes
after the close of business on the New York Stock Exchange on the day the
request was received.
Securities dealers, including Merrill Lynch, may charge a fee to process a
redemption of shares. Merrill Lynch currently charges a fee of $5.35. This fee
is currently waived for clients of the Merrill Lynch Consults(R) Service and of
Merrill Lynch Strategic Portfolio Advisor(SM) Service. No processing fee is
charged if you redeem shares directly through the Transfer Agent.
A Fund may reject an order to redeem shares under certain circumstances.
Generally, if you redeem Class C shares of International Equity Fund within
one year after purchase, you may be charged a deferred sales charge of 1.00%.
The charge will apply to the lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. You will not be charged a deferred
sales charge when you redeem shares that you acquire through reinvestment of
Fund dividends. The deferred sales charge applicable to Class C shares of
International Equity Fund may be waived in connection with involuntary
termination of an account in which International Equity Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. Corresponding
Shares distributed to shareholders of Consults International Portfolio in
connection with the Reorganization and Class C shares of the Combined Fund
purchased by clients of the Merrill Lynch Consults(R) Service and Merrill Lynch
Strategic Portfolio Advisor(SM) Service after the Reorganization will not be
subject to any deferred sales charge.
International Equity Fund offers a number of shareholder services and
investment plans, including certain exchange privileges, a systematic withdrawal
plan, an automatic investment plan and other retirement and education savings
plans which will not be available after the Reorganization to holders of
Corresponding Shares or clients of the Merrill Lynch Consults(R) Service or
Merrill Lynch Strategic Portfolio Advisor(SM) Service that purchase Class C
shares of the Combined Fund.
PERFORMANCE
General. The following tables provide performance information for shares
of Consults International Portfolio and Class C shares of International Equity
Fund, including and excluding in the case of International Equity Fund maximum
applicable sales charges, for the periods indicated. Past performance is not
indicative of future performance.
24
<PAGE> 30
CONSULTS INTERNATIONAL PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
PERIOD
------
<S> <C>
Eleven months ended September 30, 1999+..................... 10.97%
One year ended October 31, 1998............................. (2.79%)
Five years ended October 31, 1998........................... 3.95%
Inception* through October 31, 1998......................... 5.95%
</TABLE>
- ---------------
+ Aggregate total returns.
* Consults International Portfolio commenced operations on September 14, 1992.
INTERNATIONAL EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------------
WITHOUT SALES
PERIOD CHARGE (%) WITH SALES CHARGE* (%)
------ ------------- ----------------------
<S> <C> <C>
Four months ended September 30, 1999+....................... 11.52% 10.52%
One Year Ended May 31, 1999................................. (1.50%) (2.46%)
Inception** through May 31, 1999............................ 1.57% 1.57%
</TABLE>
- ---------------
* Assumes the maximum applicable sales charge. Class C shares of International
Equity Fund are subject to a 1.0% contingent deferred sales charge for one
year. This charge will not apply to Corresponding Shares issued in the
Reorganization or to Class C shares of the Combined Fund purchased by clients
of the Merrill Lynch Consults(R) Service or Merrill Lynch Strategic Portfolio
Advisor(SM) Service after the Reorganization.
** Class C shares of International Equity Fund commenced operations on October
21, 1994.
+ Aggregate total returns.
SHAREHOLDER RIGHTS
Shareholders of each Fund 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. In the case of International Equity Fund, shareholders of a class
bearing distribution and/or account maintenance expenses shall have exclusive
voting rights with respect to matters relating to such distribution and/or
account maintenance expenditures (except that Class B shareholders have voting
rights with respect to material changes to expenses charged under the Class D
distribution plan). 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 a Fund, in which event the holders of
the remaining shares are unable to elect any person as a Trustee. Corresponding
Shares will be fully paid and non-assessable and will have no preemptive rights.
In the event of a liquidation of International Equity Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any expenses which may be attributable
only to one class.
Neither Fund intends to hold meetings of shareholders in any year in which
the Investment Company Act does not require shareholders to act upon any of the
following matters: (i) election of Trustees; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors.
25
<PAGE> 31
DIVIDENDS
The current policy of Consults International Portfolio with respect to
dividends is the same as the policy of International Equity Fund. It is each
Fund's intention to distribute annually its net investment income, if any. In
addition, each Fund distributes all net realized capital gains, if any, to
shareholders at least annually.
TAX INFORMATION
The tax consequences associated with investment in shares of Consults
International Portfolio are substantially the same as the tax consequences
associated with investment in shares of International Equity Fund. See
"Dividends, Capital Gains and Taxes" in the Consults International Portfolio
Prospectus and "Dividends and Taxes" in the International Equity Fund
Prospectus.
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are generally the
same for both Consults International Portfolio and International Equity Fund.
For a discussion of these procedures, see "Portfolio Transactions and
Brokerage -- Transactions in Portfolio Securities" in the Consults International
Portfolio Statement and "Portfolio Transactions" in the International Equity
Fund Statement.
PORTFOLIO TURNOVER
Neither Fund has placed a limit on its rate of portfolio turnover and
securities may be sold without regard to the time they have been held when, in
the opinion of such Fund's investment adviser, the investment considerations
warrant such action. The portfolio turnover rates for Consults International
Portfolio for its fiscal years ended October 31, 1998 and 1997 were 48.78% and
28.62%, respectively. The portfolio turnover rates for International Equity Fund
for its fiscal years ended May 31, 1999 and 1998 were 132.43% and 107.50%,
respectively. A high portfolio turnover may result in adverse tax consequences,
such as an increase in capital gain dividends. High portfolio turnover may also
involve correspondingly greater transaction costs in the form of dealer spreads
and brokerage commissions, which are borne directly by the Funds.
ADDITIONAL INFORMATION
Net Asset Value. Each Fund determines the net asset value of its shares
(or each class of its shares in the case International Equity Fund) once daily
Monday through Friday after the close of business on the NYSE (generally, 4:00
p.m. Eastern Time), on each day during which the NYSE 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. Net asset value is computed by
dividing the value of the securities held by a Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent.
Shareholder Services. International Equity Fund offers a number of
shareholder services and investment plans designed to facilitate investment in
shares of such Fund, including certain exchange privileges, systematic
withdrawal plan, an automatic investment plan and other retirement and education
savings plans. These services as well as the exchange privilege, are not offered
to shareholders of Consults International Portfolio and will not be available
after the Reorganization to holders of Corresponding Shares.
Independent Auditors. Currently Deloitte & Touche LLP serves as the
independent auditors of International Equity Fund and Ernst & Young LLP serves
as the independent auditors of Consults International Portfolio. If the
Reorganization is completed, it is currently anticipated that Deloitte & Touche
LLP will serve as the independent auditors of Pro Forma International Equity
Fund. Deloitte & Touche LLP's principal business address is 117 Campus Drive,
Princeton, New Jersey 08540.
Custodian. Brown Brothers Harriman & Co. (the "Custodian") acts as the
custodian of each of the Funds. The Custodian's principal business address is 40
Water Street, Boston, Massachusetts 02109. If the
26
<PAGE> 32
Reorganization is completed, it is currently anticipated that the Custodian will
serve as the custodian of the Combined Fund.
Transfer Agent. Financial Data Services, Inc. (the "Transfer Agent"), 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, serves as the transfer
agent with respect to each Fund, pursuant to separate transfer agency agreements
with each of the Funds. See "Summary -- Fee Tables" above for information on the
fee schedule paid to the Transfer Agent by each Fund. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "-- Purchase, Redemption
and Exchange of Shares" above and "How to Buy, Sell, Transfer and Exchange
Shares -- Through the Transfer Agent" in the International Equity Fund
Prospectus and "How to Buy, Sell and Transfer -- Through the Transfer Agent" in
the Consults International Portfolio Prospectus.
Capital Stock. Consults International Portfolio has an indefinite number
of authorized shares, par value $0.10 per share, divided into two classes, only
one of which has shares issued. International Equity Fund has an indefinite
number of authorized shares, par value $0.10 per share, divided into four
classes, designated Class A, Class B, Class C and Class D shares. See
"-- Shareholder Rights" above and "General Information -- Description of Shares"
in each of the International Equity Fund Statement and the Consults
International Portfolio Statement for further discussion of the rights and
preferences attributable to shares of International Equity Fund and Consults
International Portfolio. See "Summary -- Fee Tables" above and "Fees and
Expenses" in each of the International Equity Fund Prospectus and the Consults
International Portfolio Prospectus for further discussion on the expenses
attributable to shares of International Equity Fund and Consults International
Portfolio
Shareholder Inquiries. Shareholder inquiries with respect to Consults
International Portfolio and International Equity Fund may be addressed to either
Fund by telephone at (800) MER-FUND or at the address set forth on the cover
page of this Proxy Statement and Prospectus.
27
<PAGE> 33
THE REORGANIZATION
GENERAL
Under the Agreement and Plan (attached hereto as Exhibit I), International
Equity Fund will acquire substantially all of the assets, and assume
substantially all of the liabilities, of Consults International Portfolio solely
in exchange for an equal aggregate value of Corresponding Shares. Upon receipt
by Consults International Portfolio of such Corresponding Shares, Consults
International Portfolio will liquidate through a distribution of such
Corresponding Shares to Consults International Portfolio shareholders, as
described below, and will thereafter terminate its existence as a business trust
and deregister as an investment company.
Generally, the assets transferred by Consults International Portfolio to
International Equity Fund will include all investments of Consults International
Portfolio held in its portfolio as of the Valuation Time (as defined in the
Agreement and Plan) and all other assets of Consults International Portfolio as
of such time.
Consults International Portfolio will distribute the Corresponding Shares
received by it in connection with the Reorganization pro rata to its
shareholders in exchange for such shareholders' proportional interests in
Consults International Portfolio. The Corresponding Shares received by Consults
International Portfolio shareholders will have the same aggregate net asset
value as each such shareholder's interest in Consults International Portfolio as
of the Valuation Time. See "Terms of the Agreement and Plan -- Valuation of
Assets and Liabilities" for information concerning the calculation of net asset
value. The distribution will be accomplished by opening new accounts on the
books of International Equity Fund in the names of all shareholders of Consults
International Portfolio, including shareholders holding Consults International
Portfolio shares in certificate form, and transferring to each shareholder's
account the Corresponding Shares representing such shareholder's interest
previously credited to the account of Consults International Portfolio.
Shareholders holding Consults International Portfolio shares in certificate form
may receive certificates representing the Corresponding Shares credited to their
account in respect of such Consults International Portfolio shares by sending
the certificates to the Transfer Agent accompanied by a written request for such
exchange.
Since the Corresponding Shares will be issued at net asset value in
exchange for the net assets of Consults International Portfolio having a value
equal to the aggregate net asset value of the shares of Consults International
Portfolio as of the Valuation Time, the net asset value per share of
International Equity Fund should remain virtually unchanged solely as a result
of the Reorganization. Thus, the Reorganization should not result in dilution of
net asset value of International Equity Fund immediately following consummation
of the Reorganization. However, as a result of the Reorganization, a shareholder
of Consults International Portfolio would hold a smaller percentage of ownership
in International Equity Fund than he or she did in Consults International
Portfolio prior to the Reorganization.
PROCEDURE
On October 26, 1999, the Board of Trustees of Consults International
Portfolio, including all of the Trustees who are not "interested persons," as
defined by the Investment Company Act, unanimously approved the Agreement and
Plan and the submission of such Agreement and Plan to Consults International
Portfolio shareholders for approval. The Board of Trustees of International
Equity Fund, including all of the Trustees who are not interested persons, also
unanimously approved the Agreement and Plan on October 20, 1999.
If the shareholders of Consults International Portfolio approve the
Reorganization at the Meeting, all required regulatory approvals are obtained,
and certain conditions are either met or waived, it is expected that the
Reorganization will take place during the first calendar quarter of 2000.
THE BOARD OF TRUSTEES OF CONSULTS INTERNATIONAL PORTFOLIO RECOMMENDS THAT
CONSULTS INTERNATIONAL PORTFOLIO SHAREHOLDERS APPROVE THE AGREEMENT AND PLAN.
28
<PAGE> 34
TERMS OF THE AGREEMENT AND PLAN
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets and liabilities
of Consults International Portfolio and International Equity Fund will be valued
as of the Valuation Time. The assets in each Fund will be valued according to
the procedures set forth under "Pricing of Shares -- Determination of Net Asset
Value" in the International Equity Fund Statement. Purchase orders for Consults
International Portfolio shares which have not been confirmed as of the Valuation
Time will be treated as assets of Consults International Portfolio for purposes
of the Reorganization; redemption requests with respect to Consults
International Portfolio shares which have not settled as of the Valuation Time
will be treated as liabilities of Consults International Portfolio for purposes
of the Reorganization.
Distribution of Corresponding Shares. On the next full business day
following the Valuation Time (the "Exchange Date"), International Equity Fund
will issue to Consults International Portfolio a number of Corresponding Shares
the aggregate net asset value of which will equal the aggregate net asset value
of shares of Consults International Portfolio as of the Valuation Time. Consults
International Portfolio will then liquidate and distribute the Corresponding
Shares received by it pro rata to its shareholders in exchange for such
shareholders' proportional interests in Consults International Portfolio. The
Corresponding Shares received by a Consults International Portfolio shareholder
will have the same aggregate net asset value as such shareholder's interest in
Consults International Portfolio as of the Valuation Time.
Expenses. The expenses of the Reorganization that are directly
attributable to each Fund and the conduct of its business will be deducted from
the assets of that Fund as of the Valuation Time. These expenses are expected to
include the expenses incurred in preparing materials to be distributed to each
Fund's Board of Trustees, legal fees incurred in preparing each Fund's Board of
Trustees materials, attending each Fund's Board meetings and preparing the
minutes thereof, and accounting fees associated with each Fund's financial
statements. The Funds shall bear, pro rata according to their respective net
assets on the Valuation Date, all expenses incurred in connection with the
Reorganization, including, but not limited to, all costs related to the
preparation of the Agreement and Plan, the preparation and distribution of the
registration statement of which this Proxy Statement and Prospectus is a part,
the cost of preparing and filing a ruling request with the IRS, other filing
fees, legal and accounting fees, printing costs, portfolio transfer taxes (if
any), and any similar expenses incurred in connection with the Reorganization.
Required Approvals. The completion of the Reorganization is conditioned
upon, among other things, the receipt of certain regulatory approvals. In
addition, Consults International Portfolio's Declaration of Trust (as amended to
date) requires approval of the Reorganization by the affirmative vote of
Consults International Portfolio shareholders representing no less than
two-thirds of the total number of votes entitled to be cast thereon.
Deregistration And Termination. Following the transfer of the assets and
liabilities of Consults International Portfolio to International Equity Fund and
the distribution of the Corresponding Shares to Consults International Portfolio
shareholders, Consults International Portfolio will terminate its registration
under the Investment Company Act and its formation under the laws of the
Commonwealth of Massachusetts and will withdraw its authority to do business in
any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan may be amended at any
time prior to the Exchange Date with respect to any of the terms therein. The
obligations of Consults International Portfolio and International Equity Fund
pursuant to the Agreement and Plan are subject to various conditions, including
a registration statement on Form N-14 being declared effective by the
Commission, the requisite approval of the Reorganization by Consults
International Portfolio shareholders, the receipt of a favorable IRS private
letter ruling or an opinion of counsel being received as to tax matters, the
receipt of opinions of counsel as to certain securities matters and the
confirmation by Consults International Portfolio and International Equity Fund
of the continuing accuracy of their respective representations and warranties
contained in the Agreement and Plan.
29
<PAGE> 35
Termination, Postponement and Waivers. The Agreement and Plan may be
terminated, and the Reorganization abandoned at any time, whether before or
after adoption thereof by Consults International Portfolio shareholders, prior
to the Exchange Date or the Exchange Date may be postponed: (i) by mutual
consent of the Boards of Trustees of Consults International Portfolio and
International Equity Fund; (ii) by the Board of Trustees of Consults
International Portfolio if any condition to Consults International Portfolio's
obligations has not been fulfilled or waived by such Trustees; or (iii) by the
Board of Trustees of International Equity Fund if any condition to International
Equity Fund's obligations has not been fulfilled or waived by such Trustees.
POTENTIAL BENEFITS TO SHAREHOLDERS AS A RESULT OF THE REORGANIZATION
Fund management and the Board of Trustees of Consults International
Portfolio have identified certain potential benefits to shareholders that are
likely to result from the Reorganization. First, following the Reorganization,
Consults International Portfolio shareholders will remain invested in an
open-end fund with a diversified international portfolio of equity securities.
In addition, since the net assets of International Equity Fund as of September
30, 1999 were $240,343,015 and will increase by approximately $37,688,155 (the
net asset value of Consults International Portfolio as of such date) as a result
of the Reorganization, Consults International Portfolio shareholders are likely
to benefit from reduced overall operating expenses (on a pro forma basis) as a
result of certain economies of scale expected after the Reorganization.
Specifically, as described above under "Comparison of the
Funds -- Management -- Advisory and Administration Arrangements and Fees," after
the Reorganization, on a pro forma basis, the Combined Fund will pay an advisory
fee to MLAM at the same effective annual rate as currently paid by Consults
International Portfolio to MLSIM and International Equity Fund to MLAM. In
addition, after the Reorganization it is anticipated that the total operating
expenses of the Combined Fund, as a percent of net assets, will be less than the
current operating expenses for Consults International Portfolio. In particular,
the Combined Fund will not pay the administrative fee that Consults
International Portfolio currently pays to the Administrator under the
Administration Agreement. See "Summary -- Fee Tables." In addition, certain
costs, such as costs of printing shareholder reports and proxy statements, legal
expenses, audit fees, qualification and registration fees, mailing costs and
other expenses would be spread across a larger asset base, thereby lowering the
expense ratio borne by shareholders of both Funds. To illustrate certain
benefits to both Funds as a result of the Reorganization, including potential
economies of scale, on September 30, 1999, the total operating expenses, as a
percent of net assets, for Consults International Portfolio shares were 2.87%
(based on Fund net assets of approximately $37.7 million) and the total
operating expenses, as a percent of net assets, for International Equity Fund
Class C shares were 2.36% (based on Class C shares net assets of approximately
$8.7 million and total Fund net assets of approximately $240.3 million). If the
Reorganization had taken place on that date, the total operating expenses, as a
percent of net assets, for the Combined Fund Class C shares on a pro forma basis
would have been 2.33% (based on Class C shares net assets of approximately $46.3
million and total Fund net assets of approximately $278.0 million) as of such
date.
The following table sets forth the net assets of Consults International
Portfolio, International Equity Fund as a whole and International Equity Fund
Class C shares as of the dates indicated.
<TABLE>
<CAPTION>
CONSULTS INTERNATIONAL PORTFOLIO INTERNATIONAL EQUITY FUND
- ------------------------------------------ -----------------------------------------------------
TOTAL NET ASSETS OF
CONSULTS TOTAL NET ASSETS OF
INTERNATIONAL INTERNATIONAL NET ASSETS OF CLASS C SHARES OF
DATE PORTFOLIO DATE EQUITY FUND INTERNATIONAL EQUITY FUND
---- ------------------- ---- ------------------- -------------------------------
<S> <C> <C> <C> <C>
As of 10/31/97....... $107,950,567 As of 5/31/97 $771,635,235 $24,773,943
As of 10/31/98....... $ 60,441,797 As of 5/31/98 $427,885,916 $14,716,930
As of 4/30/99........ $ 45,695,399 As of 5/31/99 $205,758,540 $ 6,327,941
As of 9/30/99........ $ 37,688,155 As of 9/30/99 $240,343,015 $ 8,660,997
</TABLE>
The table illustrates that, upon completion of the Reorganization, the net
assets of International Equity Fund will increase by approximately $37,688,155
(the total net assets of Consults International Portfolio as of
30
<PAGE> 36
September 30, 1999). Accordingly, since the expenses of the Combined Fund will
be spread over a larger asset base, Fund management anticipates that both Funds
are likely to benefit from reduced overall operating expenses (on a pro forma
basis) as a result of certain economies of scale expected after the
Reorganization.
Based on the foregoing, the Board of Trustees of Consults International
Portfolio concluded that the Reorganization presents no significant risks or
costs (including legal, accounting and administrative costs) that would outweigh
the benefits discussed above.
In approving the Reorganization, the Board of Trustees of both Funds
determined that the net asset value of both Funds would not be diluted as a
result of the Reorganization. See "The Reorganization -- General."
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Consults International Portfolio and
International Equity Fund have jointly requested a private letter ruling from
the IRS to the effect that for Federal income tax purposes: (i) the
Reorganization, as described herein, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code and Consults International Portfolio
and International Equity Fund will each be deemed a "party" to the
Reorganization within the meaning of Section 368(b) of the Code; (ii) in
accordance with Section 354(a)(1) of the Code, no gain or loss will be
recognized by a shareholder of Consults International Portfolio upon the receipt
of Corresponding Shares in the Reorganization solely in exchange for their
shares of Consults International Portfolio; (iii) in accordance with Section 358
of the Code, immediately after the Reorganization, the tax basis of the
Corresponding Shares received by a shareholder of Consults International
Portfolio in the Reorganization will be equal, in the aggregate, to the tax
basis of the shares of Consults International Portfolio surrendered in exchange;
(iv) in accordance with Section 1223(1) of the Code, the holding period of the
Corresponding Shares received by a shareholder of Consults International
Portfolio in the Reorganization will include the holding period of the shares of
Consults International Portfolio immediately prior to the Reorganization
(provided that at the time of the Reorganization the shares of Consults
International Portfolio were held as capital assets); (v) in accordance with
Sections 361(a), 361(c)(1) and 357(a) of the Code, no gain or loss will be
recognized by Consults International Portfolio on the acquisition of
substantially all of the assets, and assumption of substantially all of the
liabilities, of Consults International Portfolio by International Equity Fund
solely in exchange for the Corresponding Shares or on the distribution of the
Corresponding Shares to Consults International Portfolio shareholders; (vi)
under Section 1032 of the Code, no gain or loss will be recognized by
International Equity Fund on the exchange of its shares for Consults
International Portfolio assets; (vii) in accordance with Section 362(b) of the
Code, the tax basis of the assets of Consults International Portfolio in the
hands of International Equity Fund will be the same as the tax basis of such
assets in the hands of Consults International Portfolio immediately prior to the
Reorganization; (viii) in accordance with Section 1223(2) of the Code, the
holding period of the transferred assets in the hands of International Equity
Fund will include the holding period of such assets in the hands of Consults
International Portfolio; and (ix) the taxable year of Consults International
Portfolio will end on the effective date of the Reorganization and pursuant to
Section 381(a) of the Code and regulations thereunder, International Equity Fund
will succeed to and take into account certain tax attributes of Consults
International Portfolio, such as earnings and profits and capital loss
carryovers. If the IRS does not issue a favorable private letter ruling in
advance of the selected closing date, the Funds may proceed with the closing of
the Reorganization upon receipt of an opinion of counsel regarding the tax
matters covered by the ruling request.
To the extent International Equity Fund has unrealized capital gains at the
time of the Reorganization, Consults International Portfolio shareholders may
incur taxable gains in the year that International Equity Fund realizes and
distributes those gains. This will be true notwithstanding that the unrealized
gains were reflected in the price of International Equity Fund shares at the
time they were exchanged for assets of Consults International Portfolio in the
Reorganization. Conversely, shareholders of International Equity Fund will share
in unrealized capital gains of Consults International Portfolio after the
Reorganization and bear a tax consequence on the subsequent realization of such
gains. Shareholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the foregoing
relates
31
<PAGE> 37
only to Federal income tax consequences, shareholders also should consult their
tax advisers as to the foreign, state, local and other tax consequences of the
Reorganization.
Status as a Regulated Investment Company. Both Consults International
Portfolio and International Equity Fund have elected and qualified to be taxed
as regulated investment companies under Sections 851-855 of the Code, and after
the Reorganization, International Equity Fund intends to continue to operate so
as to qualify as a regulated investment company. Following the liquidation of
Consults International Portfolio and distribution of the Corresponding Shares to
Consults International Portfolio shareholders, Consults International Portfolio
will terminate its registration under the Investment Company Act and its
existence as a business trust under the laws of the Commonwealth of
Massachusetts and will withdraw its authority to do business in any state where
it is required to do so.
CAPITALIZATION
The following table sets forth as of May 31, 1999: (i) the capitalization
of International Equity Fund as a whole, (ii) the capitalization of Class C
shares of International Equity Fund, (iii) the capitalization of Consults
International Portfolio, (iv) the capitalization of Pro Forma International
Equity Fund, as adjusted to give effect to the Reorganization, and (v) the
capitalization of Class C shares of Pro Forma International Equity Fund, as
adjusted to give effect to the Reorganization.
CAPITALIZATION OF INTERNATIONAL EQUITY FUND (AS A WHOLE), CLASS C SHARES OF
INTERNATIONAL EQUITY FUND AND CONSULTS INTERNATIONAL PORTFOLIO AND
CAPITALIZATION OF PRO FORMA INTERNATIONAL EQUITY FUND (AS A WHOLE) AND
CLASS C SHARES OF PRO FORMA INTERNATIONAL EQUITY FUND EACH AS OF MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
INTERNATIONAL INTERNATIONAL CONSULTS INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND INTERNATIONAL EQUITY FUND EQUITY FUND
AS A WHOLE CLASS C SHARES PORTFOLIO AS A WHOLE CLASS C SHARES*
------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
TOTAL NET ASSETS.......... $205,758,540 $6,327,941 $42,135,173 $245,535,112 $46,235,188
SHARES OUTSTANDING........ 22,444,618 700,487 3,670,926 26,861,098 5,116,967
NET ASSET VALUE PER
SHARE................ ** $ 9.03 $ 11.48 ** $ 9.03
</TABLE>
- ---------------
* Total Net Assets and Net Asset Value Per Share include the aggregate value of
Consults International Portfolio's net assets that would have been
transferred to International Equity Fund had the Reorganization been
consummated on May 31, 1999. Assumes accrual of estimated Reorganization
expenses of $150,000 and distribution of undistributed net investment income
of $212,506 for Consults International Portfolio and undistributed realized
capital gains of $2,025,870 for Consults International Portfolio. No
assurance can be given as to how many Corresponding Shares will be issued on
the date the Reorganization takes place, and the foregoing should not be
relied upon to reflect the number of Corresponding Shares that actually will
be issued on or after such date.
** International Equity Fund calculates, and the Combined Fund will calculate
after completion of the Reorganization, Net Asset Value per share for each
class separately and not for the Fund as a whole.
INFORMATION CONCERNING THE MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on January 20, 2000, at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 9:00 a.m., Eastern Time.
32
<PAGE> 38
SOLICITATION, REVOCATION AND USE OF PROXIES
A shareholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by submitting
a notice of revocation to the Secretary of Consults International Portfolio.
Although mere attendance at the Meeting will not revoke a proxy, a shareholder
present at the Meeting may withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies received at or prior to
the Meeting, unless such proxies previously have been revoked, will be voted at
the Meeting in accordance with the directions on the proxies; if no direction is
indicated on a properly executed proxy, such shares will be voted "FOR" approval
of the Agreement and Plan.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan will be brought before the Meeting. If, however, any other
business properly is brought before the Meeting, proxies will be voted in
accordance with the judgment of the persons designated on such proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Consults International Portfolio at the
close of business on November 30, 1999 (the "Record Date") are entitled to vote
at the Meeting or any adjournment thereof. At the close of business on the
Record Date, there were shares of Consults International Portfolio
issued and outstanding and entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CONSULTS
INTERNATIONAL PORTFOLIO AND INTERNATIONAL EQUITY FUND
[To the knowledge of Consults International Portfolio, as of the Record
Date, no person or entity owned beneficially or of record 5% or more of any
class of shares of Consults International Portfolio or of all classes of
Consults International Portfolio shares in the aggregate.]
[At the Record Date, the Trustees and officers of Consults International
Portfolio as a group (11 persons) owned an aggregate of less than 1% of the
outstanding shares of Consults International Portfolio and owned an aggregate of
less than 1% of the outstanding shares of common stock of ML & Co.]
[To the knowledge of International Equity Fund, as of the Record Date, no
person or entity owned beneficially or of record 5% or more of any class of
shares of International Equity Fund or of all classes of International Equity
Fund shares in the aggregate.]
[As of the Record Date, the Trustees and officers of International Equity
Fund as a group ( persons) owned an aggregate of less than 1% of the
outstanding shares of International Equity Fund and owned less than 1% of the
outstanding shares of common stock of ML & Co.]
VOTING RIGHTS AND REQUIRED VOTE
Each share of Consults International Portfolio is entitled to one vote.
Approval of the Agreement and Plan requires the affirmative vote of Consults
International Portfolio shareholders representing not less than two-thirds of
the total votes entitled to be cast thereon.
Broker-dealer firms, including Merrill Lynch, holding shares of Consults
International Portfolio in "street name" for the benefit of their customers and
clients will request the instructions of such customers and clients on how to
vote their shares before the Meeting. Broker-dealer firms, including Merrill
Lynch, will not be permitted to grant voting authority without instructions with
respect to the approval of the Agreement and Plan. Consults International
Portfolio will include shares held of record by broker-dealers as to which such
authority has been granted in its tabulation of the total number of shares
present for purposes of determining whether the necessary quorum of shareholders
exists. Properly executed proxies that are returned but that are marked
"abstain" or broker non-votes will be counted as present for the purposes of
determining a quorum. Since approval of the Agreement and Plan requires the
affirmative vote of shareholders representing no less
33
<PAGE> 39
than two-thirds of the outstanding shares of Consults International Portfolio,
abstentions and broker non-votes will have the same effect as a vote against
approval of the Agreement and Plan.
A quorum for purposes of the Meeting consists of one-third of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the time
scheduled for the Meeting, a quorum of Consults International Portfolio's
shareholders is not present or if a quorum is present but sufficient votes in
favor of the Agreement and Plan are not received from the shareholders of
Consults International Portfolio, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies
from shareholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Consults International Portfolio present in person or
by proxy and entitled to vote at the session of the Meeting to be adjourned. The
persons named as proxies will vote in favor of any such adjournment if they
determine that adjournment and additional solicitation are reasonable and in the
interests of the shareholders of Consults International Portfolio.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by International Equity Fund and Consults International Portfolio pro rata
according to the aggregate net assets of each Fund's portfolio on the date of
Reorganization. Such expenses are currently estimated to be approximately
$150,000 in the aggregate.
Consults International Portfolio will reimburse banks, brokers and others
for their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Consults International Portfolio and will
reimburse certain persons that Consults International Portfolio may employ for
their reasonable expenses in assisting in the solicitation of proxies from such
beneficial owners of shares of Consults International Portfolio.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of Consults International Portfolio. Consults International Portfolio
has retained Shareholder Communications Corporation, 17 State Street, 27th
Floor, New York, New York 10004, to aid in the solicitation of proxies at a cost
to be borne by Consults International Portfolio estimated not to exceed
[$ ], plus out-of-pocket expenses.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto which
Consults International Portfolio and International Equity Fund, respectively,
have filed with the Commission under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Consults International Portfolio and International Equity Fund are both
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith file reports and other information
with the Commission. Proxy material, reports and other information filed by
Consults International Portfolio and International Equity Fund can be inspected
and copied at the public reference facilities of the Commission in Washington,
D.C. and at the New York Regional Office of the Commission at Seven World Trade
Center, New York, New York 10048. Copies of such materials also can be obtained
by mail from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information, the
International Equity Fund Prospectus, the Consults International Portfolio
Prospectus, the International Equity Fund Statement, the Consults International
Portfolio Statement, other material incorporated by reference and other
information regarding the Funds.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Consults International
Portfolio or International Equity Fund is a party.
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<PAGE> 40
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Consults International Portfolio by Swidler Berlin Shereff Friedman,
LLP, 919 Third Avenue, New York, New York and for International Equity Fund by
Brown & Wood LLP, One World Trade Center, New York, New York. Both firms will
rely as to matters of Massachusetts law on the opinion of Bingham Dana LLP, 150
Federal Street, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial
statements and financial highlights of Consults International Portfolio as of
October 31, 1998, as set forth in their report, which is incorporated by
reference in this Proxy Statement and Prospectus and elsewhere in the
registration statement. The financial statements and financial highlights of
Consults International Portfolio are incorporated by reference in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing. The principal business address of Ernst & Young LLP is 99 Wood
Avenue South, Iselin, New Jersey 08830.
The financial statements for the fiscal year ended May 31, 1999 and the
financial highlights for each of the years in the five-year period then ended
which are incorporated by reference in this Proxy Statement and Prospectus and
the financial highlights included in this Proxy Statement and Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as set forth in
their report thereon incorporated herein by reference, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The principal business address of Deloitte & Touche LLP
is 117 Campus Drive, Princeton, New Jersey 08540.
SHAREHOLDER PROPOSALS
A shareholder proposal intended to be presented at any subsequent meeting
of shareholders of Consults International Portfolio must be received by Consults
International Portfolio in a reasonable time before the Board of Trustees
solicitation relating to such meeting is to be made in order to be considered in
Consults International Portfolio's proxy statement and form of proxy relating to
the meeting.
By Order of the Board of Trustees,
ROBERT HARRIS
Secretary, Merrill Lynch Consults
International Portfolio
35
<PAGE> 41
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AND
MERRILL LYNCH INTERNATIONAL EQUITY FUND
DATED AS OF OCTOBER 27, 1999
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
EXHIBIT I................................................... I-1
1. DEFINED TERMS; SECTIONS AND EXHIBITS; MISCELLANEOUS
TERMS..................................................... I-1
2. THE REORGANIZATION...................................... I-3
a. Transfer of Assets................................ I-3
b. Assumption of Liabilities......................... I-3
c. Issuance and Valuation of Corresponding Shares in
the Reorganization................................ I-3
d. Distribution of Corresponding Shares to CIP
Shareholders...................................... I-3
e. Interest; Proceeds................................ I-4
f. Valuation Time.................................... I-4
g. Evidence of Transfer.............................. I-4
h. Termination and Deregistration.................... I-4
3. REPRESENTATIONS AND WARRANTIES OF CIP................... I-4
a. Formation and Qualification....................... I-4
b. Licenses.......................................... I-4
c. Authority......................................... I-4
d. Financial Statements.............................. I-5
e. Semi-Annual Report to Shareholders................ I-5
f. Prospectus and Statement of Additional
Information....................................... I-5
g. Litigation........................................ I-5
h. Material Contracts................................ I-5
i. No Conflict....................................... I-5
j. Undisclosed Liabilities........................... I-5
k. Taxes............................................. I-5
l. Assets............................................ I-5
m. Consents.......................................... I-6
n. N-14 Registration Statement....................... I-6
o. Capitalization.................................... I-6
p. Books and Records................................. I-6
4. REPRESENTATIONS AND WARRANTIES OF IEF................... I-6
a. Formation and Qualification....................... I-6
b. Licenses.......................................... I-6
c. Authority......................................... I-7
d. Financial Statements.............................. I-7
e. Prospectus and Statement of Additional
Information....................................... I-8
f. Litigation........................................ I-7
g. Material Contracts................................ I-7
h. No Conflict....................................... I-7
i. Undisclosed Liabilities........................... I-7
j. Taxes............................................. I-7
k. Consents.......................................... I-7
l. N-14 Registration Statement....................... I-8
m. Capitalization.................................... I-8
n. Corresponding Shares.............................. I-8
5. COVENANTS OF CIP AND IEF................................ I-8
a. Special Shareholders' Meeting..................... I-8
b. Unaudited Financial Statements.................... I-8
c. Share Ledger Records of IEF....................... I-9
d. Conduct of Business............................... I-9
</TABLE>
-i-
<PAGE> 43
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
e. Termination and Deregistration of CIP............. I-9
f. Filing of N-14 Registration Statement............. I-9
g. Material Contracts................................ I-9
h. Prohibited Assets................................. I-9
i. Corresponding Shares.............................. I-9
j. Tax Returns....................................... I-9
k. Combined Proxy Statement and Prospectus Mailing... I-10
l. Confirmations of Tax Basis........................ I-10
m. Shareholder List.................................. I-10
n. IEF's Continued Existence......................... I-10
6. EXCHANGE DATE........................................... I-10
7. CIP CONDITIONS.......................................... I-10
a. Representations and Warranties.................... I-10
b. Performance....................................... I-10
c. Shareholder Approval.............................. I-10
d. Approval of Board of Trustees of IEF.............. I-11
e. Deliveries by IEF................................. I-11
f. No Adverse Change................................. I-13
g. Absence of Litigation............................. I-13
h. Proceedings and Documents......................... I-13
i. N-14 Registration Statement....................... I-13
j. Accountants' Letters.............................. I-13
k. Compliance with Laws; No Adverse Action or
Decision.......................................... I-13
l. Commission Orders or Interpretations.............. I-14
8. IEF CONDITIONS.......................................... I-14
a. Representations and Warranties.................... I-14
b. Performance....................................... I-14
c. Shareholder Approval.............................. I-14
d. Approval of Board of Trustees of CIP.............. I-14
e. Deliveries by CIP................................. I-14
f. No Adverse Change................................. I-16
g. Absence of Litigation............................. I-16
h. Proceedings and Documents......................... I-16
i. N-14 Registration Statement....................... I-16
j. Accountants' Letters.............................. I-16
k. Compliance with Laws; No Adverse Action or
Decision.......................................... I-16
l. Commission Orders or Interpretations.............. I-16
m. Assets............................................ I-17
n. Letter Regarding Tax Returns...................... I-17
o. Dividends......................................... I-17
9. TERMINATION, POSTPONEMENT AND WAIVERS................... I-17
a. Termination of Agreement.......................... I-17
b. Commission Order.................................. I-18
c. Effect of Termination............................. I-18
d. Waivers; Non-Material Changes..................... I-18
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION......................................... I-18
b. Indemnification Obligations of CIP................ I-18
c. Indemnification Obligations of IEF................ I-19
d. Indemnification Procedure......................... I-19
</TABLE>
-ii-
<PAGE> 44
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
11. OTHER MATTERS........................................... I-19
a. Legend............................................ I-19
b. Materiality....................................... I-20
c. Further Assurances................................ I-20
d. Notices........................................... I-20
e. Entire Agreement.................................. I-20
f. Amendment......................................... I-20
g. Governing Law..................................... I-20
h. Assignment........................................ I-21
i. Fees and Expenses................................. I-21
j. Severability...................................... I-21
k. Headings.......................................... I-21
l. Counterparts...................................... I-21
m. Personal Liability................................ I-21
</TABLE>
-iii-
<PAGE> 45
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 27(th) day of October, 1999, by and between MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO, a Massachusetts business trust ("CIP"), and MERRILL
LYNCH INTERNATIONAL EQUITY FUND, a Massachusetts business trust ("IEF").
PLAN OF REORGANIZATION
The reorganization will consist of (i) the acquisition of the Assets (as
defined herein), and assumption of the Assumed Liabilities (as defined herein),
by IEF solely in exchange for an aggregate value of Class C shares of IEF, with
a par value of $.10 per share (the "Corresponding Shares"), equal to the net
asset value of the Assets determined in accordance with Section 2(c) hereof,
(ii) the subsequent distribution by CIP of the Corresponding Shares to its
shareholders in exchange for such shareholders' respective shares of CIP in
liquidation of CIP, and (iii) the deregistration and termination of CIP, all
upon and subject to the terms hereinafter set forth (the "Reorganization"). The
aggregate net asset value of the Corresponding Shares to be received by each
shareholder of CIP will equal the aggregate net asset value of the CIP shares
owned by such shareholder at the Valuation Time. It is intended that the
Reorganization described herein shall be a reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the
"Code"), and any successor provision.
As promptly as practicable after the liquidation of CIP pursuant to the
Reorganization, CIP shall be terminated in accordance with the laws of the
Commonwealth of Massachusetts and shall terminate its registration under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
AGREEMENT
NOW, THEREFORE, in order to consummate the Reorganization and in
consideration of the premises and the covenants and agreements hereinafter set
forth, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound, CIP and IEF
hereby agree as follows:
1. DEFINED TERMS; SECTIONS AND EXHIBITS; MISCELLANEOUS TERMS.
a. Definitions. As used herein the following terms have the following
respective meanings (such definitions to be equally applicable to both the
singular and plural forms of the terms defined):
"Agreement" has the meaning ascribed thereto in the introduction
hereof.
"Assets" has the meaning ascribed thereto in Section 2(a) hereof.
"Assumed Liabilities" has the meaning ascribed thereto in Section 2(b)
hereof.
"CIP" has the meaning ascribed thereto in the introduction hereof.
"CIP Declaration" has the meaning ascribed hereto in Section 11(m)(i)
hereof.
"CIP Prospectus" shall mean the prospectus of CIP dated as of February
27, 1999, as amended or supplemented.
"CIP Statement of Additional Information" shall mean the statement of
additional information of CIP dated as of February 27, 1999, as amended or
supplemented.
"Code" has the meaning ascribed thereto in the first paragraph under
the heading "Plan of Reorganization" hereof.
"Commission" shall mean the Securities and Exchange Commission.
I-1
<PAGE> 46
"Corresponding Shares" has the meaning ascribed thereto in the first
paragraph under the heading "Plan of Reorganization" hereof.
"Exchange Act" has the meaning ascribed thereto in Section 3(m)
hereof.
"Exchange Date" has the meaning ascribed thereto in Section 6 hereof.
"Governmental Authority" shall mean any governmental or
quasi-governmental authority including, without limitation, any federal,
state, territorial, county, municipal or other governmental or quasi-
governmental agency, board, branch, bureau, commission, court, arbitral
body, department or other instrumentality or political unit or subdivision,
whether domestic or foreign.
"IEF" has the meaning ascribed thereto in the introduction hereof.
"IEF Declaration" has the meaning ascribed hereto in Section 11(m)(ii)
hereof.
"IEF Prospectus" shall mean the prospectus of IEF dated as of
September 29, 1999, as amended or supplemented.
"IEF Statement of Additional Information" shall mean the statement of
additional information of IEF dated as of September 29, 1999, as amended or
supplemented.
"Indemnified Party" has the meaning ascribed thereto in Section 10(b)
hereof.
"Indemnifying Party" has the meaning ascribed thereto in Section 10(b)
hereof.
"Investment Company Act" has the meaning ascribed thereto in the
introduction hereof.
"Investments" shall mean, with respect to each Person, (i) the
investments of such Person shown on the schedule of its investments as of
the date set forth therein, [with such additions thereto and deletions
therefrom as may have arisen in the course of such Person's business up to
such date]; and (ii) all other assets owned by such Person or liabilities
incurred as of such date.
"Licenses" has the meaning ascribed thereto in Section 3(b) hereof.
"Lien" shall mean any security agreement, financing statement (whether
or not filed), mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, restriction, deed of
trust, indenture, option, limitation, exception to or other title defect in
or on any interest or title of any vendor, lessor, lender or other secured
party to or of such Person under any conditional sale, lease, consignment,
or bailment given for security purposes, trust receipt or other title
retention agreement with respect to any property or asset of such Person,
whether direct, indirect, accrued or contingent.
"Losses" has the meaning ascribed thereto in Section 10(b) hereof.
"Material Adverse Effect" shall mean, with respect to any Person, any
event, circumstance or condition that, individually or when aggregated with
all other similar events, circumstances or conditions could reasonably be
expected to have, or has had, a material adverse effect on: (i) the
business, property, operations, condition (financial or otherwise), results
of operations or prospects of such Person or (ii) the ability of such
Person to consummate the transactions contemplated hereunder in the manner
contemplated hereby, other than, in each case, any change relating to the
economy or securities markets in general.
"MLAM" shall have the meaning ascribed thereto in Section 5(j) hereof.
"N-14 Registration Statement" has the meaning ascribed thereto in
Section 3(n) hereof.
"Permitted Liens" shall mean, with respect to any Person, any Lien
arising by reason of (i) taxes, assessments, governmental charges or claims
that are either not yet delinquent, or being contested in good faith for
which adequate reserves have been recorded, (ii) the Federal or state
securities laws, and (iii) imperfections of title or encumbrances as do not
materially detract from the value or use of the Assets or materially affect
title thereto.
I-2
<PAGE> 47
"Person" any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint stock
company, trust, unincorporated organization, or government or any agency or
political subdivision thereof.
"Prohibited Assets" has the meaning ascribed thereto in Section 2(a)
hereof.
"Reorganization" has the meaning ascribed thereto in the first
paragraph under the heading "Plan of Reorganization" hereof.
"RICs" has the meaning ascribed thereto in Section 3(b) hereof.
"Ruling" has the meaning ascribed thereto in Section 7(e)(v) hereof.
"Securities Act" has the meaning ascribed thereto in Section 2(h)
hereof.
"SBSF" has the meaning ascribed thereto in Section 6 hereof.
"Valuation Time" has the meaning ascribed thereto in Section 2(f)
hereof.
b. Use of Defined Terms. Any defined term used in the plural shall refer
to all members of the relevant class, and any defined term used in the singular
shall refer to any one or more of the members of the relevant class. The use of
any gender shall be applicable to all genders.
c. Sections and Exhibits. References in this Agreement to Sections,
Exhibits and Schedules are to Sections, Exhibits and Schedules of and to this
Agreement. The Exhibits and Schedules to this Agreement are hereby incorporated
herein by this reference as if fully set forth herein.
d. Miscellaneous Terms. The term "or" shall not be exclusive. The terms
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Agreement as a whole and not merely to the specific article,
section, paragraph or clause where such terms may appear. The term "including"
shall mean "including, but not limited to."
2. THE REORGANIZATION.
a. Transfer of Assets. Subject to receiving the requisite approval of the
shareholders of CIP, and to the other terms and conditions contained herein, on
the Exchange Date, CIP shall convey, transfer and deliver to IEF, and IEF shall
purchase, acquire and accept from CIP, free and clear of all Liens (other than
Permitted Liens), substantially all of the assets (including interest accrued as
of the Valuation Time on debt instruments) of CIP (such assets (excluding the
Prohibited Assets) are collectively referred to herein as the "Assets").
Notwithstanding anything to the contrary in this Agreement, CIP shall retain and
shall not convey, transfer or deliver to IEF, and IEF shall not purchase,
acquire or accept any Assets that IEF advises CIP in writing, in accordance with
Section 5(h) hereof, it is not permitted, or IEF reasonably believes to be
unsuitable for it, to acquire (collectively, the "Prohibited Assets").
b. Assumption of Liabilities. Subject to receiving the requisite approval
of the shareholders of CIP, and to the other terms and conditions contained
herein, on the Exchange Date, IEF will assume and agree to pay, perform and
discharge when due substantially all of the obligations and liabilities of CIP
then existing, whether absolute, accrued, contingent or otherwise (collectively,
the "Assumed Liabilities"); provided, that recourse for such liabilities will be
limited to the net Assets of CIP acquired by IEF hereunder.
c. Issuance and Valuation of Corresponding Shares in the
Reorganization. Full Corresponding Shares, and to the extent necessary, a
fractional Corresponding Share, of an aggregate net asset value equal to the net
asset value of the Assets acquired by IEF hereunder, determined as hereinafter
provided shall be issued by IEF to CIP in exchange for the Assets. The net asset
value of each of CIP and IEF shall be determined in accordance with the
procedures described in the IEF Statement of Additional Information as of the
Valuation Time. Such valuation and determination shall be made by IEF in
cooperation with CIP. IEF shall issue its Corresponding Shares to CIP in one
certificate or share deposit receipt registered in the name of CIP.
d. Distribution of Corresponding Shares to CIP Shareholders. Pursuant to
this Agreement, as soon as practicable after the Valuation Time, CIP will
distribute all Corresponding Shares received by it from IEF in
I-3
<PAGE> 48
connection with the Reorganization to its shareholders in exchange for their
corresponding CIP shares. Such distribution shall be accomplished by the opening
of shareholder accounts on the share ledger records of IEF in the amounts due
the shareholders of CIP based on their respective holdings in CIP as of the
Valuation Time and the delivery by CIP of the certificate or share deposit
receipt evidencing the Corresponding Shares received by it from IEF hereunder to
Financial Data Services, Inc., as the transfer agent.
e. Interest; Proceeds. CIP will pay or cause to be paid to IEF any
interest or proceeds it receives on or after the Exchange Date with respect to
the Assets.
f. Valuation Time. The Valuation Time shall be after the close of the New
York Stock Exchange (approximately 4:00 p.m. New York Time) on February 17,
2000, or such earlier or later day and time as may be mutually agreed upon
between the parties hereto (the "Valuation Time").
g. Evidence of Transfer. IEF and CIP will jointly file any instrument as
may be required by the Commonwealth of Massachusetts to effect the transfer of
the Assets to IEF.
h. Termination and Deregistration. CIP's existence as a Massachusetts
business trust will be terminated as soon as practicable following the Exchange
Date by making any required filings with the Commonwealth of Massachusetts. As
soon as practicable following the Exchange Date, CIP also will take the steps
necessary to terminate its status as a registered investment company under the
Investment Company Act and will terminate registration of its securities under
the Securities Act of 1933, as amended (the "Securities Act").
3. REPRESENTATIONS AND WARRANTIES OF CIP.
CIP represents and warrants to IEF as follows:
a. Formation and Qualification. CIP is a business trust duly formed,
validly existing and in good standing in conformity with the laws of the
Commonwealth of Massachusetts, and has all requisite power and authority to own
all of its properties or assets and carry on its business as presently
conducted, is duly qualified, registered or licensed as a foreign business trust
to do business and is in good standing in each jurisdiction in which the
ownership of its properties or assets or the character of its present operations
makes such qualification, registration or licensing necessary, except where the
failure to so qualify or be in good standing would not have a Material Adverse
Effect on CIP.
b. Licenses. CIP holds all permits, consents, registrations, certificates,
authorizations and other approvals (collectively, "Licenses") required for the
conduct of its business as now being conducted; all such Licenses are in full
force and effect and no suspension or cancellation of any of them is pending or
threatened; and none of such Licenses will be affected by the consummation of
the transactions contemplated by this Agreement in a manner that would have a
Material Adverse Effect on CIP. CIP is duly registered under the Investment
Company Act as a diversified, open-end management investment company (File No.
811-6725), and such registration has not been revoked or rescinded and is in
full force and effect. CIP has elected and qualified for the special tax
treatment afforded regulated investment companies ("RICs") under Sections
851-855 of the Code at all times since its inception and intends to continue to
so qualify for its taxable year ending upon the liquidation of CIP.
c. Authority. CIP has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action on the part of CIP and no other proceedings on the part of CIP are
necessary to authorize this Agreement or the consummation of the transactions
contemplated hereby, except for the approval of CIP shareholders as provided in
Section 7(c) hereof. This Agreement has been duly and validly executed by CIP
and, subject to receipt of the requisite shareholder approval, this Agreement
constitutes a legal, valid and binding obligation of CIP enforceable against CIP
in accordance with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto and the
remedy of specific performance and injunctive and other forms of equitable
relief.
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<PAGE> 49
d. Financial Statements. IEF has been furnished with an accurate, correct
and complete statement of assets and liabilities and a schedule of Investments
of CIP, each as of October 31, 1998, said financial statements having been
examined by Ernst & Young LLP, independent public accountants. Such examined
financial statements fairly present in all material respects the financial
position of CIP as of the dates and for the periods referred to therein and in
conformity with generally accepted accounting principles applied on a consistent
basis.
e. Semi-Annual Report to Shareholders. IEF has been furnished with CIP's
Semi-Annual Report to Shareholders for the six months ended April 30, 1999, and
the unaudited financial statements appearing therein fairly present in all
material respects the financial position of CIP as of the dates and for the
periods referred to therein and in conformity with generally accepted accounting
principles applied on a consistent basis.
f. Prospectus and Statement of Additional Information. IEF has been
furnished with the CIP Prospectus and the CIP Statement of Additional
Information, and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
g. Litigation. There are no material claims, actions, suits or legal,
administrative or other proceedings pending or, to the knowledge of CIP,
threatened against CIP that could reasonably be expected to have a Material
Adverse Effect on CIP. CIP is not charged with or, to its knowledge, threatened
with any violation, or investigation of any possible violation, of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business that could reasonably be expected
to have a Material Adverse Effect on CIP.
h. Material Contracts. There are no material contracts outstanding to
which CIP is a party that have not been disclosed in the N-14 Registration
Statement, the CIP Prospectus, the CIP Statement of Additional Information or
which will not otherwise be disclosed to IEF prior to the Valuation Time.
i. No Conflict. The execution and delivery of this Agreement by CIP and
the consummation of the transactions contemplated hereby will not contravene or
constitute a default under or violation of (i) the Declaration of Trust or
by-laws of CIP, each as amended and in effect as of the date hereof, (ii) any
agreement or contract (or require the consent of any Person under any agreement
or contract that has not been obtained) to which CIP is a party or to which its
assets or properties are subject, or (iii) any judgment, injunction, order or
decree, or other instrument binding upon CIP or any of its assets or properties,
except where such contravention, default or violation would not have a Material
Adverse Effect on CIP.
j. Undisclosed Liabilities. To CIP's knowledge, CIP has no material
liabilities, contingent or otherwise, other than those shown on CIP's statements
of assets and liabilities referred to herein, those incurred in the ordinary
course of its business as an investment company since April 30, 1999, and those
incurred in connection with the Reorganization.
k. Taxes. CIP has filed (or caused to be filed), or has obtained
extensions to file, all Federal, state and local tax returns which are required
to be filed by it, and has paid (or caused to be paid) or has obtained
extensions to pay, all taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which the
Exchange Date occurs. All tax liabilities of CIP have been adequately provided
for on its books, and no tax deficiency or liability of CIP has been asserted
and no question with respect thereto has been raised by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which the Exchange Date
occurs.
l. Assets. CIP has good and marketable title to the Assets, free and clear
of all Liens, except for Permitted Liens. CIP is the direct sole and exclusive
owner of the Assets. At the Exchange Date, upon consummation of the transactions
contemplated hereby, IEF will have good and marketable title to the Assets, free
and clear of all Liens, except for Permitted Liens.
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m. Consents. No filing or registration with, or consent, approval,
authorization or order of, any Person is required for the consummation by CIP of
the Reorganization, except for (i) such as may be required under the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the Investment Company Act or state securities laws (which term as used herein
shall include the laws of the District of Columbia and Puerto Rico), (ii) the
approval of not less than two-thirds of the shareholders of CIP entitled to vote
thereon, and (iii) the approval of a majority of the members of the Board of
Trustees of CIP.
n. N-14 Registration Statement. The registration statement filed, or to be
filed, by IEF on Form N-14 relating to the Corresponding Shares to be issued
pursuant to this Agreement, which includes the proxy statement of CIP and the
prospectus of IEF with respect to the transactions contemplated herein, and any
supplement or amendment thereto or to the documents therein (as amended, the
"N-14 Registration Statement"), on the effective date of the N-14 Registration
Statement, at the time of the shareholders' meeting referred to in Section 5(a)
hereof and on the Exchange Date, insofar as it relates to CIP (i) complied, or
will comply, as the case may be, in all material respects, with the applicable
provisions of the Securities Act, the Exchange Act and the Investment Company
Act and the rules and regulations promulgated thereunder, and (ii) did not, or
will not, as the case may be, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the representations and warranties
in this subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by CIP for use in the N-14 Registration Statement as provided in
Section 5(f) hereof.
o. Capitalization. CIP is authorized to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, of two
different classes. As of the date hereof, CIP has shares of a single
class issued and outstanding. All issued and outstanding shares of CIP are duly
authorized, validly issued, fully paid and non-assessable and free of preemptive
rights. Except for in connection with any automatic dividend reinvestment plan
available to CIP shareholders, there are no options, warrants, subscriptions,
calls or other rights, agreements or commitments obligating CIP to issue any of
its shares or securities convertible into its shares.
p. Books and Records. The books and records of CIP made available to IEF
and/or its counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of CIP.
4. REPRESENTATIONS AND WARRANTIES OF IEF.
IEF represents and warrants to CIP as follows:
a. Formation and Qualification. IEF is a business trust duly formed,
validly existing and in good standing in conformity with the laws of the
Commonwealth of Massachusetts, and has all requisite power and authority to own
all of its properties or assets and carry on its business as presently
conducted, is duly qualified, registered or licensed as a foreign business trust
to do business and is in good standing in each jurisdiction in which the
ownership of its properties or assets or the character of its present operations
makes such qualification, registration or licensing necessary, except where the
failure to so qualify or be in good standing would not have a Material Adverse
Effect on IEF.
b. Licenses. IEF holds all Licenses required for the conduct of its
business as now being conducted; all such Licenses are in full force and effect
and no suspension or cancellation of any of them is pending or threatened; and
none of such Licenses will be affected by the consummation of the transactions
contemplated by this Agreement in a manner that would have a Material Adverse
Effect on IEF. IEF is duly registered under the Investment Company Act as a
diversified, open-end management investment company (File No. 811-6521), and
such registration has not been revoked or rescinded and is in full force and
effect. IEF has elected and qualified for the special tax treatment afforded to
RICs under Sections 851-855 of the Code at all times since its inception and
intends to continue to so qualify both until consummation of the Reorganization
and thereafter.
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c. Authority. IEF has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action on the part of IEF and no other proceedings on the part of IEF are
necessary to authorize this Agreement or the consummation of the transactions
contemplated hereby. This Agreement has been duly and validly executed by IEF
and constitutes a legal, valid and binding obligation of IEF enforceable against
IEF in accordance with its terms, subject to the effects of bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and court decisions with respect thereto
and the remedy of specific performance and injunctive and other forms of
equitable relief.
d. Financial Statements. CIP has been furnished with IEF's annual report
to shareholders for the fiscal year ended May 31, 1999, and the financial
statements appearing therein having been audited by Deloitte & Touche LLP,
independent public accountants, and the audited financial statements fairly
present in all material respects the financial position of IEF as of the dates
and for the periods referred to therein and in conformity with generally
accepted accounting principles applied on a consistent basis.
e. Prospectus and Statement of Additional Information. CIP has been
furnished with the IEF Prospectus and the IEF Statement of Additional
Information, and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
f. Litigation. There are no material claims, actions, suits or legal,
administrative or other proceedings pending or, to the knowledge of IEF,
threatened against IEF that could reasonably be expected to have a Material
Adverse Effect on IEF. IEF is not charged with or, to its knowledge, threatened
with any violation, or investigation of any possible violation, of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business that could reasonably be expected
to have a Material Adverse Effect on IEF.
g. Material Contracts. There are no material contracts outstanding to
which IEF is a party that have not been disclosed in the N-14 Registration
Statement, the IEF Prospectus, the IEF Statement of Additional Information or
which will not otherwise be disclosed to CIP prior to the Valuation Time.
h. No Conflict. The execution and delivery of this Agreement by IEF and
the consummation of the transactions contemplated hereby will not contravene or
constitute a default under or violation of (i) the Declaration of Trust or
by-laws of IEF, each as amended and in effect as of the date hereof, (ii) any
agreement or contract (or require the consent of any Person under any agreement
or contract that has not been obtained) to which IEF is a party or to which its
assets or properties are subject, or (iii) any judgment, injunction, order or
decree, or other instrument binding upon IEF or any of its assets or properties,
except where such contravention, default or violation would not have a Material
Adverse Effect on IEF.
i. Undisclosed Liabilities. To IEF's knowledge, IEF has no material
liabilities, contingent or otherwise, other than those shown on IEF's statements
of assets and liabilities referred to herein, those incurred in the ordinary
course of its business as an investment company since May 31, 1999 and those
incurred in connection with the Reorganization.
j. Taxes. IEF has filed (or caused to be filed), or has obtained
extensions to file, all Federal, state and local tax returns which are required
to be filed by it, and has paid (or caused to be paid) or has obtained
extensions to pay, all taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which the
Exchange Date occurs. All tax liabilities of IEF have been adequately provided
for on its books, and no tax deficiency or liability of IEF has been asserted
and no question with respect thereto has been raised by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which the Exchange Date
occurs.
k. Consents. No filing or registration with, or consent, approval,
authorization or order of, any Person is required for the consummation by IEF of
the Reorganization, except for (i) such as may be required under
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the Securities Act, the Exchange Act, and the Investment Company Act or state
securities laws (which term as used herein shall include the laws of the
District of Columbia and Puerto Rico) and (ii) the approval of a majority of the
members of the Board of Trustees of IEF.
l. N-14 Registration Statement. The N-14 Registration Statement, on its
effective date, at the time of the shareholders' meeting referred to in Section
5(a) hereof and on the Exchange Date, insofar as it relates to IEF (i) complied,
or will comply, as the case may be, in all material respects, with the
applicable provisions of the Securities Act, the Exchange Act and the Investment
Company Act and the rules and regulations promulgated thereunder, and (ii) did
not, or will not, as the case may be, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to statements
in or omissions from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by IEF for use in the N-14 Registration
Statement as provided in Section 5(f) hereof.
m. Capitalization. IEF is authorized to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, divided
into four classes, designated Class A, Class B, Class C and Class D. As of the
date hereof, IEF has , , , and Class A,
Class B, Class C and Class D shares issued and outstanding, respectively. All
issued and outstanding shares of IEF are duly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights. Except for (i) the right
of Class B shares of IEF to automatically convert to Class D shares of IEF
approximately eight years after the purchase thereof or (ii) in connection with
any automatic dividend reinvestment plan available to IEF shareholders, there
are no options, warrants, subscriptions, calls or other rights, agreements or
commitments obligating IEF to issue any of its shares or securities convertible
into its shares.
n. Corresponding Shares.
i. The Corresponding Shares to be issued by IEF to CIP and
subsequently distributed by CIP to its shareholders as provided in this
Agreement have been duly and validly authorized and, when issued and
delivered pursuant to this Agreement, will be legally and validly issued
and will be fully paid and nonassessable and will have full voting rights,
and no shareholder of IEF will have any preemptive right of subscription or
purchase in respect thereof.
ii. At or prior to the Exchange Date, the Corresponding Shares to be
issued by IEF to CIP on the Exchange Date will be duly qualified for
offering to the public in all states of the United States in which the sale
of shares of IEF presently are qualified, and there are a sufficient number
of such shares registered under the Securities Act, the Investment Company
Act and with each pertinent state securities commission to permit the
transfers contemplated by this Agreement to be consummated.
5. COVENANTS OF CIP AND IEF.
a. Special Shareholders' Meeting. CIP agrees to call a special meeting of
its shareholders as soon as practicable after the effective date of the N-14
Registration Statement for the purpose of considering the Reorganization as
described in this Agreement.
b. Unaudited Financial Statements.
i. CIP hereby agrees to furnish to IEF, at or prior to the Exchange
Date, for the purpose of determining the number of Corresponding Shares to
be issued by IEF to CIP pursuant to Section 2(c) hereof, an accurate,
correct and complete unaudited statement of assets and liabilities of CIP
with values determined in accordance with Section 2(c) hereof and an
unaudited schedule of Investments of CIP (including the respective dates
and costs of acquisition thereof), each as of the Valuation Time. Such
unaudited financial statements will fairly present in all material respects
the financial position of CIP as of the dates and for the periods referred
to therein and in conformity with generally accepted accounting principles
applied on a consistent basis.
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ii. IEF hereby agrees to furnish to CIP, at or prior to the Exchange
Date, for the purpose of determining the number of Corresponding Shares to
be issued by IEF to CIP pursuant to Section 2(c) hereof, an accurate,
correct and complete unaudited statement of assets and liabilities of IEF
with values determined in accordance with Section 2(c) hereof and an
unaudited schedule of Investments of IEF (including the respective dates
and costs of acquisition thereof), each as of the Valuation Time. Such
unaudited financial statements will fairly present in all material respects
the financial position of CIP as of the dates and for the periods referred
to therein and in conformity with generally accepted accounting principles
applied on a consistent basis.
c. Share Ledger Records of IEF. IEF agrees, as soon as practicable after
the Valuation Time, to open shareholder accounts on its share ledger records for
the shareholders of CIP in connection with the distribution of Corresponding
Shares by CIP to such shareholders in accordance with Section 2(c) hereof.
d. Conduct of Business. CIP and IEF each covenants and agrees to operate
its respective business as presently conducted between the date hereof and the
Exchange Date.
e. Termination and Deregistration of CIP. CIP agrees that following the
consummation of the Reorganization, (i) it will terminate its existence as a
business trust in accordance with the laws of the Commonwealth of Massachusetts
and any other applicable law; (ii) it will not make any distributions of any
Corresponding Shares other than to the shareholders of CIP and without first
paying or adequately providing for the payment of all of CIP's liabilities not
assumed by IEF, if any; (iii) it will file an application pursuant to Section
8(f) of the Investment Company Act for an order declaring that CIP has ceased to
be a registered investment company; and (iv) on and after the Exchange Date it
shall not conduct any business except in connection with its termination and
deregistration.
f. Filing of N-14 Registration Statement. IEF will file the N-14
Registration Statement with the Commission and will use its best efforts to
cause the N-14 Registration Statement to become effective as promptly as
practicable after the filing thereof. CIP and IEF agree to cooperate fully with
each other, and each will furnish to the other the information relating to
itself to be set forth in the N-14 Registration Statement as required by the
Securities Act, the Exchange Act, the Investment Company Act, and the rules and
regulations thereunder and the state securities or blue sky laws (if
applicable).
g. Material Contracts. CIP hereby agrees to disclose to IEF the existence
of any material contracts of CIP that have not been otherwise disclosed in the
N-14 Registration Statement, the CIP Prospectus or the CIP Statement of
Additional Information.
h. Prohibited Assets. IEF agrees to advise CIP promptly in writing if at
any time prior to the Exchange Date the Assets include any Prohibited Assets and
shall provide to CIP a list of such Prohibited Assets.
i. Corresponding Shares. CIP will not sell or otherwise dispose of any of
the Corresponding Shares to be received by it from IEF in connection with the
Reorganization, except in distribution to the shareholders of CIP in accordance
with the terms hereof.
j. Tax Returns. CIP and IEF each agrees that by the Exchange Date all of
its Federal and other tax returns and reports required to be filed on or before
such date shall have been filed and all taxes shown as due on said returns
either shall have been paid or adequate liability reserves shall have been
provided for the payment of such taxes. In connection with this provision, IEF
and CIP agree to cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes or a right to a
refund of taxes or participating in or conducting any audit or other proceeding
in respect of taxes. IEF agrees to retain for a period of ten (10) years
following the Exchange Date all returns, schedules and work papers and all
material records or other documents relating to tax matters of IEF for its
taxable period first ending after the Exchange Date and for all prior taxable
periods. Any information obtained under this subsection shall be kept
confidential except as otherwise may be necessary in connection with the filing
of returns or claims for refund or in conducting an audit or other proceeding.
After the Exchange Date, CIP shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by CIP with respect to CIP's final taxable year ending with its complete
liquidation and for any prior periods or taxable years and further shall cause
such tax returns and Forms 1099 to be duly filed with the appropriate taxing
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authorities. Notwithstanding any of the foregoing, any expenses incurred by CIP
(other than for payment of taxes) in connection with the preparation and filing
of said tax returns and Forms 1099 after the Exchange Date shall be borne by CIP
to the extent such expenses have been accrued by CIP in the ordinary course of
business without regard to the Reorganization; any excess expenses shall be
borne by Merrill Lynch Asset Management, L.P. ("MLAM") at the time such tax
returns and Forms 1099 are prepared.
k. Combined Proxy Statement and Prospectus Mailing. CIP agrees to mail to
its shareholders of record entitled to vote at the special meeting of
shareholders at which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice thereof, a combined
Proxy Statement and Prospectus which complies in all material respects with the
applicable provisions of Section 14(a) of the Exchange Act and Section 20(a) of
the Investment Company Act, and the rules and regulations promulgated
thereunder.
l. Confirmations of Tax Basis. CIP will deliver to IEF on the Exchange
Date confirmations or other adequate evidence as to the tax basis of each of the
Assets delivered to IEF hereunder, certified by Ernst & Young LLP.
m. Shareholder List. As soon as practicable after the close of business on
the Exchange Date, CIP shall deliver to IEF a list of the names and addresses of
all of the shareholders of record of CIP on the Exchange Date and the number of
shares of CIP owned by each such shareholder as of such date, certified to the
best of its knowledge and belief by the transfer agent for CIP or by CIP's
President or Vice President.
n. IEF's Continued Existence. Following the consummation of the
Reorganization, IEF expects, and agrees to use all reasonable efforts, to stay
in existence and continue its business as an open-end management investment
company registered under the Investment Company Act. IEF has no plan or
intention to sell or otherwise dispose of the Assets, except for dispositions
made in the ordinary course of business.
6. EXCHANGE DATE.
The closing of the transactions contemplated by this Agreement shall be at
the offices of Swidler Berlin Shereff Friedman, LLP ("SBSF"), 919 Third Avenue,
New York, New York 10022, at 10:00 A.M. on the next full business day following
the Valuation Time, or at such other place, time and date agreed to by CIP and
IEF. The date and time upon which such closing is to take place shall be
referred to herein as the "Exchange Date." Except with respect to Prohibited
Assets, to the extent that any Assets, for any reason, are not transferable on
the Exchange Date, CIP shall cause such Assets to be transferred to IEF's
account with Brown Brothers Harriman & Co. at the earliest practicable date
thereafter.
7. CIP CONDITIONS.
The obligations of CIP hereunder shall be subject to the satisfaction, at
or before the Exchange Date (or such other date specified herein), of the
conditions set forth below. The benefit of these conditions is for CIP only and
may be waived, in whole or in part, by CIP at any time in its sole discretion.
a. Representations and Warranties. The representations and warranties of
IEF made in this Agreement shall be true and correct in all material respects
when made, as of the Valuation Time and as of the Exchange Date all with the
same effect as if made at and as of such dates, except that any representations
and warranties that relate to a particular date or period shall be true and
correct in all material respects as of such date or period.
b. Performance. IEF shall have performed, satisfied and complied with all
covenants, agreements and conditions required to be performed, satisfied or
complied with by it under this Agreement at or prior to the Exchange Date.
c. Shareholder Approval. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the holders
of not less than two-thirds of the shares of CIP, issued and outstanding and
entitled to vote thereon, voting together as a single class.
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d. Approval of Board of Trustees of IEF. This Agreement shall have been
adopted and the Reorganization shall have been approved by the Board of Trustees
of IEF. IEF shall have delivered to CIP a copy of the resolutions of the Board
of Trustees of IEF authorizing the execution, delivery and performance by IEF of
this Agreement and the transactions contemplated hereby, certified by the
Secretary of IEF.
e. Deliveries by IEF. At or prior to the Exchange Date, IEF shall deliver
to CIP, against receipt of the Assets in accordance with Section 2(a) hereof,
the following:
i. a certificate executed by the President (or a Vice President) and
the Treasurer of IEF, dated as of the Exchange Date, certifying that the
conditions specified in Sections 7(a), (b), and (f) have been fulfilled;
ii. the unaudited financial statements of IEF required by Section
5(b)(ii) hereof;
iii. an opinion of Brown & Wood LLP, as counsel to IEF, dated as of
the Exchange Date, in form and substance satisfactory to CIP as to the
matters set forth below: (a) to such counsel's knowledge, no filing or
registration with, or consent, approval, authorization or order of, any
Person is required for the consummation by IEF of the Reorganization,
except for such as have been obtained from the Board of Trustees of IEF and
under the Securities Act, the Exchange Act and the Investment Company Act
and the rules and regulations promulgated thereunder and under
Massachusetts law and such as may be required under state securities laws;
(b) the N-14 Registration Statement has become effective under the
Securities Act, no stop order suspending the effectiveness of the N-14
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or, to such counsel's knowledge,
contemplated under the Securities Act, and the N-14 Registration Statement,
and each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the Securities Act, the Exchange Act and
the Investment Company Act and the rules and regulations promulgated
thereunder; (c) to such counsel's knowledge, the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings and
contracts and other documents in respect of IEF are accurate and fairly
present the information required to be shown; (d) such counsel does not
know of any statutes, legal or governmental proceedings or contracts or
other documents related to the Reorganization of a character required to be
described in the N-14 Registration Statement which are not described
therein or, if required to be filed, filed as required; (e) the execution
and delivery of the Agreement by IEF and the consummation of the
transactions contemplated thereby will not contravene or constitute a
default under or violation of any agreement or contract known to such
counsel (or require the consent of any Person under any agreement or
contract known to such counsel that has not been obtained) to which IEF is
a party or to which its assets or properties are subject, except where such
contravention, default or violation would not have a Material Adverse
Effect on IEF; (f) such counsel does not have actual knowledge of any
material claims, actions, suits or legal, administrative or other
proceedings pending or threatened against IEF that could reasonably be
expected to have a Material Adverse Effect on IEF; and (g) such opinion is
solely for the benefit of CIP and its Trustees and officers. Such opinion
also shall state that (AA) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto,
nothing has come to their attention that would lead them to believe that,
on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the N-14 Registration Statement or
any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and (2) the
prospectus included in the N-14 Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
(BB) such counsel does not express any opinion or belief as to the
financial statements or other financial or statistical data relating to IEF
contained or incorporated by reference in the N-14 Registration Statement.
In giving the opinion set forth above, Brown & Wood LLP may state that it
is relying on
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certificates of officers of IEF with regard to matters of fact and the
opinion of Bingham Dana LLP as to matters of Massachusetts law.
iv. an opinion of Bingham Dana LLP, as counsel to IEF, dated as of the
Exchange Date, in form and substance satisfactory to CIP as to the matters
set forth below: (a) IEF is a business trust duly formed, validly existing
and in good standing in conformity with the laws of the Commonwealth of
Massachusetts; (b) the Corresponding Shares to be issued by IEF to CIP and
subsequently distributed by CIP to its shareholders as provided for by the
Agreement have been duly and validly authorized and, when issued and
delivered pursuant to the Agreement, will be legally and validly issued and
will be fully paid and nonassessable and will have full voting rights, and
no shareholder of IEF will have any preemptive right of subscription or
purchase in respect thereof (pursuant to the Declaration of Trust, as
amended, or the by-laws of IEF or, to the best of such counsel's knowledge,
otherwise); (c) the execution and delivery of the Agreement and the
consummation of the transactions contemplated thereby have been duly and
validly authorized by all necessary action on the part of IEF and no other
proceedings on the part of IEF are necessary to authorize the Agreement or
the consummation of the transactions contemplated thereby; (d) the
Agreement has been duly and validly executed by IEF and constitutes a
legal, valid and binding obligation of IEF enforceable against IEF in
accordance with its terms, subject to the effects of bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating to
or affecting creditors' rights generally and court decisions with respect
thereto; provided, that such counsel shall express no opinion with respect
to the application of equitable principles in any proceeding, whether at
law or in equity; (e) the execution and delivery of the Agreement by IEF
and the consummation of the transactions contemplated thereby will not
contravene or constitute a default under or violation of the Declaration of
Trust or by-laws of IEF, each as amended and in effect as of the date of
the Agreement, or Massachusetts law; and (f) to such counsel's knowledge,
no filing or registration with, or consent, approval, authorization or
order of, any Person is required under Massachusetts law for the
consummation by IEF of the Reorganization, except for such as have been
obtained from the Board of Trustees of IEF and such as may be required
under Massachusetts state securities law. In giving the opinion set forth
above, Bingham Dana LLP may state that it is relying on certificates of
officers of IEF with regard to matters of fact and certain certificates and
written statements of government officials with respect to the good
standing of IEF.
v. either (a) a private letter ruling from the Internal Revenue
Service (the "Ruling") or (b) an opinion of Brown & Wood LLP, in form and
substance satisfactory to CIP, to the effect that, for Federal income tax
purposes, (a) the transfer of the Assets to IEF in exchange solely for the
Corresponding Shares and the assumption by IEF of the Assumed Liabilities
as provided for in the Agreement will constitute a reorganization within
the meaning of Section 368(a)(1)(C) of the Code, and CIP and IEF will each
be deemed to be a "party" to the Reorganization within the meaning of
Section 368(b) of the Code; (b) in accordance with Section 361(a) of the
Code, no gain or loss will be recognized to CIP under Section 361(c)(1) of
the Code as a result of the asset transfer solely in exchange for the
Corresponding Shares and the assumption by IEF of the Assumed Liabilities
or on the distribution of the Corresponding Shares to CIP shareholders as
provided for in the Agreement; (c) under Section 1032 of the Code, no gain
or loss will be recognized to IEF on the receipt of the Assets in exchange
for the Corresponding Shares and the assumption by IEF of the Assumed
Liabilities as provided for in the Agreement; (d) in accordance with
Section 354(a)(1) of the Code, no gain or loss will be recognized to the
shareholders of CIP on the receipt of Corresponding Shares in exchange for
their shares of CIP; (e) in accordance with Section 362(b) of the Code, the
tax basis of the Assets in the hands of IEF will be the same as the tax
basis of such Assets in the hands of CIP immediately prior to the
consummation of the Reorganization; (f) in accordance with Section 358 of
the Code, immediately after the Reorganization, the tax basis of the
Corresponding Shares received by the shareholders of CIP in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of CIP surrendered in exchange therefor; (g) in accordance with
Section 1223 of the Code, a shareholder's holding period for the
Corresponding Shares will be determined by including the period for which
such shareholder held the shares of CIP exchanged therefor; provided, that
such CIP shares were held as a capital asset; (h) in accordance with
Section 1223 of the Code, IEF's holding period with respect to the Assets
acquired by it will include the
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period for which such Assets were held by CIP; and (i) the taxable year of
CIP will end on the effective date of the Reorganization and pursuant to
Section 381(a) of the Code and regulations thereunder, IEF will succeed to
and take into account certain tax attributes of CIP, such as earnings and
profits, capital loss carryovers and method of accounting.
f. No Adverse Change. There shall have occurred no material adverse change
in the financial position of IEF since May 31, 1999 other than changes in its
portfolio securities since that date or changes in the market value of its
portfolio securities, each in the ordinary course of business.
g. Absence of Litigation. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
h. Proceedings and Documents. All proceedings contemplated by this
Agreement, the Reorganization, and all of the other documents incident thereto,
shall be reasonably satisfactory to CIP and its counsel, and CIP and its counsel
shall have received all such counterpart originals or certified or other copies
of such documents as CIP or its counsel may reasonably request.
i. N-14 Registration Statement. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of IEF or CIP,
contemplated by the Commission.
j. Accountants' Letters. CIP shall have received from Deloitte & Touche
LLP a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to CIP, to the effect that (i) Deloitte & Touche LLP
serves as independent public accountants to IEF within the meaning of the
Securities Act and the applicable rules and regulations promulgated thereunder;
(ii) in their opinion, the financial statements and supplementary information of
IEF included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules and
regulations promulgated thereunder; (iii) on the basis of limited procedures
agreed upon by CIP and IEF and described in such letter (but not an examination
in accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of IEF included in the N-14 Registration Statement,
and inquiries of certain officials of IEF responsible for financial and
accounting matters, nothing came to their attention that caused them to believe
that (a) such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules and
regulations promulgated thereunder, (b) such unaudited financial statements are
not fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the audited
financial statements of IEF, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements of IEF taken as a whole; and (iv) on the basis of limited
procedures agreed upon by CIP and IEF and described in such letter (but not an
examination in accordance with generally accepted auditing standards), the
information relating to IEF appearing in the N-14 Registration Statement, which
information is expressed in dollars (or percentages derived from such dollars)
(with the exception of performance comparisons, if any), if any, has been
obtained from the accounting records of IEF or from schedules prepared by
officials of IEF having responsibility for financial and reporting matters and
such information is in agreement with such records, schedules or computations
made therefrom.
k. Compliance with Laws; No Adverse Action or Decision. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of IEF or that seeks to restrain, enjoin,
prevent, materially delay, prohibit or
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otherwise make illegal the performance of this Agreement, the Reorganization or
the consummation of any of the transactions contemplated hereby or thereby.
l. Commission Orders or Interpretations. CIP shall have received from the
Commission such orders or interpretations as SBSF, as counsel to CIP, deems
reasonably necessary or desirable under the Securities Act and the Investment
Company Act in connection with the Reorganization; provided, that such counsel
shall have requested such orders or interpretations as promptly as practicable,
and all such orders shall be in full force and effect.
8. IEF CONDITIONS.
The obligations of IEF hereunder shall be subject to the satisfaction, at
or before the Exchange Date (or such other date specified herein), of the
conditions set forth below. The benefit of these conditions is for IEF only and
may be waived, in whole or in part, by IEF at any time in its sole discretion.
a. Representations and Warranties. The representations and warranties of
CIP made in this Agreement shall be true and correct in all material respects
when made, as of the Valuation Time and as of the Exchange Date all with the
same effect as if made at and as of such dates, except that any representations
and warranties that relate to a particular date or period shall be true and
correct in all material respects as of such date or period.
b. Performance. CIP shall have performed, satisfied and complied with all
covenants, agreements and conditions required to be performed, satisfied or
complied with by it under this Agreement at or prior to the Exchange Date.
c. Shareholder Approval. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the holders
of not less than two-thirds of the shares of CIP, issued and outstanding and
entitled to vote thereon, voting together as a single class.
d. Approval of Board of Trustees of CIP. This Agreement shall have been
adopted and the Reorganization shall have been approved by the Board of Trustees
of CIP. CIP shall have delivered to IEF a copy of the resolutions of the Board
of Trustees of CIP authorizing the execution, delivery and performance by CIP of
this Agreement and the transactions contemplated hereby, certified by the
Secretary of CIP.
e. Deliveries by CIP. At or prior to the Exchange Date, CIP shall deliver
to IEF, against the assumption by IEF of the Assumed Liabilities and the receipt
of the Corresponding Shares in accordance with Sections 2(b) and (c) hereof,
respectively, the following:
i. a certificate executed by the President (or a Vice President) and
the Treasurer of CIP, dated as of the Exchange Date, certifying that the
conditions specified in Sections 8(a), (b),(c) and (f) have been fulfilled;
ii. the unaudited financial statements of CIP required by Section
5(b)(i) hereof;
iii. IEF shall have received an opinion of SBSF, as counsel to CIP,
dated as of the Exchange Date, in form and substance satisfactory to IEF,
as to the matters set forth below: (a) to such counsel's knowledge, CIP has
good and marketable title to the Assets, free and clear of all Liens,
except for Permitted Liens; (b) to such counsel's knowledge, no filing or
registration with, or consent, approval, authorization or order of, any
Person is required for the consummation by CIP of the Reorganization,
except for such as have been obtained from the Board of Trustees and
shareholders of CIP and under the Securities Act, the Exchange Act and the
Investment Company Act and the rules and regulations promulgated thereunder
and under Massachusetts law and such as may be required under state
securities laws; (c) the proxy statement of CIP contained in the N-14
Registration Statement, and each amendment or supplement thereto, as of
their respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the Exchange Act
and the Investment Company Act and the rules and regulations promulgated
thereunder; (d) to such counsel's knowledge, the descriptions in the proxy
statement of CIP contained in the N-14 Registration Statement of statutes,
legal and governmental proceedings and contracts and other documents in
respect of CIP are
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accurate and fairly present the information required to be shown; (e) such
counsel does not know of any statutes, legal or governmental proceedings or
contracts or other documents related to the Reorganization of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (f) the
execution and delivery of the Agreement by CIP and the consummation of the
transactions contemplated thereby will not contravene or constitute a
default under or violation of any agreement or contract known to such
counsel (or require the consent of any Person under any agreement or
contract known to such counsel that has not been obtained) to which CIP is
a party or to which its assets or properties are subject, except where such
contravention, default or violation would not have a Material Adverse
Effect on CIP; (g) such counsel does not have actual knowledge of any
material claims, actions, suits or legal, administrative or other
proceedings pending or threatened against CIP that could reasonably be
expected to have a Material Adverse Effect on CIP; and (h) such opinion is
solely for the benefit of IEF and its Trustees and officers. Such opinion
also shall state that (AA) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto,
nothing has come to their attention that would lead them to believe that,
on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the proxy statement of CIP
contained in the N-14 Registration Statement or any amendment or supplement
thereto contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; and (2) the proxy statement of CIP contained in the
N-14 Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (BB) such counsel does not
express any opinion or belief as to the financial statements or other
financial or statistical data relating to CIP contained or incorporated by
reference in the N-14 Registration Statement. In giving the opinion set
forth above, SBSF may state that it is relying on certif icates of officers
of CIP with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of
CIP and the opinion of Bingham Dana LLP as to matters of Massachusetts law.
iv. an opinion of Bingham Dana LLP, as Massachusetts counsel to CIP,
dated as of the Exchange Date, in form and substance satisfactory to IEF,
as to the matters set forth below: (a) CIP is a business trust duly formed,
validly existing and in good standing in conformity with the laws of the
Commonwealth of Massachusetts; (b) the execution and delivery of the
Agreement and the consummation of the transactions contemplated thereby
have been duly and validly authorized by all necessary action on the part
of CIP and no other proceedings on the part of CIP are necessary to
authorize the Agreement or the consummation of the transactions
contemplated thereby; (c) the Agreement has been duly and validly executed
by CIP and constitutes a legal, valid and binding obligation of CIP
enforceable against CIP in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto; provided, that such counsel shall express
no opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity; (d) the execution and delivery of
the Agreement by CIP and the consummation of the transactions contemplated
thereby do not contravene or constitute a default under or violation of the
Declaration of Trust or by-laws of CIP, each as amended and in effect on
the date of the Agreement, or Massachusetts law; and (e) to such counsel's
knowledge, no filing or registration with, or consent, approval,
authorization or order of, any Person is required under Massachusetts law
for the consummation by CIP of the Reorganization, except for such as have
been obtained from the Board of Trustees and shareholders of CIP and such
as may be required under Massachusetts state securities law. In giving the
opinion set forth above, Bingham Dana LLP may state that it is relying on
certificates of officers of CIP with regard to matters of fact and certain
certificates and written statements of government officials with respect to
the good standing of CIP.
v. either (a) a Ruling or (b) an opinion of Brown & Wood LLP, in form
and substance satisfactory to IEF, with respect to the matters specified in
Section 7(e)(v) hereof.
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f. No Adverse Change. There shall have occurred no material adverse change
in the financial position of CIP since April 30, 1999 other than changes in its
portfolio securities since that date or changes in the market value of its
portfolio securities, each in the ordinary course of business.
g. Absence of Litigation. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
h. Proceedings and Documents. All proceedings contemplated by this
Agreement, the Reorganization, and all of the other documents incident thereto,
shall be reasonably satisfactory to IEF and its counsel, and IEF and its counsel
shall have received all such counterpart originals or certified or other copies
of such documents as IEF or its counsel may reasonably request.
i. N-14 Registration Statement. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of CIP or IEF,
contemplated by the Commission.
j. Accountants' Letters. IEF shall have received from Ernst & Young LLP a
letter dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form and
substance satisfactory to IEF, to the effect that (i) Ernst & Young LLP serves
as independent public accountants to CIP within the meaning of the Securities
Act and the applicable rules and regulations promulgated thereunder; (ii) in
their opinion, the financial statements and supplementary information of CIP
included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules and
regulations promulgated thereunder; (iii) on the basis of limited procedures
agreed upon by CIP and IEF and described in such letter (but not an examination
in accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of CIP included in the N-14 Registration Statement,
and inquiries of certain officials of CIP responsible for financial and
accounting matters, nothing came to their attention that caused them to believe
that (a) such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules and
regulations promulgated thereunder, (b) such unaudited financial statements are
not fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the audited
financial statements of CIP, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements of CIP taken as a whole; and (iv) on the basis of limited
procedures agreed upon by IEF and CIP and described in such letter (but not an
examination in accordance with generally accepted auditing standards), the
information relating to CIP appearing in the N-14 Registration Statement, which
information is expressed in dollars (or percentages derived from such dollars)
(with the exception of performance comparisons, if any), if any, has been
obtained from the accounting records of CIP or from schedules prepared by
officials of CIP having responsibility for financial and reporting matters and
such information is in agreement with such records, schedules or computations
made therefrom.
k. Compliance with Laws; No Adverse Action or Decision. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of CIP or that seeks to restrain, enjoin,
prevent, materially delay, prohibit or otherwise make illegal the performance of
this Agreement, the Reorganization or the consummation of any of the
transactions contemplated hereby or thereby.
l. Commission Orders or Interpretations. IEF shall have received from the
Commission such orders or interpretations as Brown & Wood LLP, as counsel to
IEF, deems reasonably necessary or desirable under the
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Securities Act and the Investment Company Act in connection with the
Reorganization; provided, that such counsel shall have requested such orders or
interpretations as promptly as practicable, and all such orders shall be in full
force and effect.
m. Assets. The Assets to be transferred to IEF, or the Assumed Liabilities
to be assumed by IEF, hereunder shall not include a significant amount of assets
or liabilities, as applicable, which IEF, by reason of limitations in IEF's
Declaration of Trust or otherwise, may not properly acquire or assume, as
applicable.
n. Letter Regarding Tax Returns. CIP shall have delivered to IEF a letter
from Ernst & Young LLP, dated the Exchange Date, stating that such firm has
performed a limited review of the Federal, state and local income tax returns of
CIP for the period ended October 31, 1998 (which returns originally were
prepared and filed by CIP), and that based on such limited review, nothing came
to their attention which caused them to believe that such returns did not
properly reflect, in all material respects, the Federal, state and local income
taxes of CIP for the period covered thereby; and that for the period from
October 31, 1998, to and including the Exchange Date and for any taxable year of
CIP ending upon the liquidation of CIP, such firm has performed a limited review
to ascertain the amount of applicable Federal, state and local taxes, and has
determined that either such amount has been paid or reserves established for
payment of such taxes, this review to be based on unaudited financial data; and
that based on such limited review, nothing has come to their attention which
caused them to believe that the taxes paid or reserves set aside for payment of
such taxes were not adequate in all material respects for the satisfaction of
Federal, state and local taxes for the period from October 31, 1998, to and
including the Exchange Date and for any taxable year of CIP ending upon the
liquidation of CIP or that CIP would not continue to qualify as a regulated
investment company for Federal income tax purposes.
o. Dividends. Prior to the Exchange Date, CIP shall have declared a
dividend or dividends which, together with all such previous dividends, shall
have the effect of distributing to its shareholders all of its investment
company taxable income for the period from November 1, 1999 to and including the
Exchange Date, if any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized for the period from
November 1, 1999 to and including the Exchange Date.
9. TERMINATION, POSTPONEMENT AND WAIVERS.
a. Termination of Agreement. Notwithstanding anything contained in this
Agreement to the contrary, subject to Section 10(a) hereof, this Agreement may
be terminated and the Reorganization abandoned at any time (whether before or
after adoption thereof by the shareholders of CIP) prior to the Exchange Date,
or the Exchange Date may be postponed, by notice in writing prior to the
Exchange Date
i. by CIP or IEF if :
(1) the Boards of Trustees of CIP and IEF so mutually agree in
writing;
(2) the transactions contemplated by this Agreement have not been
consummated by June 30, 2000; provided, however, that the right to
terminate or postpone this Agreement under this Section 9(a)(i)(2) shall
not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure
of consummation of the transactions contemplated by this Agreement on or
before such date; or
(3) any Governmental Authority of competent jurisdiction shall have
issued any judgment, injunction, order, ruling or decree or taken any
other action restraining, enjoining or otherwise prohibiting this
Agreement, the Reorganization or the consummation of any of the
transactions contemplated hereby or thereby and such judgment,
injunction, order, ruling, decree or other action becomes final and
non-appealable; provided, that the party seeking to terminate this
Agreement pursuant to this Section 9(a)(i)(3) shall have used its
reasonable best efforts to have such judgment, injunction, order,
ruling, decree or other action lifted, vacated or denied.
ii. by CIP if any condition of CIP's obligations set forth in Section
7 of this Agreement has not been fulfilled or waived by it; or
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iii. by IEF if any condition of IEF's obligations set forth in Section
8 of this Agreement has not been fulfilled or waived by it.
b. Commission Order. If any order or orders of the Commission with respect
to this Agreement shall be issued prior to the Exchange Date and shall impose
any terms or conditions which are determined by action of the Boards of Trustees
of CIP and IEF to be acceptable, such terms and conditions shall be binding as
if a part of this Agreement without further vote or approval of the shareholders
of CIP, unless such terms and conditions shall result in a change in the method
of computing the number of Corresponding Shares to be issued by IEF to CIP in
which event, unless such terms and conditions shall have been included in the
proxy solicitation materials furnished to the shareholders of CIP prior to the
meeting at which the Reorganization shall have been approved, this Agreement
shall not be consummated and shall terminate unless CIP promptly shall call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval and the requisite approval of such conditions shall be
obtained.
c. Effect of Termination. In the event of termination of this Agreement
pursuant to the provisions hereof, the same shall become null and void and have
no further force or effect, and there shall not be any liability on the part of
either CIP or IEF or Persons who are their directors, trustees, officers, agents
or shareholders in respect of this Agreement.
d. Waivers; Non-Material Changes. At any time prior to the Exchange Date,
any of the terms or conditions of this Agreement may be waived by the Board of
Trustees of the party hereto that is entitled to the benefit thereof, if, in the
judgment of such Board after consultation with its counsel, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement to the shareholders of the respective trust for which they serve
as Trustees, on behalf of which such action is taken. In addition, the Boards of
Trustees of CIP and IEF have delegated to their respective investment adviser
the ability to make non-material changes to this Agreement if such investment
adviser deems it to be in the best interests of the trust for which it serves as
investment adviser to do so.
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
a. The respective representations and warranties contained in Sections 3
and 4 hereof shall expire with, and be terminated by, the consummation of the
Reorganization, and neither CIP nor IEF nor any of their officers or trustees,
agents or shareholders shall have any liability with respect to such
representations or warranties after the Exchange Date. This provision shall not
protect any officer, trustee, agent or shareholder of CIP or IEF against any
liability to the entity for which such Person serves in such capacity, or to its
shareholders, to which such Person would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties in
the conduct of such office.
b. Indemnification Obligations of CIP. CIP hereby agrees to indemnify and
hold harmless IEF from and against any and all losses, claims, damages,
liabilities, costs (including reasonable attorneys' fees) and expenses
(including expenses of investigation) (collectively, "Losses") which IEF may
incur or sustain as a result of, relating to or arising out of, (i) any
corporate obligation of CIP, whether consisting of tax deficiencies or
otherwise, required to be paid by IEF and based upon a claim or claims against
CIP which were omitted or not fairly reflected in the financial statements
delivered to IEF in connection with the Reorganization; (ii) any breach or
alleged breach in any material respect of any warranty, or the inaccuracy in any
material respect of any representation, as the case may be, made by CIP; (iii)
the failure or threatened failure, in any material respect, of CIP to fulfill
any agreement or covenant of CIP contained in this Agreement; or (iv) any claim
is made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (b) the Proxy
Statement and Prospectus delivered to the shareholders of CIP and forming a part
of the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such claim is
based on written information
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furnished by IEF to CIP. The party being indemnified is referred to herein as
the "Indemnified Party" and the indemnifying party is referred to herein as the
"Indemnifying Party."
c. Indemnification Obligations of IEF. IEF hereby agrees to indemnify and
hold harmless CIP from and against any and all Losses which CIP may incur or
sustain as a result of, relating to or arising out of, (i) any breach or alleged
breach in any material respect of any warranty, or the inaccuracy in any
material respect of any representation, as the case may be, made by IEF; (ii)
the failure or threatened failure, in any material respect, of IEF to fulfill
any agreement or covenant of IEF contained in this Agreement; or (iii) any claim
is made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (b) the Proxy
Statement and Prospectus delivered to shareholders of CIP and forming a part of
the N-14 Registration Statement included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except insofar as such claim is based on written
information furnished by CIP to IEF.
d. Indemnification Procedure. In the event that any claim is made against
IEF in respect of which indemnity may be sought by IEF from CIP under Section
10(b) hereof, or in the event that any claim is made against CIP in respect of
which indemnity may be sought by CIP from IEF under Section 10(c) hereof, then
the Indemnified Party, with reasonable promptness and before payment of such
claim, shall give written notice of such claim to the Indemnifying Party. If no
objection as to the validity of the claim is made in writing to the Indemnified
Party by the Indemnifying Party within thirty (30) days after the giving of
notice hereunder, then the Indemnified Party may pay such claim and shall be
entitled to reimbursement therefor, pursuant to this Agreement. If, prior to the
termination of such thirty-day period, objection in writing as to the validity
of such claim is made to the Indemnified Party, the Indemnified Party shall
withhold payment thereof until the validity of such claim is established (i) to
the satisfaction of the Indemnifying Party, or (ii) by a final determination of
a court of competent jurisdiction, whereupon the Indemnified Party may pay such
claim and shall be entitled to reimbursement thereof, pursuant to this
Agreement, or (iii) with respect to any tax claims, within seven (7) calendar
days following the earlier of (A) an agreement between CIP and IEF that an
indemnity amount is payable, (B) an assessment of a tax by a taxing authority,
or (C) a "determination" as defined in Section 1313(a) of the Code. For purposes
of this Section, the term "assessment" shall have the same meaning as used in
Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable
provision under the laws of the appropriate taxing authority. In the event of
any objection by the Indemnifying Party, the Indemnifying Party promptly shall
investigate the claim, and if it is not satisfied with the validity thereof, the
Indemnifying Party shall conduct the defense against such claim. All costs and
expenses incurred by the Indemnifying Party in connection with such
investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of, any
other rights the parties may have under applicable law.
11. OTHER MATTERS.
a. Legend. Pursuant to Rule 145 under the Securities Act, and in
connection with the issuance of any shares to any Person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c) of the Securities Act, IEF will cause to
be affixed upon the certificate(s) issued to such Person (if any) a legend as
follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MERRILL LYNCH INTERNATIONAL EQUITY FUND, (OR ITS STATUTORY
SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF
1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
FUND, SUCH REGISTRATION IS NOT REQUIRED.
I-19
<PAGE> 64
and, further, that stop transfer instructions will be issued to IEF's transfer
agent with respect to such shares. CIP will provide IEF on the Exchange Date
with the name of any CIP shareholder who is to the knowledge of CIP an affiliate
of it on such date.
b. Materiality. All covenants, agreements, representations and warranties
made under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each of the
parties, notwithstanding any investigation made by them or on their behalf.
c. Further Assurances. Each party hereto covenants and agrees to provide
the other party hereto and its agents and counsel with any and all
documentation, information, assistance and cooperation that may become necessary
from time to time with respect to the transactions contemplated by this
Agreement.
d. Notices. Any notice, report or other communication hereunder shall be
in writing and shall be given to the Person entitled thereto by hand delivery,
prepaid certified mail or overnight service, addressed to CIP or IEF, as
applicable, at the addresses set forth below. If the notice is sent by certified
mail, it shall be deemed to have been given to the Person entitled thereto five
(5) business days after being deposited in the United States mail and if the
notice is sent by overnight service, it shall be deemed to have been given to
the Person entitled thereto one (1) business day after it was deposited with the
courier service for delivery to that Person. Notice of any change in any address
listed below also shall be given in the manner set forth above. Whenever the
giving of notice is required, the giving of such notice may be waived by the
party entitled to receive such notice.
<TABLE>
<S> <C>
If to CIP, to: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Arthur Zeikel
With a copy to: Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Joel H. Goldberg, Esq.
If to IEF, to: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Terry K. Glenn
With a copy to: Brown & Wood LLP
One World Trade Center
New York, New York 10048
Attention: Frank P. Bruno, Esq.
</TABLE>
e. Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the matters contemplated herein and
supersedes all previous agreements or understandings between the parties related
to such matters.
f. Amendment. Except as set forth in Section 9(d) hereof, this Agreement
may be amended, modified, superseded, canceled, renewed or extended, and the
terms or covenants hereof may be waived, only by a written instrument executed
by all of the parties hereto or, in the case of a waiver, by the party waiving
compliance. Except as otherwise specifically provided in this Agreement, no
waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or at any prior or subsequent time.
g. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of [New York] applicable to agreements made and to be performed in
said state, without giving effect to the principles of conflict of laws thereof.
I-20
<PAGE> 65
h. Assignment. This Agreement shall not be assigned by any of the parties
hereto, in whole or in part, whether by operation of law or otherwise, without
the prior written consent of the other party hereto. Any purported assignment
contrary to the terms hereof shall be null, void and of no effect.
i. Fees and Expenses. With respect to expenses incurred in connection with
the Reorganization, (i) IEF shall pay all expenses incurred which are solely
attributable to IEF and the conduct of its business, (ii) CIP shall pay all
expenses incurred which are solely attributable to CIP and the conduct of its
business, and (iii) CIP and IEF shall pay all other expenses incurred in
connection with the Reorganization pro rata according to each trust's net assets
on the Valuation Date, including, but not limited to, all costs related to the
preparation and distribution of the N-14 Registration Statement. Such fees and
expenses shall include costs of preparing and filing a Ruling, legal and
accounting fees, state securities fees (if any), printing costs, filing fees,
portfolio transfer taxes (if any), and any similar expenses incurred in
connection with the Reorganization. If for any reason the Reorganization is not
consummated, a party shall not be liable to the other party hereto for any
damages resulting therefrom, including, without limitation, consequential
damages, except to the extent that such party acted with willful misfeasance,
bad faith, willful misconduct or reckless disregard.
j. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
k. Headings. Headings to sections in this Agreement are intended solely
for convenience and no provision of this Agreement is to be construed by
reference to the heading of any section.
l. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall be deemed to be
an original but all such counterparts together shall constitute but one
instrument.
m. Personal Liability.
i. The Declaration of Trust establishing CIP dated June 26, 1992, a copy of
which, together with all amendments thereto (the "CIP Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Consults International Portfolio" refers to the
Trustees under the CIP Declaration collectively as Trustees, but not as
individuals or personally, and no Trustee, shareholder, officer, employee or
agent of CIP shall be held to any personal liability, nor shall resort be had to
their private property for satisfaction of any obligation or claim or otherwise
in connection with the affairs of CIP, but the Trust Property (as defined in the
CIP Declaration) only shall be liable.
ii. The Declaration of Trust establishing IEF dated June 7, 1993, a copy of
which, together with all amendments thereto (the "IEF 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 IEF Declaration collectively as Trustees, but not as individuals or
personally, and no Trustee, shareholder, officer, employee or agent of IEF shall
be held to any personal liability, nor shall resort be had to their private
property for satisfaction of any obligation or claim or otherwise in connection
with the affairs of IEF, but the Trust Property (as defined in the IEF
Declaration) only shall be liable.
I-21
<PAGE> 66
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO
By:
------------------------------------
Name:
Title:
Attest:
---------------------------------
Name:
Title:
MERRILL LYNCH INTERNATIONAL
EQUITY FUND
By:
------------------------------------
Name:
Title:
Attest:
--------------------------------
Name:
Title:
I-22
<PAGE> 67
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER , 1999
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch
Consults International Portfolio ("Consults International Portfolio") and
Merrill Lynch International Equity Fund ("International Equity Fund") dated
[ , 1999] (the "Proxy Statement and Prospectus"), which has been
filed with the Securities and Exchange Commission and can be obtained, without
charge, by calling International Equity Fund at (800) MER-FUND, or by writing to
International Equity Fund at the above address. This Statement of Additional
Information has been incorporated by reference into the Proxy Statement and
Prospectus.
Further information about International Equity Fund is contained in and
incorporated by reference to its Prospectus, dated September 29, 1999, and its
Statement of Additional Information, dated September 29, 1999, which are
incorporated by reference into this Statement of Additional Information.
International Equity Fund's Statement of Additional Information and Prospectus
accompany this Statement of Additional Information. International Equity Fund's
Annual Report to Shareholders for the year ended May 31, 1999 is incorporated
herein by reference and accompanies this Statement of Additional Information.
Further information about Consults International Portfolio is contained in
and incorporated by reference to its Prospectus, dated February 27, 1999, and
its Statement of Additional Information, dated February 27, 1999, which are
incorporated by reference into this Statement of Additional Information.
Consults International Portfolio's Statement of Additional Information and
Prospectus accompany this Statement of Additional Information. Consults
International Portfolio's Semi-Annual Report to Shareholders for the six months
ended April 30, 1999 is also incorporated herein by reference.
The Commission maintains a web site (http://www.sec.gov) that contains the
prospectus and statement of additional information of each of Consults
International Portfolio and International Equity Fund, other material
incorporated by reference and other information regarding Consults International
Portfolio and International Equity Fund.
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information......................................... 2
Financial Statements........................................ 2
Pro Forma Combined Schedule of Investments for International
Equity Fund and Consults International Portfolio as of May
31, 1999 (unaudited)...................................... F-1
Pro Forma Combined Statement of Assets and Liabilities for
International Equity Fund and Consults International
Portfolio as of May 31, 1999 (unaudited).................. F-10
Pro Forma Combined Statement of Operations for International
Equity Fund and Consults International Portfolio for the
year ended May 31, 1999 (unaudited)....................... F-12
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS [ , 1999].
<PAGE> 68
GENERAL INFORMATION
The shareholders of Consults International Portfolio are being asked to
approve the acquisition of substantially all of the assets, and assumption of
substantially all of the liabilities, of Consults International Portfolio by
International Equity Fund solely in exchange for an equal aggregate value of
newly-issued Class C shares of International Equity Fund (the "Reorganization").
International Equity Fund is an open-end management investment company organized
as a Massachusetts business trust. A Special Meeting of Shareholders of Consults
International Portfolio to consider the Reorganization will be held at 800
Scudders Mill Road, Plainsboro, New Jersey, on January 20, 2000, at 9:00 a.m.,
New York time.
For detailed information about the Reorganization, shareholders of Consults
International Portfolio should refer to the Proxy Statement and Prospectus. For
further information about International Equity Fund, Consults International
Portfolio shareholders should refer to International Equity Fund's Statement of
Additional Information and Prospectus, each dated September 29, 1999, and the
Annual Report to Shareholders of International Equity Fund for the year ended
May 31, 1999 each of which accompany this Statement of Additional Information
and are incorporated by reference herein. For further information about Consults
International Portfolio, shareholders should refer to Consults International
Portfolio's Statement of Additional Information and Prospectus, each dated
February 27, 1999, which accompany this Statement of Additional Information and
are incorporated by reference herein. Consults International Portfolio and
International Equity Fund sometimes are referred to herein collectively as the
"Funds" and individually as a "Fund," as the context requires. International
Equity Fund following the Reorganization is sometimes referred to herein as the
"Combined Fund."
FINANCIAL STATEMENTS
Pro forma financial statements reflecting consummation of the
Reorganization are included herein.
INTERNATIONAL EQUITY FUND
Audited financial statements and accompanying notes for the fiscal year
ended May 31, 1999 and the independent auditor's report thereon, dated July 16,
1999 of International Equity Fund are incorporated by reference from
International Equity Fund's Annual Report to Shareholders, which accompanies
this Statement of Additional Information.
CONSULTS INTERNATIONAL PORTFOLIO
Audited financial statements and accompanying notes for the fiscal year
ended October 31, 1998, and the independent auditor's report thereon, dated
December 3, 1998, of Consults International Portfolio are incorporated by
reference from Consults International Portfolio's Annual Report to Shareholders,
which accompanies this Statement of Additional Information. Unaudited financial
statements and accompanying notes for the six months ended April 30, 1999 for
Consults International Portfolio are incorporated by reference from Consults
International Portfolio's Semi-Annual Report to Shareholders for the six months
ended April 30, 1999, which is incorporated herein by reference.
2
<PAGE> 69
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL FUND
AS OF MAY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ FUND++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AFRICA
- -----------------------------------------------------------------------------------------------------------------------------------
South Africa Gold Mines 16,750 +Anglo American PLC 760,715 -- 760,715
22,500 AngloGold Limited 452,812 -- 452,812
(ADR)(a)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 1,213,527 -- 1,213,527
AFRICA
- -----------------------------------------------------------------------------------------------------------------------------------
EUROPE
- -----------------------------------------------------------------------------------------------------------------------------------
Austria Banks 8,000 Bank Austria AG 410,476 -- 410,476
--------------------------------------------------------------------------------------------------------------
Building Materials & 1,200 Wienerberger 210,672 -- 210,672
Components Baustoffindustrie
AG
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 621,148 -- 621,148
AUSTRIA
- -----------------------------------------------------------------------------------------------------------------------------------
Belgium Equity Basket 26,200 MSCI Belgium OPALS 2,052,508 -- 2,052,508
'B'(c)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 2,052,508 -- 2,052,508
BELGIUM
- -----------------------------------------------------------------------------------------------------------------------------------
Denmark Equity Basket 5,900 MSCI Denmark OPALS 816,678 -- 816,678
'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
Total Investments in 816,678 -- 816,678
Denmark
- -----------------------------------------------------------------------------------------------------------------------------------
Finland Equity Basket 6,000 MSCI Finland OPALS 1,632,000 -- 1,632,000
'B'(c)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 1,632,000 -- 1,632,000
FINLAND
- -----------------------------------------------------------------------------------------------------------------------------------
France Aerospace & Defense 10,000 Thomson CSF 322,487 -- 322,487
--------------------------------------------------------------------------------------------------------------
Automobiles 2,500 PSA Peugeot Citroen 370,975 -- 370,975
--------------------------------------------------------------------------------------------------------------
Banking 7,000 Banque Nationale de 591,052 -- 591,052
Paris (BNP)
7,000 Compagnie Financiere 760,760 -- 760,760
de Paribas (CFP)
2,500 Societe Generale 'A' 455,097 -- 455,097
----------- ----------- -----------
1,806,909 -- 1,806,909
--------------------------------------------------------------------------------------------------------------
Building Materials & 4,900 Compagnie de Saint 770,635 -- 770,635
Components 5,600 Gobain 505,613 -- 505,613
Lafarge SA
(Ordinary)
----------- ----------- -----------
1,276,248 -- 1,276,248
--------------------------------------------------------------------------------------------------------------
Business & Public Services 2,000 Cap Gemini SA 288,629 -- 288,629
6,900 Suez Lyonnaise des 1,145,748 -- 1,145,748
Eaux
17,100 Vivendi 1,268,735 -- 1,268,735
17,100 Vivendi (Rights)(e) 17,691 -- 17,691
----------- ----------- -----------
2,720,803 -- 2,720,803
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 8,800 Schneider SA 524,172 -- 524,172
--------------------------------------------------------------------------------------------------------------
Energy Equipment & Services 6,000 Coflexip 490,314 -- 490,314
--------------------------------------------------------------------------------------------------------------
Energy Sources 7,000 Elf Aquitaine SA 1,015,322 -- 1,015,322
20,700 +Total SA 'B' 1,120,031 1,400,039 2,520,070
----------- ----------- -----------
2,135,353 1,400,039 3,535,392
--------------------------------------------------------------------------------------------------------------
Food & Household Products 8,400 Groupe Danone(a) 855,228 1,462,164 2,317,392
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 800 L'Oreal SA 482,790 -- 482,790
7,500 Rhone-Poulenc SA 356,606 -- 356,606
----------- ----------- -----------
839,396 -- 839,396
--------------------------------------------------------------------------------------------------------------
Industrial Components 6,500 Compagnie Generale 287,187 -- 287,187
des Etablissements
Michelin 'B'
--------------------------------------------------------------------------------------------------------------
Insurance 26,900 Axa 1,558,879 1,547,332 3,106,211
--------------------------------------------------------------------------------------------------------------
Manufacturing 63,600 +Sanofi-Synthelabo 1,334,089 1,350,976 2,685,065
SA
--------------------------------------------------------------------------------------------------------------
Merchandising 6,600 Carrefour SA 867,643 -- 867,643
9,300 Pinault-Printemps- 904,437 682,594 1,587,031
Redoute SA
850 Promodes 556,044 -- 556,044
----------- ----------- -----------
2,328,124 682,594 3,010,718
--------------------------------------------------------------------------------------------------------------
Metals -- Steel 30,000 Usinor SA 409,431 -- 409,431
--------------------------------------------------------------------------------------------------------------
Recreation/Other Consumer 7,500 LVMH (Louis Vuitton 418,679 1,674,717 2,093,396
Goods Moet Hennessy)
--------------------------------------------------------------------------------------------------------------
Telecommunications 18,282 France Telecom SA 1,404,195 -- 1,404,195
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 19,082,469 8,117,822 27,200,291
FRANCE
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-1
<PAGE> 70
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Germany Automobiles 31,000 DaimlerChrysler AG
11,000 Volkswagen AG
-----------------------------------------------------------------------------------------------------------
Banking 25,461 Deutsche Bank AG
36,600 HypoVereinsbank
-----------------------------------------------------------------------------------------------------------
Chemicals 23,300 BASF AG
26,200 Bayer AG
9,000 Hoechst AG
-----------------------------------------------------------------------------------------------------------
Electrical & Electronics 23,500 Siemens AG
-----------------------------------------------------------------------------------------------------------
Equity Basket 12,000 MSCI European OPALS 'B'(c)
-----------------------------------------------------------------------------------------------------------
Insurance 6,650 Allianz AG (Registered Shares)
5,350 Axa Colonia Konzern AG
-----------------------------------------------------------------------------------------------------------
Merchandising 950 Karstadt AG
-----------------------------------------------------------------------------------------------------------
Metals -- Steel 50,500 +Thyssen Krupp AG
-----------------------------------------------------------------------------------------------------------
Telecommunications 44,400 Deutsche Telekom AG
12,750 Mannesmann AG
-----------------------------------------------------------------------------------------------------------
Transportation -- Airlines 25,000 Deutsche Lufthansa AG (Registered
Shares)
-----------------------------------------------------------------------------------------------------------
Utilities -- Electric & Gas 18,500 RWE AG
10,400 RWE AG (Preferred)
17,500 Veba AG
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY
- ---------------------------------------------------------------------------------------------------------------------------------
Greece Telecommunications 10,500 Hellenic Telecommunications
Organization SA (OTE)
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE
- ---------------------------------------------------------------------------------------------------------------------------------
Hungary Banking 22,799 OTP Bank Rt. (GDR)(b)
-----------------------------------------------------------------------------------------------------------
Energy Sources 41,194 MOL Magyar Olaj-es Gazipari Rt.
(GDR)(b)
-----------------------------------------------------------------------------------------------------------
Health & Personal Care 3,500 EGIS Rt
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY
- ---------------------------------------------------------------------------------------------------------------------------------
Ireland Banking 27,500 Bank of Ireland
-----------------------------------------------------------------------------------------------------------
Building Materials & Components 21,000 CRH PLC
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN IRELAND
- ---------------------------------------------------------------------------------------------------------------------------------
Italy Banking 60,000 San Paolo-IMI SpA
230,000 Unicredito Italiano SpA
-----------------------------------------------------------------------------------------------------------
Energy Sources 310,000 ENI SpA
-----------------------------------------------------------------------------------------------------------
Insurance 50,000 Assicurazioni Generali
-----------------------------------------------------------------------------------------------------------
Natural Gas -- Utilities 140,000 Italgas SpA
-----------------------------------------------------------------------------------------------------------
Telecommunications 272,230 Telecom Italia SpA (Registered)
356,000 Telecom Italia SpA
-----------------------------------------------------------------------------------------------------------
Tires & Rubber 240,000 Pirelli SpA
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY
- ---------------------------------------------------------------------------------------------------------------------------------
Netherlands Appliances & Household Durables 25,300 +Koninklijke (Royal) Philips
Electronics NV
-----------------------------------------------------------------------------------------------------------
Banking 64,000 ABN AMRO Holding NV
-----------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 28,000 Wolters Kluwer NV 'A'
-----------------------------------------------------------------------------------------------------------
Business & Public Services 31,500 TNT Post Group NV
-----------------------------------------------------------------------------------------------------------
Chemicals 28,400 Akzo Nobel NV
-----------------------------------------------------------------------------------------------------------
Energy Sources 28,300 Royal Dutch Petroleum Company
-----------------------------------------------------------------------------------------------------------
Financial Services 38,000 ING Groep NV
-----------------------------------------------------------------------------------------------------------
Food & Household Products 9,821 Unilever NV 'A'
-----------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
Germany 2,680,686 -- 2,680,686
682,803 -- 682,803
----------- ----------- -----------
3,363,489 -- 3,363,489
--------------------------------------------
1,330,337 -- 1,330,337
887,748 1,093,446 1,981,194
----------- ----------- -----------
2,218,085 1,093,446 3,311,531
--------------------------------------------
908,199 -- 908,199
1,021,237 -- 1,021,237
401,593 -- 401,593
----------- ----------- -----------
2,331,029 -- 2,331,029
--------------------------------------------
1,583,959 -- 1,583,959
--------------------------------------------
990,000 -- 990,000
--------------------------------------------
1,820,704 -- 1,820,704
503,168 -- 503,168
----------- ----------- -----------
2,323,872 -- 2,323,872
--------------------------------------------
393,129 -- 393,129
--------------------------------------------
997,400 -- 997,400
--------------------------------------------
1,774,724 -- 1,774,724
--------------------------------------------
1,745,411 -- 1,745,411
----------- ----------- -----------
3,520,135 -- 3,520,135
--------------------------------------------
538,175 -- 538,175
--------------------------------------------
828,398 -- 828,398
305,391 -- 305,391
1,000,326 -- 1,000,326
----------- ----------- -----------
2,134,115 -- 2,134,115
--------------------------------------------
20,393,388 1,093,446 21,486,834
- -------------------------------------------------------------------
Greece 228,070 -- 228,070
--------------------------------------------
228,070 -- 228,070
- -------------------------------------------------------------------
Hungary 986,057 -- 986,057
--------------------------------------------
988,656 -- 988,656
--------------------------------------------
73,091 -- 73,091
--------------------------------------------
2,047,804 -- 2,047,804
- -------------------------------------------------------------------
Ireland 517,427 -- 517,427
--------------------------------------------
362,732 -- 362,732
--------------------------------------------
880,159 -- 880,159
- -------------------------------------------------------------------
Italy 811,965 -- 811,965
1,083,978 -- 1,083,978
----------- ----------- -----------
1,895,943 -- 1,895,943
--------------------------------------------
1,940,461 -- 1,940,461
--------------------------------------------
1,781,725 -- 1,781,725
--------------------------------------------
-- 601,293 601,293
--------------------------------------------
1,482,143 -- 1,482,143
1,755,182 1,920,376 3,675,558
----------- ----------- -----------
3,237,325 1,920,376 5,157,701
--------------------------------------------
674,652 674,652
--------------------------------------------
8,855,454 3,196,321 12,051,775
- -------------------------------------------------------------------
Netherlands 1,744,810 429,756 2,174,566
--------------------------------------------
1,421,200 -- 1,421,200
--------------------------------------------
1,127,973 1,127,973
--------------------------------------------
793,312 -- 793,312
--------------------------------------------
1,181,184 1,181,184
--------------------------------------------
1,579,225 -- 1,579,225
--------------------------------------------
2,035,138 -- 2,035,138
--------------------------------------------
654,291 -- 654,291
--------------------------------------------
</TABLE>
F-2
<PAGE> 71
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications 20,000 KPN NV
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NETHERLANDS
- -----------------------------------------------------------------------------------------------------------------------------------
Norway Equity Basket 10,500 MSCI Norway OPALS 'B'(c)
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORWAY
- -----------------------------------------------------------------------------------------------------------------------------------
Poland Banks 14,000 Bank Rozwoju Eksportu SA (BRE)
-------------------------------------------------------------------------------------------------------------
Trading Companies & Distributors 7,000 Elektrim Spolka Akcyjna SA
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND
- -----------------------------------------------------------------------------------------------------------------------------------
Portugal Equity Basket 23,200 MSCI Portugal OPALS 'B'(c)(d)
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PORTUGAL
- -----------------------------------------------------------------------------------------------------------------------------------
Spain Banking 72,000 Banco Santander Central Hispano, SA
-------------------------------------------------------------------------------------------------------------
Construction & Housing 8,400 +Dragados & Construcciones, SA
-------------------------------------------------------------------------------------------------------------
4,650 Fomento de Construcciones y Contratas SA
-------------------------------------------------------------------------------------------------------------
Electric Utilities 104,000 Endesa SA
-------------------------------------------------------------------------------------------------------------
Energy Sources 98,400 Repsol, SA
-------------------------------------------------------------------------------------------------------------
Equity Basket 8,800 MSCI Spain OPALS 'B'()(c)
-------------------------------------------------------------------------------------------------------------
Telecommunications 30,600 +Telefonica SA
612 +Telefonica SA (New Shares)
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN
- -----------------------------------------------------------------------------------------------------------------------------------
Sweden Appliances & Household Durables 102,000 Electrolux AB 'B'
-------------------------------------------------------------------------------------------------------------
Automobiles 13,000 Volvo AB 'B'
-------------------------------------------------------------------------------------------------------------
Banking 20,000 Skandinaviska Enskilda Banken (SEB) 'A'
19,000 Svenska Handelsbanken 'A'
-------------------------------------------------------------------------------------------------------------
Electrical & Electronics 100,000 Telefonaktiebolaget LM Ericsson 'B'
-------------------------------------------------------------------------------------------------------------
Equity Basket 8,000 MSCI Sweden OPALS 'B'(c)(d)
-------------------------------------------------------------------------------------------------------------
Forest Products & Paper 10,000 Svenska Cellulosa AB (SCA) 'B'
-------------------------------------------------------------------------------------------------------------
Merchandising 28,000 Hennes & Mauritz AB 'B'
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN
- -----------------------------------------------------------------------------------------------------------------------------------
Switzerland Banking 8,450 Credit Suisse Group (Registered Shares)
3,000 UBS AG (Registered Shares)
-------------------------------------------------------------------------------------------------------------
Health & Personal Care 1,950 Novartis AG (Registered Shares)
130 Roche Holding AG
-------------------------------------------------------------------------------------------------------------
Food & Household Products 1,400 Nestle SA (Registered Shares)
-------------------------------------------------------------------------------------------------------------
Insurance 190 Schweizerische
Rueckversicherungs-Gesellschaft
(Registered Shares)
600 Zurich Allied AG
-------------------------------------------------------------------------------------------------------------
Telecommunications 4,150 Swisscom AG (Registered Shares)
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND
- -----------------------------------------------------------------------------------------------------------------------------------
United Kingdom Aerospace & Military Technology 128,000 British Aerospace PLC
-------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
967,670 -- 967,670
--------------------------------------------
9,195,646 2,738,913 11,934,559
- -------------------------------------------------------------------
Norway 926,730 -- 926,730
--------------------------------------------
926,730 -- 926,730
- -------------------------------------------------------------------
Poland 376,571 -- 376,571
--------------------------------------------
81,825 -- 81,825
--------------------------------------------
458,396 -- 458,396
- -------------------------------------------------------------------
Portugal 1,574,120 -- 1,574,120
--------------------------------------------
1,574,120 -- 1,574,120
- -------------------------------------------------------------------
Spain 1,504,800 -- 1,504,800
--------------------------------------------
290,991 -- 290,991
--------------------------------------------
267,745 -- 267,745
----------- ----------- -----------
558,736 -- 558,736
--------------------------------------------
1,365,021 853,138 2,218,159
--------------------------------------------
533,351 1,251,743 1,785,094
--------------------------------------------
1,033,736 -- 1,033,736
--------------------------------------------
1,470,302 -- 1,470,302
29,406 -- 29,406
----------- ----------- -----------
1,499,708 -- 1,499,708
--------------------------------------------
6,495,352 2,104,881 8,600,233
- -------------------------------------------------------------------
Sweden 621,341 1,359,184 1,980,525
--------------------------------------------
330,496 -- 330,496
--------------------------------------------
242,566 -- 242,566
687,988 -- 687,988
----------- ----------- -----------
930,554 -- 930,554
--------------------------------------------
1,686,122 990,262 2,676,384
--------------------------------------------
1,722,000 -- 1,722,000
--------------------------------------------
233,236 -- 233,236
--------------------------------------------
630,204 -- 630,204
--------------------------------------------
6,153,953 2,349,446 8,503,399
- -------------------------------------------------------------------
Switzerland 601,085 871,137 1,472,222
871,795 -- 871,795
----------- ----------- -----------
1,472,880 871,137 2,344,017
--------------------------------------------
1,384,089 1,456,936 2,841,025
1,381,197 -- 1,381,197
----------- ----------- -----------
2,765,286 1,456,936 4,222,222
--------------------------------------------
992,604 1,534,024 2,526,628
--------------------------------------------
361,887 -- 361,887
354,241 -- 354,241
----------- ----------- -----------
716,128 -- 716,128
--------------------------------------------
1,500,657 -- 1,500,657
--------------------------------------------
7,447,555 3,862,097 11,309,652
- -------------------------------------------------------------------
United Kingdom 843,896 -- 843,896
--------------------------------------------
</TABLE>
F-3
<PAGE> 72
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banking 32,000 Abbey National PLC
40,000 Bank of Scotland
32,000 Barclays PLC
32,724 HSBC Holdings PLC
86,000 Lloyds TSB Group PLC
37,500 National Westminster Bank PLC
--------------------------------------------------------------------------------------------------------------
Beverages 55,000 Cadbury Schweppes PLC
295,500 Diageo PLC
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 82,500 WPP Group PLC
--------------------------------------------------------------------------------------------------------------
Building Materials & Components 65,000 RMC Group PLC
--------------------------------------------------------------------------------------------------------------
Business & Public Services 80,000 Securicor PLC
137,500 Shanks & McEwan Group PLC
--------------------------------------------------------------------------------------------------------------
Construction & Housing 50,000 The Berkeley Group PLC
--------------------------------------------------------------------------------------------------------------
Data Processing & Reproduction 82,500 Computacenter PLC
--------------------------------------------------------------------------------------------------------------
Energy 60,000 British Energy PLC
--------------------------------------------------------------------------------------------------------------
Energy Sources 309,500 BP Amoco PLC
--------------------------------------------------------------------------------------------------------------
Financial Services 75,000 Allied Zurich PLC
52,000 +Halifax
20,000 Schroders PLC
--------------------------------------------------------------------------------------------------------------
Food & Household Products 142,285 Unilever PLC
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 35,000 AstraZeneca Group PLC
80,000 Glaxo Wellcome PLC
124,000 Nycomed Amersham PLC
101,100 SmithKline Beecham PLC
--------------------------------------------------------------------------------------------------------------
Industrial Components 110,000 BBA Group PLC
--------------------------------------------------------------------------------------------------------------
Insurance 160,000 Prudential Corporation PLC
177,273 Royal & Sun Alliance Insurance Group PLC
25,515 Sun Life and Provincial Holdings PLC
--------------------------------------------------------------------------------------------------------------
Leisure & Tourism 30,000 Bass PLC
90,000 Carlton Communications PLC
--------------------------------------------------------------------------------------------------------------
Machinery & Engineering 30,000 GKN PLC
--------------------------------------------------------------------------------------------------------------
Merchandising 220,000 ASDA Group PLC
14,000 Dixons Group PLC
130,000 The Great Universal Stores PLC
75,000 J Sainsbury PLC
625,000 Tesco PLC
--------------------------------------------------------------------------------------------------------------
Metals -- Nonferrous 24,000 Rio Tinto PLC (Registered Shares)
--------------------------------------------------------------------------------------------------------------
Miscellaneous Materials & Commodities 137,500 Rexam PLC
--------------------------------------------------------------------------------------------------------------
Multi-Industry 126,321 BTR Siebe PLC
--------------------------------------------------------------------------------------------------------------
Retail 80,000 Boots Company PLC
--------------------------------------------------------------------------------------------------------------
Telecommunications 165,000 British Telecommunications PLC
50,000 Cable & Wireless PLC
130,000 Vodafone Group PLC
--------------------------------------------------------------------------------------------------------------
Transportation -- Airlines 227,000 British Airways PLC
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
660,975 -- 660,975
556,577 -- 556,577
969,943 -- 969,943
1,092,491 -- 1,092,491
1,136,051 -- 1,136,051
859,844 -- 859,844
----------- ----------- -----------
5,275,881 -- 5,275,881
-------------------------------------------
372,739 -- 372,739
1,545,246 1,561,014 3,106,260
----------- ----------- -----------
1,917,985 1,561,014 3,478,999
-------------------------------------------
665,779 -- 665,779
-------------------------------------------
866,970 -- 866,970
-------------------------------------------
717,338 -- 717,338
512,984 -- 512,984
----------- ----------- -----------
1,230,322 -- 1,230,322
-------------------------------------------
551,613 -- 551,613
-------------------------------------------
541,606 -- 541,606
-------------------------------------------
535,601 -- 535,601
-------------------------------------------
4,068,929 1,466,603 5,535,532
-------------------------------------------
955,916 955,916
671,095 -- 671,095
415,992 -- 415,992
----------- ----------- -----------
1,087,087 955,916 2,043,003
-------------------------------------------
1,250,769 -- 1,250,769
-------------------------------------------
1,390,402 -- 1,390,402
1,374,598 869,644 2,244,242
882,549 -- 882,549
1,317,714 -- 1,317,714
----------- ----------- -----------
4,965,263 869,644 5,834,907
-------------------------------------------
778,503 -- 778,503
-------------------------------------------
791,153 1,318,588 2,109,741
1,449,050 -- 1,449,050
192,732 -- 192,732
----------- ----------- -----------
2,432,935 1,318,588 3,751,523
-------------------------------------------
442,412 -- 442,412
716,937 -- 716,937
----------- ----------- -----------
1,159,349 -- 1,159,349
-------------------------------------------
500,775 -- 500,775
-------------------------------------------
623,507 -- 623,507
251,292 -- 251,292
1,386,319 -- 1,386,319
455,742 -- 455,742
1,818,863 -- 1,818,863
----------- ----------- -----------
4,535,723 -- 4,535,723
-------------------------------------------
351,624 -- 351,624
-------------------------------------------
543,808 -- 543,808
-------------------------------------------
575,444 -- 575,444
-------------------------------------------
-- 1,045,263 1,045,263
-------------------------------------------
2,750,301 -- 2,750,301
616,462 -- 616,462
2,474,975 -- 2,474,975
----------- ----------- -----------
5,841,738 -- 5,841,738
-------------------------------------------
337,149 1,291,208 1,628,357
-------------------------------------------
</TABLE>
F-4
<PAGE> 73
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utilities -- Electrical & Gas 290,058 BG PLC
50,000 National Power PLC
50,000 Scottish Power PLC
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN UNITED KINGDOM
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE
- ------------------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
- ------------------------------------------------------------------------------------------------------------------------------------
Argentina Oil & Gas Producers 25000 YPF Sociedad Anonima (ADR)(a)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ARGENTINA
- ------------------------------------------------------------------------------------------------------------------------------------
Brazil Equity Basket 55,000 MSCI Brazil OPALS(c)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL
- ------------------------------------------------------------------------------------------------------------------------------------
Chile Financial Investment Fund 24,750 +Genesis Chile Fund
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHILE
- ------------------------------------------------------------------------------------------------------------------------------------
Mexico Foreign Bonds 1,923,000 Mexican Par Bond (Rights)(e)
USD1,250,000 United Mexican States, 'C', 6.201% due
12/31/2019
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN AMERICA
- ------------------------------------------------------------------------------------------------------------------------------------
MIDDLE EAST
- ------------------------------------------------------------------------------------------------------------------------------------
Israel Industrial Conglomerates 8,109 Koor Industries Limited (ADR)(a)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MIDDLE EAST
- ------------------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
- ------------------------------------------------------------------------------------------------------------------------------------
Canada Aerospace & Military Technology 27,760 Bombardier Inc. 'B'
--------------------------------------------------------------------------------------------------------------
Banking 3,360 Bank of Montreal
7,210 Royal Bank of Canada
5,140 The Toronto-Dominion Bank
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 12,090 Seagram Company
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 17,980 +Rogers Communications, Inc. 'B'
--------------------------------------------------------------------------------------------------------------
Business & Public Services 34,890 Laidlaw Inc.
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 6,470 +Newbridge Networks Corporation
--------------------------------------------------------------------------------------------------------------
Energy Sources 8,590 Alberta Energy Company Ltd.
22,520 +Renaissance Energy Ltd.
9,120 Suncor Energy, Inc.
--------------------------------------------------------------------------------------------------------------
Forest Products & Paper 21,410 Abitibi-Consolidated Inc.
--------------------------------------------------------------------------------------------------------------
Gold Mines 18,210 Placer Dome Inc.
--------------------------------------------------------------------------------------------------------------
Merchandising 6,510 Canadian Tire Corp. 'A'
--------------------------------------------------------------------------------------------------------------
Metals -- Nonferrous 14,730 Inco Limited
--------------------------------------------------------------------------------------------------------------
Telecommunications 8,160 BCE Inc.
15,450 Nortel Networks Corporation
7,190 Teleglobe Inc.
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
NORTH AMERICA
- ------------------------------------------------------------------------------------------------------------------------------------
PACIFIC BASIN/ASIA
- ------------------------------------------------------------------------------------------------------------------------------------
Australia Banking 41,200 National Australia Bank Limited
45,000 Westpac Banking Corporation Limited
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 44,000 Foster's Brewing Group Limited
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
714,495 879,698 1,594,193
389,292 -- 389,292
430,723 -- 430,723
----------- ----------- -----------
1,534,510 879,698 2,414,208
-------------------------------------------
42,393,259 9,387,934 51,781,193
-------------------------------------------
131,254,689 32,850,860 164,105,549
- -------------------------------------------------------------------
LATIN AMERICA
- -------------------------------------------------------------------
Argentina -- 1,053,125 1,053,125
-------------------------------------------
-- 1,053,125 1,053,125
- -------------------------------------------------------------------
Brazil 2,072,950 -- 2,072,950
-------------------------------------------
2,072,950 -- 2,072,950
- -------------------------------------------------------------------
Chile 730,125 -- 730,125
-------------------------------------------
730,125 -- 730,125
- -------------------------------------------------------------------
Mexico 19 -- 19
1,037,500 -- 1,037,500
-------------------------------------------
1,037,519 -- 1,037,519
- -------------------------------------------------------------------
3,840,594 1,053,125 4,893,719
- -------------------------------------------------------------------
MIDDLE EAST
- -------------------------------------------------------------------
Israel 174,850 -- 174,850
-------------------------------------------
174,850 -- 174,850
- -------------------------------------------------------------------
NORTH AMERICA
- -------------------------------------------------------------------
Canada 432,305 -- 432,305
-------------------------------------------
128,985 -- 128,985
330,959 -- 330,959
271,943 -- 271,943
----------- ----------- -----------
731,887 -- 731,887
-------------------------------------------
633,070 -- 633,070
-------------------------------------------
371,705 -- 371,705
-------------------------------------------
246,757 -- 246,757
-------------------------------------------
178,854 -- 178,854
-------------------------------------------
248,266 -- 248,266
286,382 -- 286,382
344,520 -- 344,520
----------- ----------- -----------
879,168 -- 879,168
-------------------------------------------
219,851 -- 219,851
-------------------------------------------
203,090 -- 203,090
-------------------------------------------
194,348 -- 194,348
-------------------------------------------
210,357 -- 210,357
-------------------------------------------
376,509 -- 376,509
1,161,508 -- 1,161,508
218,071 -- 218,071
----------- ----------- -----------
1,379,579 -- 1,379,579
-------------------------------------------
6,057,480 -- 6,057,480
- -------------------------------------------------------------------
PACIFIC BASIN/ASIA
- -------------------------------------------------------------------
Australia 668,759 -- 668,759
308,815 -- 308,815
----------- ----------- -----------
977,574 -- 977,574
-------------------------------------------
124,926 -- 124,926
-------------------------------------------
</TABLE>
F-5
<PAGE> 74
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting & Publishing 93,800 The News Corporation Limited
31,500 The News Corporation Limited (Preferred)
19,500 Publishing & Broadcasting Limited
--------------------------------------------------------------------------------------------------------------
Building Materials & Components 81,000 Pioneer International Limited
--------------------------------------------------------------------------------------------------------------
Business & Public Services 6,000 Brambles Industries Limited
--------------------------------------------------------------------------------------------------------------
Chemicals 31,500 Orica Limited
--------------------------------------------------------------------------------------------------------------
Energy Sources 51,000 Broken Hill Proprietary Company Limited
23,600 Woodside Petroleum Limited
--------------------------------------------------------------------------------------------------------------
Gold Mines 80,000 +Newcrest Mining
93,000 Normandy Mining Limited
--------------------------------------------------------------------------------------------------------------
Insurance 23,500 +AMP Limited
42,800 National Mutual Holdings Limited
33,800 QBE Insurance Group Limited
--------------------------------------------------------------------------------------------------------------
Merchandising 18,800 Coles Myer Limited
35,000 Woolworths Limited
--------------------------------------------------------------------------------------------------------------
Metals -- Nonferrous 200,000 M.I.M. Holdings Limited
67,500 WMC Limited
--------------------------------------------------------------------------------------------------------------
Real Estate 24,700 Lend Lease Corporation Limited
18,700 Westfield Holdings Limited
--------------------------------------------------------------------------------------------------------------
Telecommunications 33,000 +AAPT Limited
168,600 +Telstra Corporation Limited
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA
- ------------------------------------------------------------------------------------------------------------------------------------
Hong Kong Multi-Industry 65000 Hutchison Whampoa Limited
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG
- ------------------------------------------------------------------------------------------------------------------------------------
Japan Appliances & Household Durables 24,600 Sony Corporation
--------------------------------------------------------------------------------------------------------------
Automobiles 115,000 Fuji Heavy Industries, Ltd.
39,000 Toyota Motor Corporation
--------------------------------------------------------------------------------------------------------------
Banking 144,000 The Asahi Bank, Ltd.
40,000 The Bank of Tokyo-Mitsubishi, Ltd.
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 74 Japan Tobacco, Inc.
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 16,000 Nippon Broadcasting System, Incorporated
1,350 Nippon Television Network Corp.
--------------------------------------------------------------------------------------------------------------
Building Materials & Components 116,000 Sekisui Chemical Co., Ltd.
--------------------------------------------------------------------------------------------------------------
Business & Public Services 39,000 Ricoh Co., Ltd.
--------------------------------------------------------------------------------------------------------------
Chemicals 94,000 Kaneka Corporation
39,000 Shin-Etsu Chemical Co., Ltd.
144,000 Toray Industries, Inc.
--------------------------------------------------------------------------------------------------------------
Construction & Housing 161,000 Nishimatsu Construction Co., Ltd.
--------------------------------------------------------------------------------------------------------------
Convertible Bonds USD1,070,000 MBL International Finance (Bermuda), 3%
due 11/30/2002
--------------------------------------------------------------------------------------------------------------
Data Processing and Reproduction 179,000 Fujitsu Limited
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
776,868 -- 776,868
240,941 -- 240,941
122,836 -- 122,836
----------- ----------- -----------
1,140,645 -- 1,140,645
-------------------------------------------
188,645 -- 188,645
-------------------------------------------
160,423 -- 160,423
-------------------------------------------
174,544 -- 174,544
-------------------------------------------
524,752 -- 524,752
147,444 -- 147,444
----------- ----------- -----------
672,196 -- 672,196
-------------------------------------------
149,158 -- 149,158
67,533 -- 67,533
----------- ----------- -----------
216,691 -- 216,691
-------------------------------------------
256,433 -- 256,433
70,839 -- 70,839
132,672 -- 132,672
----------- ----------- -----------
459,944 -- 459,944
-------------------------------------------
98,552 -- 98,552
117,004 -- 117,004
----------- ----------- -----------
215,556 -- 215,556
-------------------------------------------
108,597 -- 108,597
250,820 -- 250,820
----------- ----------- -----------
359,417 -- 359,417
-------------------------------------------
313,609 -- 313,609
110,714 -- 110,714
----------- ----------- -----------
424,323 -- 424,323
-------------------------------------------
119,601 -- 119,601
573,241 262,818 836,059
----------- ----------- -----------
692,842 262,818 955,660
-------------------------------------------
5,807,726 262,818 6,070,544
- ------------------------------------------------------------------
Hong Kong -- 540,689 540,689
-------------------------------------------
-- 540,689 540,689
- ------------------------------------------------------------------
Japan 950,588 1,364,706 2,315,294
-------------------------------------------
752,693 -- 752,693
1,066,280 -- 1,066,280
----------- ----------- -----------
1,818,973 -- 1,818,973
-------------------------------------------
685,998 -- 685,998
536,868 536,868
----------- ----------- -----------
685,998 536,868 1,222,866
-------------------------------------------
741,839 -- 741,839
-------------------------------------------
689,312 -- 689,312
469,760 -- 469,760
----------- ----------- -----------
1,159,072 -- 1,159,072
-------------------------------------------
718,873 -- 718,873
-------------------------------------------
432,974 -- 432,974
-------------------------------------------
822,403 -- 822,403
745,650 466,031 1,211,681
700,315 -- 700,315
----------- ----------- -----------
2,268,368 466,031 2,734,399
-------------------------------------------
888,368 -- 888,368
-------------------------------------------
1,182,350 -- 1,182,350
-------------------------------------------
1,322,121 1,673,571 2,995,692
-------------------------------------------
</TABLE>
F-6
<PAGE> 75
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electrical & Electronics 118,000 Hitachi Ltd.
29,000 Square Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Electronic Components & 5,000 Keyence Corporation
Instrumentation 15,000 Murata Manufacturing Co., Ltd.
38 +NTT Mobile Communications Network, Inc.
7,000 Rohm Company Ltd.
-------------------------------------------------------------------------------------------------------------
Financial Investment Company 13,000 Jafco Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Diversified Financials 123,000 Daiwa Securities Group Inc.
120,000,000 +Sanwa International Finance Ltd.
(Convertible Preferred)
130 Shohkoh Fund & Co., Ltd.
12,700 Takefuji Corporation
-------------------------------------------------------------------------------------------------------------
Health & Personal Care 48,000 Fujisawa Pharmacturical Co., Ltd.
29,000 Sankyo Company, Ltd.
9,000 Taisho Pharmaceutical Company, Ltd.
19,000 Takeda Chemical Industries, Ltd.
-------------------------------------------------------------------------------------------------------------
Industrial Components 68,000 Bridgestone Corp.
131,000 NSK Limited
-------------------------------------------------------------------------------------------------------------
Insurance 136,000 Mitsui Marine and Fire Insurance Company,
Ltd.
-------------------------------------------------------------------------------------------------------------
Machinery & Engineering 118,000 Komatsu Ltd.
4,400 THK Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Merchandising 2,000 Art Vivant Co., Ltd.
31,000 Ito-Yokado Co., Ltd.
46,000 Uny Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Metals -- Steel 324,000 Nippon Steel Corporation
-------------------------------------------------------------------------------------------------------------
Multi-Industry 54,000 Ibiden Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Non Index 660,099 Nikkei 225 (Warrant)(g)
-------------------------------------------------------------------------------------------------------------
Real Estate 85,000 Mitsui Fudosan Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Telecommunications 140 Nippon Telegraph & Telephone Corporation
(NTT)
-------------------------------------------------------------------------------------------------------------
Transportation -- Road 134 East Japan Railway Company
& Rail 116,000 Nippon Express Co., Ltd.
-------------------------------------------------------------------------------------------------------------
Wholesale & International 81,000 Mitsui & Co., Ltd.
Trade 6,400 Softbank Corporation
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN
- -----------------------------------------------------------------------------------------------------------------------------------
New Zealand Broadcasting & Publishing 127,270 +Sky Network Television Limited
-------------------------------------------------------------------------------------------------------------
Energy Sources 90,270 Fletcher Challenge Energy
-------------------------------------------------------------------------------------------------------------
Forest Products & Paper 321,410 Fletcher Challenge Paper
-------------------------------------------------------------------------------------------------------------
Telecommunications 81,970 Telecom Corporation of New Zealand
Limited
-------------------------------------------------------------------------------------------------------------
Total Investments in New Zealand
- -----------------------------------------------------------------------------------------------------------------------------------
Philippines Equity Basket 15,000 MSCI Philippines OPALS 'B'()(c)
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PHILIPPINES
- -----------------------------------------------------------------------------------------------------------------------------------
Singapore Equity Basket 64,000 MSCI Singapore OPALS 'B'(c)
-------------------------------------------------------------------------------------------------------------
Telecommunications 151,000 Singapore Telecommunications, Ltd.
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- -------------------------------------------------------------------
<S> <C> <C> <C>
869,113 -- 869,113
915,410 -- 915,410
----------- ----------- -----------
1,784,523 -- 1,784,523
--------------------------------------------
724,938 -- 724,938
828,915 -- 828,915
2,081,027 -- 2,081,027
918,061 -- 918,061
----------- ----------- -----------
4,552,941 -- 4,552,941
--------------------------------------------
523,447 -- 523,447
--------------------------------------------
650,157 -- 650,157
1,028,998 -- 1,028,998
72,809 -- 72,809
1,120,588 -- 1,120,588
----------- ----------- -----------
2,872,552 -- 2,872,552
--------------------------------------------
755,195 -- 755,195
683,554 -- 683,554
288,567 -- 288,567
845,319 -- 845,319
----------- ----------- -----------
2,572,635 -- 2,572,635
--------------------------------------------
735,377 1,050,539 1,785,916
628,409 -- 628,409
----------- ----------- -----------
1,363,786 1,050,539 2,414,325
--------------------------------------------
685,070 -- 685,070
--------------------------------------------
701,939 -- 701,939
81,657 -- 81,657
----------- ----------- -----------
783,596 -- 783,596
--------------------------------------------
51,367 -- 51,367
716,819 1,134,963 1,851,782
691,715 -- 691,715
----------- ----------- -----------
1,459,901 1,134,963 2,594,864
--------------------------------------------
681,823 -- 681,823
--------------------------------------------
876,885 -- 876,885
--------------------------------------------
280,009 -- 280,009
--------------------------------------------
710,563 -- 710,563
--------------------------------------------
830,986 537,697 1,368,683
--------------------------------------------
777,133 -- 777,133
663,132 -- 663,132
----------- ----------- -----------
1,440,265 -- 1,440,265
--------------------------------------------
518,749 -- 518,749
737,034 -- 737,034
----------- ----------- -----------
1,255,783 -- 1,255,783
--------------------------------------------
34,844,289 6,764,375 41,608,664
- -------------------------------------------------------------------
New Zealand 200,220 -- 200,220
--------------------------------------------
216,883 -- 216,883
--------------------------------------------
273,459 -- 273,459
--------------------------------------------
353,529 -- 353,529
--------------------------------------------
1,044,091 -- 1,044,091
- -------------------------------------------------------------------
Philippines 716,400 -- 716,400
--------------------------------------------
716,400 -- 716,400
- -------------------------------------------------------------------
Singapore 2,956,160 -- 2,956,160
--------------------------------------------
254,804 -- 254,804
--------------------------------------------
3,210,964 -- 3,210,964
- -------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 76
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SHARES HELD/
INDUSTRY FACE AMOUNT INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
South Korea Appliances & Household Durables 568 +Samsung Electronics (GDR)(b)
---------------------------------------------------------------------------------------------------------
Telecommunications 946 SK Telecom Co. Ltd. (ADR)(a)
---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA
- -------------------------------------------------------------------------------------------------------------------------------
Thailand Equity Basket 11,000 MSCI Thailand OPALS(c)
---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND
---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PACIFIC BASIN/ASIA
- -------------------------------------------------------------------------------------------------------------------------------
SOUTH EAST ASIA
- -------------------------------------------------------------------------------------------------------------------------------
India Beverages & Tobacco 200 ITC Ltd.
---------------------------------------------------------------------------------------------------------
Chemicals 308 Reliance Industries Ltd.
---------------------------------------------------------------------------------------------------------
Health & Personal Care 200 +Reckitt & Coleman of India Ltd.
---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH EAST ASIA
- -------------------------------------------------------------------------------------------------------------------------------
FACE
SHORT-TERM SECURITIES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Commercial Paper* USD 910,000 General Motors Acceptance Corp., 4.94% due
6/01/1999
---------------------------------------------------------------------------------------------------------
US Government & Agency Obligations* USD 10,150,000 Federal Home Loan Banks, 4.68% due 6/01/1999
1,500,000 US Treasury Bills, 4.22% due 7/22/1999
---------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
- -------------------------------------------------------------------------------------------------------------------------------
NOMINAL
VALUE
COVERED BY
OPTIONS
OPTIONS PURCHASED PURCHASED
- -------------------------------------------------------------------------------------------------------------------------------
Call Options Purchased 47,000 OCBC, expiring March 2000 at USD 0.01
40,000 DBS, expiring March 2000 at USD 0.01
50,000 UOB, expiring March 2000 at USD 0.01
50,000 SIA, expiring March 2000 at USD 0.01
---------------------------------------------------------------------------------------------------------
Currency Put Options Purchased 12,000,000 Japanese Yen, expiring October 1999 at Y150
---------------------------------------------------------------------------------------------------------
Put Options Purchased 1,935 CAC, expiring June 1999 at USD 37.73
---------------------------------------------------------------------------------------------------------
Total Options Purchased
---------------------------------------------------------------------------------------------------------
Total Investments
- -------------------------------------------------------------------------------------------------------------------------------
NOMINAL
VALUE
COVERED BY
OPTIONS
OPTIONS WRITTEN WRITTEN
- -------------------------------------------------------------------------------------------------------------------------------
Currency Call Options Written 12,000,000 Japanese Yen, expiring October 1999 at Y96.45
---------------------------------------------------------------------------------------------------------
Total Options Written
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment, Net of Options Written(Cost $233,447,106) -- 98.7%
Interest Rate Swaps -- (0.1%)
Variation Margin on Financial Futures Contracts** -- 0.0%
Unrealized Appreciation on Forward Foreign Exchange Contracts*** -- 0.0%
Other Assets Less Liabilities -- 1.4%
Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
EQUITY INTERNATIONAL EQUITY
FUND++ FUND++ FUND++
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
South Korea 20,959 -- 20,959
13,474 -- 13,474
34,433 -- 34,433
- ------------------------------------------------------------------------------------------------------------------------------
Thailand 1,084,820 -- 1,084,820
---------------------------------------------
1,084,820 -- 1,084,820
---------------------------------------------
46,742,723 7,567,882 54,310,605
- ------------------------------------------------------------------------------------------------------------------------------
SOUTH EAST ASIA
- ------------------------------------------------------------------------------------------------------------------------------
India 4,735 -- 4,735
---------------------------------------------
1,114 -- 1,114
---------------------------------------------
2,132 -- 2,132
---------------------------------------------
7,981 -- 7,981
- ------------------------------------------------------------------------------------------------------------------------------
-- 909,625 909,625
---------------------------------------------
10,146,042 -- 10,146,042
1,490,625 -- 1,490,625
---------------------------------------------
11,636,667 909,625 12,546,292
- ------------------------------------------------------------------------------------------------------------------------------
298,779 -- 298,779
321,280 -- 321,280
286,050 -- 286,050
355,400 -- 355,400
- ------------------------------------------------------------------------------------------------------------------------------
1,200 -- 1,200
- ------------------------------------------------------------------------------------------------------------------------------
50,552 -- 50,552
- ------------------------------------------------------------------------------------------------------------------------------
1,313,261 -- 1,313,261
- ------------------------------------------------------------------------------------------------------------------------------
202,241,772 42,381,492 244,623,264
- ------------------------------------------------------------------------------------------------------------------------------
(21,600) -- (21,600)
- ------------------------------------------------------------------------------------------------------------------------------
(21,600) -- (21,600)
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment, Net of Options Written(Cost $233,447,106) -- 98.7% 202,220,172 42,381,492 244,601,664
Interest Rate Swaps -- (0.1%) (138,566) -- (138,566)
Variation Margin on Financial Futures Contracts** -- 0.0% (81,578) -- (81,578)
Unrealized Appreciation on Forward Foreign Exchange Contracts*** -- 0.0% 27,246 -- 27,246
Other Assets Less Liabilities -- 1.4% 3,731,266 (246,319) 2,388,376#
----------- ----------- -----------
Net Assets 205,758,540 42,135,173 248,505,337#
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE> 77
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at
the time of purchase by the Fund.
** Financial futures contracts sold as of May 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
VALUE
NUMBER OF CONTRACTS ISSUE EXCHANGE EXPIRATION DATE (NOTES 1a & 1c)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
37 FT-SE 100 LIFFE June 1999 3,698,628
All Ordinaries Sydney FE June 1999
11 Index 515,968
4 TSE-35 Index Toronto SE June 1999 526,352
- -------------------------------------------------------------------------------------
Total Financial Futures Contracts Sold (Total Contract
Price -- $4,784,944) 4,740,948
- -------------------------------------------------------------------------------------
</TABLE>
Financial futures contracts purchased as of May 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
VALUE
NUMBER OF CONTRACTS ISSUE EXCHANGE EXPIRATION DATE (NOTES 1a & 1c)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
20 Taiwan MSCI Index SIMEX June 1999 630,600
68 Nikkei 225 Index SIMEX June 1999 4,491,549
57 OMX Index OML June 1999 513,000
24 CAC 40 MATIF June 1999 1,075,180
- -------------------------------------------------------------------------------------
Total Financial Futures Contracts Puchased (Total Contract
Price -- $6,997,339) 6,710,329
- -------------------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of May 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
UNREALIZED
APPRECIATION
FOREIGN CURRENCY SOLD EXPIRATION DATE (NOTE 1c)
- -----------------------------------------------------
<S> <C> <C>
PHP 24,610,000 June 1999 $ 649
SGD 1,400,000 June 1999 3,933
Y 738,664,000 June 1999 22,664
-------
Total Unrealized Appreciation on
Forward Foreign Exchange Contracts --
Net (US$ commitment -- $7,642,931) $27,246
- -----------------------------------------------------
</TABLE>
- ---------------
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) Optimized Portfolio As Listed Securities (OPALS) are investments that are
exchange quoted and provide an equivalent investment exposure to that of the
specific Morgan Stanley Capital International (MSCI) country index.
(e) The rights may be exercised until 6/30/2003.
(f) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number of
shares are subject to adjustment under certain conditions until the
expiration date.
(g) Security held as collateral in connection with open financial futures
contracts.
+ Non-income producing investment.
# Assumes accrual of estimated Reorganization expenses of $150,000 and
distribution of undistributed net investment income and undistributed
realized capital gains.
See Notes to Financial Statements.
F-9
<PAGE> 78
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
FOR MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL FUND
AS OF MAY 31, 1999 (UNAUDITED)
The following unaudited pro forma Combined Statement of Assets and
Liabilities for the Combined Fund has been derived from the Statements of Assets
and Liabilities of the respective Funds at May 31, 1999 and such information has
been adjusted to give effect to the Reorganization as if the Reorganization had
occurred at MAY 31, 1999. The pro forma Combined Statement of Assets and
Liabilities is presented for informational purposes only and does not purport to
be indicative of the financial condition that actually would have resulted if
the Reorganization had been consummated at MAY 31, 1999. The pro forma Combined
Statement of Assets and Liabilities should be read in conjunction with the
financial statements and related notes from the audited financial statements of
International Equity Fund included in its Annual Report to Shareholders, which
accompanies this Statement of Additional Information and from Consults
International Portfolio's audited financial statements and related notes
included in its Semi-Annual Report to Shareholders for the six months ended
April 30, 1999, which is incorporated herein by reference.
<TABLE>
<CAPTION>
INTERNATIONAL CONSULTS PRO FORMA
EQUITY INTERNATIONAL INTERNATIONAL
FUND PORTFOLIO ADJUSTMENTS EQUITY FUND
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a)..................... $200,928,511 $42,381,492 $243,310,003
Options purchased at value** (Notes 1a & 1c)......... 1,313,261 -- 1,313,261
Unrealized appreciation on forward foreign exchange
contracts (Notes 1c)............................... 27,246 7,055 34,301
Foreign Cash (Note 1b)............................... 416,308 578 416,886
Cash................................................. 1,084,017 -- 1,084,017
Receivables:
Securities sold.................................... 6,158,342 932,000 7,090,342
Dividends.......................................... 1,527,061 262,737 1,789,798
Beneficial interest sold........................... 94,140 -- 94,140
Forward foreign exchange contracts (Note 1c)....... 54,745 -- 54,745
Interest........................................... 18,890 -- 18,890
Prepaid registrations fees and other assets (Note
1f)................................................ 584,106 19,533 603,639
------------ ----------- ----------- ------------
Total assets......................................... 212,206,627 43,603,395 255,810,022
------------ ----------- ----------- ------------
LIABILITIES:
Options written, at value*** (Notes 1a & 1c)......... 21,600 -- 21,600
Interest rate swaps at value (Note 1c)............... 138,566 -- 138,566
Payables:
Securities purchased............................... 4,642,154 909,500 5,551,654
Beneficial interest redeemed....................... 832,537 325,361 1,157,898
Dividends to shareholders (Note )................ -- -- $ 2,208,601(1) 2,238,376
Distributor (Note 2)............................... 129,562 34,204 163,766
Investment adviser (Note 2)........................ 124,698 25,653 150,351
Forward foreign exchange contracts (Note 1c)....... 102,773 -- 102,773
Variation margin (Note 1c)......................... 81,578 -- 81,578
Interest rate swap contracts (Note 1c)............. 5,929 -- 5,929
Custodian bank (Note 1h)...........................
Administration fee................................. -- 8,551 8,551
Accrued expenses and other liabilities............... 368,690 164,953 150,000(2) 683,643
------------ ----------- ----------- ------------
Total liabilities.................................... 6,448,087 1,468,222 2,358,601 10,304,685
------------ ----------- ----------- ------------
NET ASSETS:
Net Assets........................................... $205,758,540 $42,135,173 $(2,358,601) $245,535,112
============ =========== =========== ============
</TABLE>
F-10
<PAGE> 79
<TABLE>
<CAPTION>
INTERNATIONAL CONSULTS PRO FORMA
EQUITY INTERNATIONAL INTERNATIONAL
FUND PORTFOLIO ADJUSTMENTS EQUITY FUND
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Class A Common Stock, $0.10 par value, unlimited
number of shares authorized........................ $ 213,300 -- $ 213,300
Class B Common Stock, $0.10 par value, unlimited
number of shares authorized........................ 1,578,379 1,578,379
Class C Common Stock, $0.10 par value, unlimited
number of shares authorized........................ 70,049 $ 367,093 $ 74,555 511,697
Class D Common Stock, $0.10 par value, unlimited
number of shares authorized........................ 382,734 -- (94,780) 382,734
Paid-in capital in excess of par..................... 259,340,650 32,497,282 (224,555) 291,643,152
Undistributed investment income -- net............... -- 212,506 (212,506) --
Undistributed (accumulated) realized capital gains
(losses) on investments and foreign currency
transactions -- net................................ (3,000,383) 2,025,870 (2,025,870) (3,000,383)
Accumulated distributions in excess of realized
capital gains on investments and foreign currency
transactions -- net (Note 1g)...................... (56,646,573) -- (56,646,573)
Unrealized appreciation on investments and foreign
currency transactions -- net....................... 3,820,384 7,032,422 10,852,806
------------ ----------- ----------- ------------
NET ASSETS........................................... $205,758,540 $42,135,173 $(2,358,601) $245,535,112
============ =========== =========== ============
NET ASSET VALUE:
Class A:
Net assets......................................... $ 19,539,653 $ (11,823) $ 19,527,830
============ =========== =========== ============
Shares outstanding................................. 2,133,003 -- 2,133,003
============ =========== =========== ============
Net Asset Value.................................... $ 9.16 $ 9.16
============ =========== =========== ============
Class B:
Net assets......................................... $144,680,835 $ (87,546) $144,593,289
============ =========== =========== ============
Shares outstanding................................. 15,783,791 -- 15,783,791
============ =========== =========== ============
Net Asset Value.................................... $ 9.17 $ 9.16
============ =========== =========== ============
Class C:
Net Assets......................................... $ 6,327,941 $42,135,173 $(2,267,701) $ 46,195,413
============ =========== =========== ============
Shares outstanding................................. 700,487 3,670,926 745,554 5,116,967
============ =========== =========== ============
Net Asset Value.................................... $ 9.03 $ 11.48 $ 9.03
============ =========== =========== ============
Class D:
Net Assets......................................... $ 35,210,111 $ (21,306) $ 35,188,805
============ =========== =========== ============
Shares outstanding................................. 3,827,337 -- 3,827,337
============ =========== =========== ============
Net Asset Value.................................... $ 9.20 $ 9.19
============ =========== =========== ============
- -------------------------------------------------------------------------------------------------------------------
* Identified Cost.................................. $197,139,732 $35,349,553 -- $232,489,285
============ =========== =========== ============
** Cost of options purchased........................ 1,065,221 -- -- 1,065,221
============ =========== =========== ============
*** Premiums received................................ $ 107,400 -- -- $ 107,400
============ =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
(1) Reflects the payment of undistributed net investment income and
undistributed realized capital gains.
(2) Reflects the charge for estimated Reorganization expenses of $150,000.
See Notes to Financial Statements.
F-11
<PAGE> 80
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL FUND, INC.
FOR THE YEAR ENDED MAY 31, 1999
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Operations for the
Combined Fund has been derived from the Statements of Operations of
International Equity Fund and Consults International Portfolio for the year
ended May 31, 1999, and such information has been adjusted to give effect to the
Reorganization as if the Reorganization had occurred on June 1, 1998. The Pro
Forma Statement of Operations is presented for informational purposes only and
does not purport to be indicative of the results of operations that actually
would have resulted if the Reorganization had been consummated on June 1, 1998
nor which may result from future operations. The Pro Forma Combined Statement of
Operations should be read in conjunction with the financial statements and
related notes from the audited financial statements of International Equity Fund
included in its Semi-Annual Report to Shareholders, which accompanies this
Statement of Additional Information and from Consults International Portfolio's
audited financial statements and related notes included in its Semi-Annual
Report to Shareholders for the six months ended April 30, 1999, which is
incorporated herein by reference.
<TABLE>
<CAPTION>
INTERNATIONAL CONSULTS PRO FORMA
EQUITY INTERNATIONAL INTERNATIONAL
FUND PORTFOLIO ADJUSTMENTS EQUITY FUND
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTES 1d & 1e):
Dividends**..................................... $ 5,963,622 $ 1,176,201 $ 7,139,823
Interest and discount earned.................... 1,934,055 100,966 2,035,021
------------ ------------ --------- ------------
Total income.................................... 7,897,677 1,277,167 9,174,844
------------ ------------ --------- ------------
EXPENSES:
Account maintenance and distribution
fees -- Class B (Note 2)...................... 2,041,156 633,490 2,674,646
Investment advisory fees........................ 2,109,287 475,116 2,584,403
Transfer agent fees -- Class B.................. 683,550 31,136 714,686
Custodian fees.................................. 292,910 71,812 364,722
Accounting services (Note 2).................... 192,999 83,370 $ (76,369)(1) 200,000
Professional fees............................... 104,485 89,335 (85,000)(1) 108,820
Printing and shareholder reports................ 131,445 54,782 (12,282)(1) 173,945
Administration fees (Note 2).................... -- 158,372 (158,372)(1) --
Transfer agent fees -- Class D.................. 134,308 -- 134,308
Stamp tax fee................................... -- 126,477 126,477
Account maintenance fees -- Class D (Note 2).... 114,287 -- 114,287
Account maintenance and distribution
fees -- Class C (Note 2)...................... 94,029 -- 94,029
Registration fees (Note 1f)..................... 35,419 31,257 66,676
Trustees' fees and expenses..................... 40,336 25,796 (25,796)(2) 40,336
Transfer agent fees -- Class A (Note 2)......... 63,169 -- 63,169
Pricing fees.................................... 26,785 8,040 34,825
Transfer agent fees -- Class C.................. 32,995 -- 32,995
Organization expenses........................... 4,110 -- 4,110
Other........................................... 14,159 8,945 23,104
------------ ------------ --------- ------------
Total expenses.................................. 6,115,429 1,797,928 (357,819) 555,538
------------ ------------ --------- ------------
Investment income (loss) -- net................. 1,782,248 (520,761) 357,819 619,306
------------ ------------ --------- ------------
</TABLE>
F-12
<PAGE> 81
<TABLE>
<CAPTION>
INTERNATIONAL CONSULTS PRO FORMA
EQUITY INTERNATIONAL INTERNATIONAL
FUND PORTFOLIO ADJUSTMENTS EQUITY FUND
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
& FOREIGN CURRENCY TRANSACTIONS -- NET (NOTES
1b, 1c & 1e):
Realized gain (loss) from:
Investments -- net............................ $ (5,085,323) $ 4,531,684 $ (553,639)
Foreign currency transactions -- net.......... (820,717) 273,828 (546,889)
Change in unrealized appreciation/depreciation
on:
Investments -- net............................ (12,338,951) (14,217,408) (26,556,359)
Foreign currency transactions -- net.......... (2,052,133) (318,324) (2,370,457)
Net realized and unrealized gain on investments
and foreign currency transactions............. (20,297,124) (9,730,220) (30,027,344)
------------ ------------ --------- ------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $(18,514,876) $(10,250,981) $ 357,819 $(28,566,410)
============ ============ ========= ============
- ---------------------------------------------------------------------------------------------------------------
** Net foreign withholding tax on dividends...... $ 43,859 $ 113,776 $ 157,635
============ ============ ========= ============
</TABLE>
- --------------------------------------------------------------------------------
(1) Reflects the anticipated savings as a result of the Reorganization through
fewer audits and consolidation of printing, accounting and other services.
(2) This Pro Forma Combined Statement of Operations excludes non-recurring
estimated Reorganization expenses of $150,000.
F-13
<PAGE> 82
MERRILL LYNCH INTERNATIONAL EQUITY FUND
AND CONSULTS INTERNATIONAL FUND
COMBINED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
International Equity Fund is registered under the Investment Company Act of
1940 as a diversified, open-end management investment company. International
Equity Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management accruals
and estimates. These unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. International Equity 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 International Equity
Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Trustees of International Equity Fund 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 or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of International
Equity Fund's Board of Trustees.
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments -- International Equity Fund may
engage in various portfolio strategies to seek to increase its return by hedging
its portfolio against adverse movements in the equity, debt, and currency
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
- Financial futures contracts -- International Equity Fund may purchase or
sell financial 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, International
Equity Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant
to the contract, International Equity 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
F-14
<PAGE> 83
International Equity Fund as unrealized gains or losses. When the
contract is closed, International Equity 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 -- International Equity 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 International Equity
Fund, sold by such Fund but not yet delivered, or committed or
anticipated to be purchased by such Fund.
- Forward foreign exchange contracts -- International Equity 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 International Equity Fund's records.
However, the effect on operations is recorded from the date International
Equity Fund enters into such contracts.
- Interest rate swaps -- International Equity Fund is authorized to enter
into equity swap agreements, which are OTC contracts in which one party
agrees to make periodic payments based on the change in market value of a
specified equity security, basket of equity securities or equity index in
return for periodic payments based on a fixed or variable interest rate
of the change in market value of a different equity security, basket of
equity securities or equity index. Swap agreements may be used to obtain
exposure to an equity or market without owning or taking physical custody
of securities in circumstances in which direct investment is restricted
by local law or is otherwise impractical.
- Options -- International Equity Fund is authorized to write and purchase
put and call options. When International Equity Fund writes an option, an
amount equal to the premium received by such 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
International Equity Fund enters into a closing transaction), such Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes -- It is International Equity Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required. Under the
applicable foreign tax law, a withholding tax may be imposed on interest,
dividends, and capital gains at various rates.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when International Equity Fund has determined the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(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
International Equity Fund are recorded on the ex-dividend dates. Distributions
in excess of realized capital gains are due primarily to differing tax
treatments for post-October losses.
F-15
<PAGE> 84
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
International Equity 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.
International Equity Fund also has entered into a Distribution Agreement and
Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), which
is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of International Equity Fund's
portfolio and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of International Equity Fund.
For such services, International Equity Fund pays a monthly fee of 0.75%, on an
annual basis, of the average daily value of International Equity Fund's net
assets. MLAM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursuant to which
MLAM pays MLAM U.K. a fee in an amount to be determined from time to time by
MLAM and MLAM U.K. but in no event in excess of the amount that MLAM actually
receives. For the year ended May 31, 1999, MLAM paid MLAM U.K. a fee of $97,386
pursuant to such Agreement.
Pursuant to the Distribution Plans adopted by International Equity Fund in
accordance with Rule 12b-1 under the Investment Company Act of 1940,
International Equity 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:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE FEE DISTRIBUTION FEE
----------------------- ----------------
<S> <C> <C>
Class B...................................... 0.25% 0.75%
Class C...................................... 0.25% 0.75%
Class D...................................... 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to International Equity 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 shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended May 31, 1999, MLFD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of
International Equity Fund's Class A and Class D shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
---- ------
<S> <C> <C>
Class A..................................................... $67 $1,234
Class D..................................................... $635 $8,967
</TABLE>
For the year ended May 31, 1999, MLPF&S received contingent deferred sales
charges of $11,000 and $2,037 relating to transactions in Class B and Class C
shares of International Equity Fund, respectively.
In addition, MLPF&S received $30,307 in commissions on the execution of
portfolio security transactions for International Equity Fund for the year ended
May 31, 1999.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML &
Co., is International Equity Fund's transfer agent.
Accounting services are provided to International Equity Fund by MLAM at
cost.
Certain officers and/or trustees of International Equity Fund are officers
and/or directors of MLAM, PFD, PSI, FDS, MLFD, and/or ML & Co.
F-16
<PAGE> 85
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 9 of the Class A, Class B, Class C and Class D shares Distribution
Agreements.
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 or her in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he or she may be involved or with which he or she may be threatened,
while in office or thereafter, by reason of his or her being or having been such
a Trustee, officer, employee or agent, except with respect to any matter as to
which he or she shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her 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 or she 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 or she 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 or she is
not entitled to such indemnification."
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended, 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 or
she 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 (as defined in the Distribution
Agreements) and each person, if any, who controls the Distributor within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"),
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
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 Securities Act and is, therefore,
C-1
<PAGE> 86
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer, or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
or the principal underwriter in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 16. EXHIBITS.
<TABLE>
<C> <C> <S>
1(a) -- Amended and Restated Declaration of Trust of the Registrant,
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.(a)
2 -- Amended and Restated By-Laws of the Registrant.(a)
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization between the
Registrant and Merrill Lynch Consults International
Portfolio (included in Exhibit I to the Proxy Statement and
Prospectus contained in this Registration Statement).
5 -- 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 the Registrant.(b)
6(a) -- Investment Advisory Agreement between the Registrant and
Merrill Lynch Asset Management, Inc.(c)
(b) -- Sub-Advisory Agreement between Merrill Lynch Asset
Management, Inc. and Merrill Lynch Asset Management U.K.
Limited.(h)
7(a) -- Form of new Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc. (the "Distributor").(e)
(b) -- Class B Shares Distribution Agreement between the Registrant
and the Distributor.(c)
(c) -- Letter Agreement between the Registrant and the Distributor
with respect to the Merrill Lynch Mutual Fund Advisor
Program.(c)
(d) -- Form of Class C Shares Distribution Agreement between the
Registrant and the Distributor.(e)
(e) -- Form of Class D Shares Distribution Agreement between the
Registrant and the Distributor.(e)
8 -- None.
9(a) -- Custodian Agreement between the Registrant and Brown
Brothers Harriman & Co.(d)
(b) -- Amendment to Custodian Agreement between the Registrant and
Brown Brothers Harriman & Co.(f)
10(a) -- Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement of Registrant. (c)
(b) -- Form of Class C Distribution Plan and Class C Distribution
Plan Sub-Agreement of Registrant.(e)
(c) -- Form of Class D Distribution Plan and Class D Distribution
Plan Sub-Agreement of Registrant.(e)
(d) -- Merrill Lynch Select Pricing(SM) System Plan pursuant to
Rule 18f-3.(g)
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant.(i)
12 -- Private Letter Ruling from the Internal Revenue Service.(i)
13 -- -Not applicable.
</TABLE>
C-2
<PAGE> 87
<TABLE>
<C> <C> <S>
14(a) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(b) -- Consent of Ernst & Young LLP, independent auditors for
Merrill Lynch Consults International Portfolio.
15 -- Not applicable.
16 -- Power of Attorney.(j)
17(a) -- Prospectus dated September 29, 1999 and Statement of
Additional Information dated September 29, 1999 of the
Registrant.
(b) -- Annual Report to the Shareholders of the Registrant for the
year ended May 31, 1999.
(c) -- Prospectus dated February 27, 1999 and Statement of
Additional Information dated February 27, 1999 of Merrill
Lynch Consults International Portfolio.
(d) -- Form of Proxy.
</TABLE>
- ---------------
(a) Filed on September 27, 1995, as an Exhibit to Post-Effective Amendment No.
4 to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File No. 33-44917) (the "Form N-1A").
(b) Reference is made to Article I (sections 1.1 and 1.2), Article II (sections
2.2, 2.3 and 2.4), 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 6.1, 6.2, 6.3, 6.4,
6.5, 6.7 and 6.8), Article VII (section 7.1), Article VIII (sections 8.1,
8.2 and 8.3), Article IX (section 9.2), Article X (sections 10.1, 10.2,
10.3, 10.4, 10.5, 10.6, 10.7 and 10.8), and Article XI (sections 11.2,
11.3, 11.4 and 11.5) of the Registrant's Amended and Restated Declaration
of Trust, filed as Exhibit 1(a) to the Form N-1A; the Certificate of
Establishment and Designation, filed as Exhibit 1(b) to the Form N-1A; the
Certificate of Amendment to the Declaration of Trust and Establishment and
Designation of Classes, filed as Exhibit 1(c) to the Form N-1A; and Article
I, Article V and Article VII of the Registrant's Amended and Restated
By-Laws, filed as Exhibit 2 to the Form N-1A.
(c) Filed on January 14, 1994, as an Exhibit to Post-Effective Amendment No. 1
to the Form N-1A.
(d) Filed on September 29, 1994, as an Exhibit to Post-Effective Amendment No.
2 to the Form N-1A.
(e) Filed On October 18, 1994, as an Exhibit to Post-Effective Amendment No. 3
to the Form N-1A.
(f) Filed on September 27, 1996, as an Exhibit to Post-Effective Amendment No.
5 to the Form N-1A.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996 relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
(h) Filed on August 29, 1997, as an Exhibit to Post-Effective Amendment No. 6
to the Form N-1A.
(i) To be filed by amendment.
(j) Included on the signature page of this Registration Statement.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the
reoffering prospectus will contain information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-
C-3
<PAGE> 88
effective amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of securities at that time shall be
deemed to be the initial bona fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, either
a copy of the Internal Revenue Service private letter ruling applied for or the
opinion of counsel received as to certain tax matters, within a reasonable time
after receipt of such ruling or opinion.
C-4
<PAGE> 89
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and State
of New Jersey, on the 29th day of October, 1999.
MERRILL LYNCH INTERNATIONAL EQUITY FUND
(Registrant)
By /s/ TERRY K. GLENN
------------------------------------------
(Terry K. Glenn, President)
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signature appears below hereby constitutes and appoints Terry K. Glenn, Donald
C. Burke and Robert Harris, and each of them (with full power of each of them to
act alone), his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and on his behalf, and in his name,
place and stead, in any all capacities to execute and sign any and all
amendments or post-effective amendments to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof and the Registrant hereby
confers like authority on its behalf.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President and Trustee (Principal October 29, 1999
- ------------------------------------------------ Executive Officer)
(Terry K. Glenn)
/s/ DONALD C. BURKE Vice President and Treasurer October 29, 1999
- ------------------------------------------------ (Principal Financial and
(Donald C. Burke) Accounting Officer)
/s/ DONALD CECIL Trustee October 29, 1999
- ------------------------------------------------
(Donald Cecil)
/s/ EDWARD H. MEYER Trustee October 29, 1999
- ------------------------------------------------
(Edward H. Meyer)
/s/ CHARLES C. REILLY Trustee October 29, 1999
- ------------------------------------------------
(Charles C. Reilly)
/s/ RICHARD R. WEST Trustee October 29, 1999
- ------------------------------------------------
(Richard R. West)
</TABLE>
C-5
<PAGE> 90
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ARTHUR ZEIKEL Trustee October 29, 1999
- ------------------------------------------------
(Arthur Zeikel)
/s/ EDWARD D. ZINBARG Trustee October 29, 1999
- ------------------------------------------------
(Edward D. Zinbarg)
</TABLE>
C-6
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
14(a) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(b) -- Consent of Ernst & Young LLP, independent auditors for
Merrill Lynch Consults International Portfolio.
17(a) -- Prospectus dated September 29, 1999 and Statement of
Additional Information dated September 29, 1999 of the
Registrant.
(b) -- Annual Report to Shareholders of the Registrant for the year
ended May 31, 1999.
(c) -- Prospectus dated February 27, 1999 and Statement of
Additional Information dated February 27, 1999 of Merrill
Lynch Consults International Portfolio.
(d) -- Form of Proxy.
</TABLE>
C-7
<PAGE> 1
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch International Equity Fund:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated July 16, 1999 of Merrill Lynch International
Equity Fund in the Proxy Statement and Prospectus, which is a part of such
Registration Statement, and to the reference to us under the captions
"Comparison of the Funds -- Financial Highlights" and "Experts", appearing in
such Proxy Statement and Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 29, 1999
<PAGE> 1
EXHIBIT 14(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The
Reorganization-Comparison of the Funds-Financial Highlights", "Selection of
Independent Auditors" and "Experts" and to the use of our report dated December
3, 1998 for Merrill Lynch Consults International Portfolio incorporated by
reference in the Registration Statement (Form N-14 No. 333-0000) and related
combined Preliminary Proxy Statement and Prospectus of Merrill Lynch Consults
International Portfolio and Merrill Lynch International Equity Fund filed with
the Securities and Exchange Commission.
/s/ Ernst & Young, LLP
MetroPark, New Jersey
October 28, 1999
<PAGE> 1
Prospectus [LOGO] Merrill Lynch
Merrill Lynch International Equity Fund
September 29, 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE> 2
Table of Contents
[CLIP ART] KEY FACTS
--------------------------------------------------------------------
The Merrill Lynch International Equity Fund at a Glance ......... 3
Risk/Return Bar Chart ........................................... 5
Fees and Expenses ............................................... 6
[CLIP ART] DETAILS ABOUT THE FUND
--------------------------------------------------------------------
How the Fund Invests ............................................ 8
Investment Risks ................................................ 10
[CLIP ART] YOUR ACCOUNT
--------------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System ......................... 18
How to Buy, Sell, Transfer and Exchange Shares .................. 23
Participation in Merrill Lynch Fee-Based Programs ............... 27
[CLIP ART] MANAGEMENT OF THE FUND
--------------------------------------------------------------------
Merrill Lynch Asset Management .................................. 30
Financial Highlights ............................................ 31
[CLIP ART] FOR MORE INFORMATION
--------------------------------------------------------------------
Shareholder Reports .................................... Back Cover
Statement of Additional Information .................... Back Cover
MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 3
Key Facts [CLIP ART]
In an effort to help you better
understand the many concepts involved in
making an investment decision, we have
defined highlighted terms in this
prospectus in the sidebar.
Equity Securities -- securities
representing ownership of a company or
securities whose price is linked to the
value of securities that represent
company ownership.
THE MERRILL LYNCH INTERNATIONAL EQUITY FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
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.
What are the Fund's main investment strategies?
The Fund normally invests in a diversified portfolio consisting of equity
securities of companies from a variety of different countries, including those
in emerging markets, and except for unusual circumstances will at all times be
invested in securities from at least three different countries other than the
United States. The Fund's management anticipates that a substantial portion of
the Fund's investments will be in companies in the developed countries of Europe
and the Far East. Investments may be shifted among various equity markets
outside the United States depending upon management's outlook with respect to
prevailing trends and developments. The Fund can invest in securities
denominated in either U.S. dollars or foreign currencies. The Fund's management
anticipates that under most circumstances the Fund's investments will primarily
be denominated in foreign currencies. The Fund's investments in debt securities
will generally be longer-term non-convertible debt securities. The Fund has not
established any rating criteria for the debt securities in which it may invest
but it does not intend to purchase debt securities that are in default. The Fund
may invest in high yield or "junk" bonds and in certain types of "derivative"
securities for hedging purposes.
The Fund chooses investments using a "top down" investment style. This means
that the Fund chooses investments primarily based on views of general economic
and financial trends rather than on individual companies.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may fluctuate. Changes in the value of the Fund's equity
investments may occur because the stock market is rising or falling or as the
result of specific factors that affect particular investments. If the value of
the Fund's investments goes down, you may lose money.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 3
<PAGE> 4
[CLIP ART] Key Facts
Although the Fund may invest in derivatives to hedge against risks in its
portfolio, it is not bound to do so and the Fund cannot guarantee the success of
any hedging strategies it does use. Derivatives and high yield or "junk" bonds
may be volatile and subject to liquidity, leverage, credit and other types of
risks.
We cannot guarantee that the Fund will achieve its investment objective.
Who should invest?
The Fund may be an appropriate investment for you if you:
- Are looking for capital appreciation for long-term goals, such as
retirement or funding a child's education
- Want a professionally managed and diversified portfolio
- Are looking for broad exposure to foreign equity markets
- Are willing to accept the risks of foreign investing in order to
seek capital appreciation and secondarily, income
4 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 5
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class B shares for each complete calendar year since the Fund's inception. Sales
charges are not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. The table compares the average annual
total returns for each class of the Fund's shares for the periods shown with
those of the Morgan Stanley Capital International ("MSCI") World Index (Ex-US).
How the Fund performed in the past is not necessarily an indication of how the
Fund will perform in the future.
[The following information was depicted as a bar chart in the printed material]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
-0.61% 4.56% 5.95% -5.95% 3.36%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
19.13% (quarter ended December 31, 1998) and the lowest return for a quarter was
- -19.38% (quarter ended September 30, 1998). The Fund's year-to-date return as of
June 30, 1999 was 10.25%.
<TABLE>
<CAPTION>
Average Annual Total Returns (for the Past Past Since
calendar year ended December 31, 1998) One Year Five Years Inception
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch International Equity Fund* A -1.01% N/A 0.43%+
MSCIWorld Index (Ex-US)** 18.76% N/A 8.13%+++
- --------------------------------------------------------------------------------------
Merrill Lynch International Equity Fund* B -0.64% 1.37% 3.37%++
MSCIWorld Index (Ex-US)** 18.76% 9.19% 9.24%
- --------------------------------------------------------------------------------------
Merrill Lynch International Equity Fund* C 2.40% N/A 0.71%+
MSCIWorld Index (Ex-US)** 18.76% N/A 8.13%+++
- --------------------------------------------------------------------------------------
Merrill Lynch International Equity Fund* D -1.18% 1.09% 3.15%++
MSCIWorld Index (Ex-US)** 18.76% 9.19% 9.24%
- --------------------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged market capitalization-weighted Index is comprised of
developed equity markets around the world. Past performance is not
predictive of future performance.
+ Inception date is October 21, 1994.
++ Inception date is July 30, 1993.
+++ Since October 31, 1994.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 5
<PAGE> 6
[CLIP ART] Key Facts
UNDERSTANDING
EXPENSES
Fund investors pay various fees and
expenses, either directly or indirectly.
Listed below are some of the main types
of expenses, which all mutual funds may
charge:
Expenses paid directly by the
shareholder:
Shareholder Fees -- these include sales
charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the
shareholder:
Annual Fund Operating Expenses --
expenses that cover the costs of
operating the Fund.
Investment Advisory Fee -- a fee paid to
the Investment Adviser for managing the
Fund.
Distribution Fees -- fees used to
support the Fund's marketing and
distribution efforts, such as
compensating Financial Consultants,
advertising and promotion.
Service (Account Maintenance) Fees --
fees used to compensate securities
dealers for account maintenance
activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from
your investment) (a): Class A Class B(b) Class C Class D
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed
on Purchases (as a percentage of
offering price) 5.25%(c) None None 5.25%(c)
- -----------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- -----------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed
on Dividend Reinvestments None None None None
- -----------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets):
- -----------------------------------------------------------------------------------
Investment Advisory Fee 0.75% 0.75% 0.75% 0.75%
- -----------------------------------------------------------------------------------
Distribution and/or Service
(12b-1) Fees(e) None 1.00% 1.00% 0.25%
- -----------------------------------------------------------------------------------
Other Expenses (including transfer
agency fees)(f) 0.58% 0.64% 0.65% 0.59%
- -----------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.33% 2.39% 2.40% 1.59%
- -----------------------------------------------------------------------------------
</TABLE>
(a) In addition, Merrill Lynch may charge clients a processing fee
(currently $5.35) when a client buys or sells shares.
(b) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and Ends at the end of the calendar year. For the fiscal year ended May 31,
1999, the Fund paid the Transfer Agent fees totaling $914,022. The
Investment Adviser provides accounting services to the Fund at its cost.
For the fiscal year ended May 31, 1999, the Fund reimbursed the Investment
Adviser $192,999 for these services.
6 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 7
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $653 $ 924 $1,216 $2,042
- --------------------------------------------------------------------------------
Class B $642 $ 945 $1,275 $2,540*
- --------------------------------------------------------------------------------
Class C $343 $ 748 $1,280 $2,736
- --------------------------------------------------------------------------------
Class D $678 $1,001 $1,345 $2,315
- --------------------------------------------------------------------------------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $653 $ 924 $1,216 $2,042
- --------------------------------------------------------------------------------
Class B $242 $ 745 $1,275 $2,540*
- --------------------------------------------------------------------------------
Class C $243 $ 748 $1,280 $2,736
- --------------------------------------------------------------------------------
Class D $678 $1,001 $1,345 $2,315
- --------------------------------------------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately eight years after purchase.
See note (b) to the Fees and Expenses table above.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 7
<PAGE> 8
Details About the Fund [CLIP ART]
ABOUT THE
PORTFOLIO MANAGER
Clive D. Lang has been the Portfolio
Manager of the Fund since April 1998 and
a Vice President of Merrill Lynch Asset
Management since 1997. Mr. Lang has been
associated with Merrill Lynch Asset
Management U.K. Limited since 1997, and
prior to that was the Chief Investment
Officer of Panagora Asset Management
Limited.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch
Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund will invest in a diversified portfolio primarily consisting of equity
securities of non-U.S. companies. The Fund will under normal conditions invest
at least 65% of its assets in equity securities. Equity securities consist of:
- Common stock
- Preferred stock
- Securities convertible into common stock
- Derivative securities, such as options and futures, the value of
which is based on a common stock or group of common stocks
The Fund will focus on investments in common stock.
The Fund may invest in equity securities of companies throughout the world. The
Fund 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 represents
assets or activities located in such countries. There are no limits on the
geographic allocation of the Fund's investments. The Fund's management, however,
anticipates that a substantial portion of the Fund's investments will be in
companies in the developed countries of Europe and the Far East. The Fund may
also invest in companies in emerging markets, but the Fund's management
anticipates that a greater portion of the Fund's investments will be in
companies in developed countries. The Fund will under normal conditions have at
least 65% of its total assets invested in securities from at least three
different countries other than the United States.
The Fund chooses investments using a "top down" investment style. This means
that the Fund chooses investments primarily based on views of general economic
and financial trends rather than on individual companies. The Fund seeks to
achieve gains principally by allocating its investments to equity markets that
will benefit from the economic and financial trends perceived by the Fund's
management and therefore outperform other equity markets. The Fund's management
believes such allocation decisions can play a more important role in investment
results than other factors. The Fund attempts to identify equity markets with
the best potential to outperform other equity markets based on analysis of
economic factors such as inflation, commodity prices, the direction of interest
and currency movements, estimates of growth in industrial output and profits,
and government fiscal policies. The Fund's management also uses market technical
analysis. The Fund chooses
8 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 9
Common stocks -- are shares of ownership
of a corporation.
Preferred stock -- is a class of stock
that often pays dividends at a specified
rate and has preference over common
stock in dividend payments and
liquidation of assets. Preferred stock
may also be convertible into common
stock.
Technical Analysis -- a method of
predicting the direction of future price
movement of an asset based on
identifying significant recurring
patterns from the asset's historic
prices.
Investment grade -- any of the four
highest debt obligation ratings by
recognized rating agencies, including
Moody's Investors Service, Inc.,
Standard & Poor's or Fitch IBCA, Inc.
Liquidity -- the ease with which a
security can be traded. Securities that
are less liquid have fewer potential
buyers and, as a consequence, greater
volatility.
Volatility -- the frequency and amount
of changes in a security's market value.
individual securities that will benefit from the economic circumstances
anticipated by Fund management or that are representative of a particular equity
market. The Fund therefore does not depend heavily on security selection
techniques involving fundamental analysis of individual companies.
The Fund may invest up to 35% of its assets in non-convertible debt securities.
The Fund's investments in non-convertible debt securities will generally be
longer-term securities with the potential for capital appreciation through
changes in interest rates, exchange rates or the general perception of the
creditworthiness of issuers in certain countries. The Fund may also invest in
non-convertible debt securities for income, but this will not be a focus of the
Fund's investments. The Fund may invest in debt securities that are not rated
investment grade, which are commonly known as "junk" bonds, although it does not
intend to purchase debt securities that are in default. Junk bonds are high risk
investments, and may result in the Fund losing both income and principal. Junk
bonds are generally less liquid and experience more price volatility than
higher-rated fixed income securities.
Because the Fund will invest primarily in foreign securities, it offers the
potential for more diversification than an investment only in the U.S. Foreign
securities have often (although not always) performed differently than U.S.
Securities. The Fund will invest in securities denominated in currencies other
than the U.S. dollar. The Fund's return on investments denominated in foreign
currencies will be affected by changes in currency exchange rates. The Fund may
engage in currency transactions to seek to hedge against the risk of loss from
changes in currency exchange rates, but Fund management cannot guarantee that it
will be able to enter into such transactions or that such transactions will be
effective. The Fund will normally invest a portion of its portfolio in U.S.
dollars or short-term interest bearing U.S. dollar-denominated securities to
provide for possible redemptions.
The Fund may also invest in derivative securities the potential return of which
is based on the change in a specified interest rate or equity index (an "indexed
security"). For example, the Fund may invest in a security that pays a variable
amount of interest or principal based on the current level of the French or
Korean stock markets. The Fund may also invest in derivative securities the
potential return of which is based inversely on the change in a specified
interest rate or equity index (an "inverse security"). Inverse securities
generally change in value in a manner that is opposite to most fixed income
securities -- that is, interest rates or principal payments on inverse
securities increase when the underlying interest rate or equity index decreases
and
MERRILL LYNCH INTERNATIONAL EQUITY FUND 9
<PAGE> 10
[CLIP ART] Details About the Fund
decrease when the underlying interest rate or equity index increases. Certain
indexed securities and inverse securities have greater sensitivity to changes in
interest rates or equity index levels than other securities, and the Fund's
investments in such instruments may decline in value significantly if interest
rates or equity index levels move in a manner not anticipated by Fund
management.
The Fund has no minimum holding period for investments, and will buy or sell
securities whenever the Fund's management sees an appropriate opportunity.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any fund, there can be no guarantee that the Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value, including
the possibility that the market will go down sharply and unpredictably.
Selection risk is the risk that the investments that Fund management selects
will underperform the stock market or other funds with similar investment
objectives and investment strategies.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often (though
not always) performed differently than securities in the United States. However,
such investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of securities traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
10 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 11
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Emerging Markets Risk -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affect returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price changes
or long term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price to
earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take
MERRILL LYNCH INTERNATIONAL EQUITY FUND 11
<PAGE> 12
[CLIP ART] Details About the Fund
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Currency Risk -- Securities in which the Fund invests are usually denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated in
that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
nonpublic information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a
12 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 13
security, or any of their agents, goes bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold securities in certain foreign
markets than in the U.S. The increased expense of investing in foreign markets
reduces the amount the Fund can earn on its investments and typically results in
a higher operating expense ratio for the Fund than investment companies invested
only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
- If the transition to euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and
other disruptions of the markets could occur.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 13
<PAGE> 14
[CLIP ART] Details About the Fund
- Withdrawal from EMU by a participating country could also have a
negative effect on the Fund's investments, for example if securities
redenominated in euros are transferred back into that country's
national currency.
Borrowing and Leverage Risk -- The Fund may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Fund shares and in the yield on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund's return. Certain derivative securities that the
Fund buys may create leverage.
Securities Lending -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events could
trigger adverse tax consequences to the Fund.
Risks associated with certain types of securities in which the Fund may invest
include:
Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like a regular debt security, that is, if market
interest rates rise, the value of a convertible usually falls. Since it is
convertible into common stock, the convertible also has the same types of market
and issuer risk as the underlying common stock.
Derivatives -- The Fund may use derivative instruments including futures,
options, indexed securities, inverse securities and swaps. Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as gold or oil), or an index such as Standard & Poor's 500 Index.
Derivatives allow the Fund to increase or decrease its risk exposure more
quickly and efficiently than other types of instruments. Derivatives are
volatile and involve significant risks, including:
- Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
14 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 15
- Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of
an investment.
- Leverage risk -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
- Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the derivative outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings being hedged may
not be reduced. There can be no assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may choose not to do so.
Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
interest rates increase and increase when interest rates decrease. Investments
in inverse floaters may subject the Fund to the risks of reduced or eliminated
interest payments and losses of principal. In addition, certain indexed
securities and inverse floaters may increase or decrease in value at a greater
rate than the underlying interest rate, which effectively leverages the Fund's
investment. Indexed securities and inverse floaters are derivative securities
MERRILL LYNCH INTERNATIONAL EQUITY FUND 15
<PAGE> 16
[CLIP ART] Details About the Fund
and can be considered speculative. Indexed and inverse securities involve credit
risk and certain indexed and inverse securities may involve currency risk,
leverage risk and liquidity risk.
Swap Agreements -- Swap agreements involve the risk that the party with whom the
Fund has entered into the swap will default on its obligation to pay the Fund
and the risk that the Fund will not be able to meet its obligations to pay the
other party to the agreement.
Debt Securities -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt are subject to the risk that a government entity may delay or
refuse to pay interest or repay principal on its sovereign debt. Some of these
reasons may include cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government entity defaults,
it may ask for more time in which to pay or for further loans. There is no legal
process for collecting sovereign debt that a government does not pay or
bankruptcy proceeding by which all or part of sovereign debt that a government
entity has not repaid may be collected.
Depositary Receipts -- The Fund may invest in securities of foreign issuers in
the form of Depositary Receipts or other securities that are convertible into
securities of foreign issuers. American Depositary Receipts are receipts
typically issued by an American bank or trust company that show evidence of
underlying securities issued by a foreign corporation. European Depositary
Receipts and Global Depositary Receipts each evidence a similar ownership
arrangement. The Fund may also invest in unsponsored Depositary Receipts. The
issuers of such unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and therefore, there may be less
information available regarding such issuers.
16 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 17
Repurchase Agreements; Purchase and Sale Contracts -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed upon
time and price. This insulates the Fund from changes in the market value of the
security during the period, except for currency fluctuations. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts provide that the purchaser receives any interest on the security paid
during the period. If the seller fails to repurchase the security in either
situation and the market value declines, the Fund may lose money.
Illiquid Securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. The Fund may be unable to sell
them on short notice or may be able to sell them only at a price below current
value. The Fund may get only limited information about the issuer, so it may be
less able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 17
<PAGE> 18
Your Account [CLIP ART]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales charge
at the time of purchase. If you buy Class D shares, you also pay an ongoing
account maintenance fee of 0.25%. You may be eligible for a sales charge
reduction or waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
18 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 19
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill
- Current Class A Lynch. Limited Lynch. Limited Lynch. Limited
shareholders availability through availability through availability through
- Certain Retirement other securities other securities other securities
Plans dealers. dealers. dealers.
- Participants in
certain Merrill Lynch-
sponsored programs
- Certain affiliates of
Merrill Lynch
- ---------------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within one redeemed within one
year.) year.)
- ---------------------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee No
Distribution Fees? 0.75% Distribution 0.75% Distribution Distribution Fee.
Fee. Fee.
- ---------------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND 19
<PAGE> 20
[CLIP ART] Your Account
Right of Accumulation -- permits you to
pay the sales charge that would apply to
the cost or value (whichever is higher)
of all shares you own in the Merrill
Lynch mutual funds that offer Select
Pricing options.
Letter of Intent -- permits you to pay
the sales charge that would be
applicable if you add up all shares of
Merrill Lynch Select Pricing(SM) System
funds that you agree to buy within a 13
month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer- sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
- Purchases under a Right of Accumulation or Letter of Intent
- TMA(SM) Managed Trusts
- Certain Merrill Lynch investment or central asset accounts
- Certain employer-sponsored retirement or savings plans
- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances
20 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 21
- Certain investors, including directors or trustees of Merrill
Lynch mutual funds and Merrill Lynch employees
- Certain Merrill Lynch fee-based programs
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while Class
A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Fund shares.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 21
<PAGE> 22
[CLIP ART] Your Account
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases as
you hold your shares over time, according to the following schedule:
<TABLE>
<CAPTION>
Years Since Purchase Sales 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>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Merrill Lynch funds have identical deferred sales charge schedules. If
you exchange your shares for shares of another fund, the higher charge will
apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old
- Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers
- Redemption in connection with participation in certain Merrill
Lynch fee-based programs
- Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held
- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established
22 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 23
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relative to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The following chart summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 23
<PAGE> 24
[CLIP ART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 19.
appropriate for you Be sure to read this Prospectus carefully.
------------------------------------------------------------------------------------------------------------
Next, determine the amount The minimum initial investment for the Fund is $1,000 for all
your investment accounts except:
- $250 for certain Merrill Lynch fee-based programs
- $100 for retirement plans.
(The minimums for initial investments may be waived under certain
circumstances.)
------------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. Any purchase orders placed
securities dealer submit prior to the close of business on the New York Stock Exchange
your purchase order (generally 4:00 p.m. Eastern time) will be priced at the net asset
value determined that day.
Purchase orders placed after that time will be priced at the net
asset value determined on the next business day. The Fund may
reject any order to buy shares and may suspend the sale of shares
at any time. Merrill Lynch may charge a processing fee to confirm a
purchase. This fee is currently $5.35.
------------------------------------------------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call the Transfer Agent at
Agent 1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this Prospectus.
- ------------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is generally
Investment $50 except that retirement plans have a minimum additional
purchase of $1 and certain programs, such as automatic
investment plans, may have higher minimums.
(The minimum for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic charge.
dividend reinvestment plan
------------------------------------------------------------------------------------------------------------
Participate in the You may invest a specific amount on a periodic basis through
automatic investment plan certain Merrill Lynch investment or central asset accounts.
- ------------------------------------------------------------------------------------------------------------------------------------
Transfer Shares Transfer to a participating You may transfer your Fund shares only to another securities
to Another securities dealer dealer that has entered into an agreement with Merrill
Securities Dealer Lynch. Certain shareholder services may not be available for
the transferred shares. You may only purchase additional
shares of funds previously owned before the transfer. All
future trading of these assets must be coordinated by the
receiving firm.
------------------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer - Transfer your shares to an account with the Transfer
Agent; or
- Sell your shares paying any applicable CDSC.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 25
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Your Shares Have Your Merrill Lynch The price of your shares is based on the next calculation of
Financial Consultant or net asset value after your order is placed. For your
securities dealer submit redemption request to be priced at the net asset value on
your sales order the day of your request, you must submit your request to
your dealer prior to that day's close of business on the New
York Stock Exchange (generally 4:00 p.m. Eastern time). Any
redemption request placed after that time will be priced at
the net asset value at the close of business on the next
business day. Dealers must submit redemption requests to the
Fund not more than thirty minutes after the close of
business on the New York Stock Exchange on the day the
request was received.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the Transfer
Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. In some cases a signature guarantee may be
required. Please see the Statement of Additional Information
for details on when a signature guarantee is needed. If you
hold stock certificates, return the certificates with the
letter. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
- -----------------------------------------------------------------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. If you hold
your Fund shares in a Merrill Lynch CMA(R), CBA(R) or
Retirement Account you can arrange for systematic
redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject
to certain conditions. Under either method you must have
dividends and other distributions automatically reinvested.
For Class B and C shares your total annual withdrawals
cannot be more than 10% per year of the value of your shares
at the time your plan is established. The deferred sales
charge is waived for systematic redemptions. Ask your
Merrill Lynch Financial Consultant for details.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INTERNATIONAL EQUITY FUND 25
<PAGE> 26
[CLIP ART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchange Your Shares Select the fund into You can exchange your shares of the Fund for shares of many
which you want to other Merrill Lynch mutual funds. You must have held the
exchange. Be sure to shares used in the exchange for at least 15 calendar days
read that fund's before you can exchange to another fund.
prospectus
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class A
shares and wish to exchange into a fund in which you have no
Class A shares, you will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of the Fund
will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may be
modified or terminated at any time in the future.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 27
Net Asset Value -- the market value of
the Fund's total assets after deducting
liabilities, divided by the number of
shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the
MERRILL LYNCH INTERNATIONAL EQUITY FUND 27
<PAGE> 28
[CLIP ART] Your Account
Dividends -- Ordinary income and capital
gains paid to shareholders. Dividends
may be reinvested in additional Fund
shares as they are paid.
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value. However,
if you participate in the program for less than a specified period, you may be
charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any net
realized long-term capital gains. The Fund may also pay a special distribution
at the end of the calendar year to comply with Federal tax requirements. If your
account is with Merrill Lynch and you would like to receive dividends in cash,
contact your Merrill Lynch Financial Consultant. If your account is with the
Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent. Although this cannot be predicted with any certainty, the Fund
anticipates that the majority of its dividends, if any, will consist of capital
gains.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gain
dividends are generally taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
28 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 29
"BUYING A DIVIDEND"
Unless your investment is in a tax
deferred account, you may want to avoid
buying shares shortly before the Fund
pays a dividend. The reason? If you buy
shares when a fund has realized but not
yet distributed income or capital gains,
you will pay the full price for the
shares and then receive a portion of the
price back in the form of a taxable
dividend. Before investing you may want
to consult your tax adviser.
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 United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund if
certain requirements are met.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 29
<PAGE> 30
Management of the Fund [CLIP ART]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Trustees. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of 0.75%
of the average daily net assets of the Fund.
Merrill Lynch Asset Management is part of the Merrill Lynch Asset Management
Group which had approximately $520 billion in investment company and other
portfolio assets under management as of August 1999. This amount includes assets
managed for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told Fund management that they also
expect to resolve the Year 2000 Problem, and Fund management will continue to
monitor the situation as the Year 2000 approaches. However, if the problem has
not been fully addressed, the Fund could be negatively affected. The Year 2000
Problem could also have a negative impact on the issuers of securities in which
the Fund invests. This negative impact may be greater for companies in foreign
markets, particularly emerging markets, since they may be less prepared for the
Year 2000 Problem than domestic companies and markets. If the companies in which
the Fund invests have Year 2000 Problems, the Fund's returns could be adversely
affected.
30 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 31
FINANCIAL HIGHLIGHTS
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial statements,
is included in the Fund's annual report to shareholders, which is available upon
request.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- ---------------------------------------------
For the
Period
For the Year Ended October For the Year Ended
May 31, 21, 1994+ May 31,
------------------------------------------ to ---------------------------------------------
Increase (Decrease) in May 31,
Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995 1999++ 1998++ 1997++ 1996++ 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning
period $ 9.57 $ 12.58 $ 11.94 $ 10.25 $ 11.73 $ 9.62 $ 12.42 $ 11.76 $ 10.19 $ 11.44
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income-- net .13 .12 .12 .16 .26 .04 --+++ .01 .04 .02
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net (.18) (1.08) 1.09 1.53 (1.05) (.19) (1.04) 1.08 1.53 (.69)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (.05) (.96) 1.21 1.69 (.79) (.15) (1.04) 1.09 1.57 (.67)
- -----------------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income -- net -- -- (.24) -- (.15) -- -- (.10) -- (.04)
In excess of investment
income -- net -- -- (.01) -- -- -- -- (.01) -- --
Realized gain on
investments -- net -- (1.08) (.32) -- (.54) -- (.93) (.32) -- (.54)
In excess of realized gain
on investments -- net (.36) (.97) -- -- -- (.30) (.83) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.36) (2.05) (.57) -- (.69) (.30) (1.76) (.43) -- (.58)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 9.16 $ 9.57 $ 12.58 $ 11.94 $ 10.25 $ 9.17 $ 9.62 $ 12.42 $ 11.76 $ 10.19
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share (.35)% (6.02)% 10.76% 16.49% (6.78)%# (1.36)% (7.01)% 9.70% 15.41% (5.91)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses 1.33% 1.16% 1.11% 1.06% 1.23%* 2.39% 2.20% 2.14% 2.09% 2.13%
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income (loss)--net 1.54% 1.08% 1.04% 1.47% 4.64%* .41% (.01)% .08% .37% .23%
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $19,540 $33,960 $44,624 $116,628 $74,478 $144,681 $311,520 $583,213 $945,368 $961,941
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95% 132.43% 107.50% 60.56% 71.86% 63.95%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
MERRILL LYNCH INTERNATIONAL EQUITY FUND 31
<PAGE> 32
[CLIP ART] Management of the Fund
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
- -----------------------------------------------------------------------------------------------------------------------------------
Class C Class D
--------------------------------------------------- -----------------------------------------------
For the
Period
For the Year Ended October For the Year Ended
May 31, 21, 1994+ May 31,
--------------------------------------- to -----------------------------------------------
Increase (Decrease) in May 31,
Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995 1999++ 1998++ 1997++ 1996++ 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning
of period $ 9.49 $ 12.26 $ 11.65 $ 10.10 $ 11.62 $ 9.63 $ 12.59 $ 11.94 $ 10.27 $ 11.51
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income-- net .03 --+++ --+++ .05 .24 .11 .09 .10 .13 .10
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net (.19) (1.02) 1.08 1.50 (1.09) (.20) (1.07) 1.09 1.54 (.68)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (.16) (1.02) 1.08 1.55 (.85) (.09) (.98) 1.19 1.67 (.58)
- -----------------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --net -- -- (.14) -- (.13) -- -- (.21) -- (.12)
In excess of investment
income--net -- -- (.01) -- -- -- -- (.01) -- --
Realized gain on
investments--net -- (.92) (.32) -- (.54) -- (1.04) (.32) -- (.54)
In excess of realized gain
on investments--net (.30) (.83) -- -- -- (.34) (.94) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.30) (1.75) (.47) -- (.67) (.34) (1.98) (.54) -- (.66)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 9.03 $ 9.49 $ 12.26 $ 11.65 $ 10.10 $ 9.20 $ 9.63 $ 12.59 $ 11.94 $ 10.27
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share (1.50)% (6.96)% 9.71% 15.35% (7.36)%# (.70)% (6.18)% 10.50% 16.26% (5.11)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses 2.40% 2.21% 2.15% 2.09% 2.30%* 1.59% 1.42% 1.36% 1.31% 1.34%
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income (loss)--net .40% (.01)% .04% .45% 4.26%* 1.23% .77% .86% 1.13% .85%
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $6,328 $14,717 $24,774 $46,985 $25,822 $35,210 $67,689 $119,024 $175,151 $188,583
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95% 132.43% 107.50% 60.56% 71.86% 63.95%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
32 MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 33
(This page intentionally left blank)
MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 34
(This page intentionally left blank)
MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 35
-----------------------------
POTENTIAL
INVESTORS
Open an account (two options)
-----------------------------
(1) (2)
- -------------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
or SECURITIES DEALER P.O. Box 45289
Jacksonville, Florida 32232-5289
Advises shareholders on
their Fund investments. Performs recordkeeping and
- -------------------------- reporting services.
--------------------------------
-----------------------------------------------
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
-----------------------------------------------
- ------------------------------ --------------------------------
COUNSEL CUSTODIAN
Brown & Wood LLP Brown Brothers Harriman & Co.
One World Trade Center 40 Water Street
New York, New York 10048-0557 Boston, Massachusetts 02109
Provides legal advice -------------- Holds the Fund's assets
to the Fund. THE FUND for safekeeping.
- ------------------------------ --------------------------------
The Board of
Trustees
oversees the Fund.
------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ----------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
------------------------------------
MERRILL LYNCH INTERNATIONAL EQUITY FUND
<PAGE> 36
For More Information [CLIP ART]
Shareholder Reports
Additional information about the Fund's investments
is available in the Funds's annual and semi-annual
reports to shareholders. In the Fund's annual
report you will find a discussion of the market
conditions and investment strategies that
significantly affected the Fund's performance
during its last fiscal year. You may obtain these
reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder
report and certain other mailings, regardless of
the number of Fund accounts you have. To receive
separate shareholder reports for each account, call
your Merrill Lynch Financial Consultant or write to
the Transfer Agent at its mailing address. Include
your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account
number. If you have any questions, please call your
Merrill Lynch Financial Consultant or the Transfer
Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information
contains further information about the Fund and is
incorporated by reference (legally considered to be
part of this prospectus). You may request a free
copy by writing the Fund at Financial Data
Services, Inc. P.O. Box 45289 Jacksonville, Florida
32232-5289 or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or
the Fund, at the telephone number or address
indicated above, if you have any questions.
Information about the Fund (including the Statement
of Additional Information) can be reviewed and
copied at the SEC's Public Reference Room in
Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the public
reference room. This information is also available
on the SEC's Internet site at http://www.sec.gov
and copies may be obtained upon payment of a
duplicating fee by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained
in this Prospectus. No one is authorized to provide
you with information that is different from
information contained in this Prospectus
Investment Company Act file #811-6521
Code #16747-09-99
(C)Merrill Lynch Asset Management, L.P.
Prospectus [LOGO] Merrill Lynch
Merrill Lynch
International Equity Fund
September 29, 1999
<PAGE> 37
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch International Equity Fund
P.O. Box 9011, Princeton, New Jersey 08543-9011 o 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 United
States depending upon management's outlook with respect to prevailing trends and
developments. It is anticipated that a substantial portion of the Fund's assets
will be invested in the developed countries of Europe and the Far East and that
a significant portion of its assets also may be invested in developing
countries. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. There can be no assurance that the Fund's
investment objective will be achieved.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
September 29, 1999 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
or the Prospectus at no charge by calling (800) 456-4587 ext. 789 between 8:00
a.m. and 8:00 p.m. on any business day.
------------------------
Merrill Lynch Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
The date of this Statement of Additional Information is September 29, 1999.
------------------------
<PAGE> 38
TABLE OF CONTENTS
Page
----
Investment Objective and Policies ......................................... 2
Description of Certain Investments ..................................... 2
European Economic and Monetary Union ................................... 4
Derivatives ............................................................ 5
Other Investment Policies and Practices ................................ 10
Investment Restrictions ................................................ 11
Portfolio Turnover ..................................................... 13
Management of the Fund .................................................... 13
Trustees and Officers .................................................. 13
Compensation of Trustees ............................................... 14
Management and Advisory Arrangements ................................... 15
Code of Ethics ......................................................... 16
Purchase of Shares ........................................................ 17
Initial Sales Charge Alternatives--
Class A and Class D Shares ........................................... 17
Deferred Sales Charge Alternatives--
Class B and Class C Shares ........................................... 21
Distribution Plans ..................................................... 23
Limitations on the Payment of Deferred Sales Charges ................... 25
Redemption of Shares ...................................................... 26
Redemption ............................................................. 26
Repurchase ............................................................. 27
Reinstatement Privilege-- Class A and Class D Shares ................... 27
Pricing of Shares ......................................................... 27
Determination of Net Asset Value ....................................... 27
Computation of Offering Price Per Share ................................ 28
Portfolio Transactions .................................................... 29
Shareholder Services ...................................................... 30
Investment Account ..................................................... 30
Exchange Privilege ..................................................... 31
Fee-Based Programs ..................................................... 33
Retirement and Education Savings Plans ................................. 33
Automatic Investment Plans ............................................. 33
Automatic Dividend Reinvestment Plan ................................... 34
Systematic Withdrawal Plan ............................................. 34
Dividends and Taxes ....................................................... 35
Dividends .............................................................. 35
Taxes .................................................................. 35
Tax Treatment of Options, Futures and Forward
Foreign Exchange Transactions .......................................... 37
Special Rules for Certain Foreign Currency Transactions ................ 37
Performance Data .......................................................... 38
General Information ....................................................... 40
Description of Shares .................................................. 40
Independent Auditors ................................................... 41
Custodian .............................................................. 41
Transfer Agent ......................................................... 41
Legal Counsel .......................................................... 41
Reports to Shareholders ................................................ 41
Shareholder Inquiries .................................................. 41
Additional Information ................................................. 41
Financial Statements ...................................................... 42
<PAGE> 39
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 "How the Fund Invests" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
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 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.
The U.S. Government has from time to time 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.
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 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, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Description of Certain Investments
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible into
securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. American Depositary Receipts ("ADRs") are receipts typically
issued by an American bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. European Depositary
Receipts ("EDRs") are receipts issued in Europe that evidence a similar
ownership arrangement. Global Depositary Receipts ("GDRs") are receipts issued
throughout the world that evidence a similar 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 in Europe and are designed for use throughout the
world. The Fund may invest in unsponsored Depositary Receipts. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States, and therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
Convertible Securities. Convertible securities entitle the holder to
receive interest payments on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.
The characteristics of convertible securities make them appropriate
investments for an investment company seeking capital appreciation and,
secondarily, investment income. These characteristics include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in
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<PAGE> 40
value relative to the underlying common stock due to their fixed-income nature.
As a result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Even in cases where a substantial portion of the
convertible securities held by the Fund are denominated in United States
dollars, the underlying equity securities may be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in the
exchange rate between the currency in which the debt security is denominated and
the currency in which the share price is quoted will affect the value of the
convertible security. As described below, the Fund is authorized to enter into
foreign currency hedging transactions in which it may seek to reduce the effect
of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value" which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
3
<PAGE> 41
The Fund may invest in securities that are not registered under the
Securities Act or that are subject to trading restrictions under the laws of a
foreign jurisdiction ("restricted securities"). Restricted securities may be
sold in private placement transactions between the issuers and their purchasers
and may be neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities may not be freely
transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market,
privately placed securities may be less liquid and more difficult to value than
publicly traded securities. To the extent that privately placed securities may
be resold in privately negotiated transactions, the prices realized from the
sales, due to illiquidity, could be less than those originally paid by the Fund
or less than their fair market value. In addition, issuers whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were publicly
traded. If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers, which
may involve greater risks. These issuers may have limited product lines, markets
or financial resources, or they may be dependent on a limited management group.
In making investments in such securities, the Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Trustees has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Trustees has adopted
guidelines and delegated to the Investment Adviser 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 continue to develop, the Board of Trustees will carefully
monitor the Fund's investments in these securities. 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.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the Fund
may invest up to 10% of its total assets in securities of other investment
companies. In addition, under the Investment Company Act the Fund may not own
more than 3% of the total outstanding voting stock of any investment company and
not more than 5% of the value of the Fund's total assets may be invested in the
securities of any investment company. If the Fund acquires shares in investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies (including management and advisory fees).
Investments by the Fund in wholly owned investment entities created under the
laws of certain countries will not be deemed an investment in other investment
companies.
European Economic and Monetary Union
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty on European Union (the "Maastricht Treaty") set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). EMU established a single
common European currency (the "euro") that was introduced on January 1, 1999 and
is expected to replace the existing national currencies of all EMU participants
by July 1, 2002. EMU took effect for the initial EMU participants on January 1,
1999. Certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are listed,
traded, and make dividend and other payments only in euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or
4
<PAGE> 42
completely unwound. Because any participating country may opt out of EMU within
the first three years, it is also possible that a significant participant could
choose to abandon EMU, which could diminish its credibility and influence. Any
of these occurrences could have adverse effects on the markets of both
participating and non-participating countries, including sharp appreciation or
depreciation of participants' national currencies and a significant increase in
exchange rate volatility, a resurgence in economic protectionism, an undermining
of confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic unity,
and/or reversion of the attempts to lower government debt and inflation rates
that were introduced in anticipation of EMU. Also, withdrawal from EMU by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Fund's investments
in Europe generally or in specific countries participating in EMU. Gains or
losses from euro conversions may be taxable to Fund shareholders under foreign
or, in certain limited circumstances, U.S. tax laws.
Derivatives
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil), a currency or an index (a measure of value or
rates, such as the Standard & Poor's 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
Indexed and Inverse Securities
The Fund may invest in securities the potential return of which is based on
an index. As an illustration, the Fund may invest in a debt security that pays
interest based on the current value of an interest rate index, such as the prime
rate. The Fund may also invest in a debt security which returns principal at
maturity based on the level of a securities index or a basket of securities, or
based on the relative changes of two indices. In addition, the Fund may invest
in securities the potential return of which is based inversely on the change in
an index (that is, a security the value of which will move in the opposite
direction of changes to an index). For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices. Indexed and
inverse securities involve credit risk, and certain indexed and inverse
securities may involve leverage risk, liquidity risk, and currency risk.
The Fund may invest in indexed and inverse securities for hedging purposes
only. When used for hedging purposes, indexed and inverse securities involve
correlation risk.
Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite manner
to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than anticipated by
the Fund or if the cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the Derivative will
not match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced. This risk is
known as "Correlation Risk."
The Fund may use Derivative instruments and trading strategies including
the following:
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities
held in its portfolio or securities indices the performance of which correlates
with securities held in its portfolio. When the Fund purchases a put option, in
consideration for an upfront payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund at a
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk
5
<PAGE> 43
of loss in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the market
value of the portfolio holdings associated with the put option increases rather
than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put. Purchasing a put option may
involve correlation risk, and may also involve liquidity and credit risk.
Purchasing Call Options. The Fund may also purchase call options on securities
it intends to purchase or securities or interest rate indices, which are
correlated with the types of securities it intends to purchase. When the Fund
purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium, the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on securities, or agrees to pay to
another party an amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case of an option on
a securities index. The Fund may write call options to earn income, through the
receipt of option premiums. In the event the party to which the Fund has written
an option fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding. Writing a call option may
involve correlation risk.
Writing Put Options. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay to another party an amount based on
any decline in a specified securities index below a specified level on or before
the expiration date, in the case of an option on a securities index. The Fund
may write put options to earn income, through the receipt of option premiums. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund would be willing
to purchase the security at the exercise price for investment purposes (in the
case of an option on a security) or is writing the put in connection with
trading strategies involving combinations of options -- for example, the sale
and purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread"). Writing a
put option may involve substantial leverage risk.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will also
be considered covered if the
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<PAGE> 44
Fund owns the securities it would be required to deliver upon exercise of the
option (or, in the case of an option on a securities index, securities which
substantially correlate with the performance of such index) or owns a call
option, warrant or convertible instrument which is immediately exercisable for,
or convertible into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on U.S. and foreign exchanges and in the OTC
markets. In general, exchange-traded options have standardized exercise prices
and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitation on the Use of OTC
Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is a
currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Swaps
The Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which direct investment is restricted
by local law or is otherwise impractical.
The Fund will enter into an equity swap transaction only if, immediately
following the time the Fund enters into the transaction, the aggregate notional
principal amount of equity swap transactions to which the Fund is a party would
not exceed 5% of the Fund's net assets.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell listed or OTC options on currencies and
purchase and sell currency futures and related options thereon (collectively,
"Currency Instruments") for purposes of hedging against the decline in the value
of currencies in which its portfolio holdings are denominated against the U.S.
dollar.
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<PAGE> 45
Forward Foreign Exchange Transactions. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set
at the time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a foreign exchange
transaction for purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or selling a
currency in which the Fund has received or anticipates receiving a dividend or
distribution. The Fund may enter into a foreign exchange transaction for
purposes of hedging a portfolio position by selling forward a currency in which
a portfolio position of the Fund is denominated or by purchasing a currency in
which the Fund anticipates acquiring a portfolio position in the near future.
Forward foreign exchange transactions involve substantial currency risk, and
also involve credit and liquidity risk.
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures".
Currency futures involve substantial currency risk, and also involve leverage
risk.
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Investment Adviser believes that (i) there
is a demonstrable high correlation between the currency in which the cross-hedge
is denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against
adverse currency movements, transactions in Currency Instruments involve the
risk that anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be ineffective. To the extent that the
Fund hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
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 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
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio effectively.
8
<PAGE> 46
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available and it is not possible to engage in effective
foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency Risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be completely
offset by movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain Derivatives traded in OTC markets, including OTC options, involve
substantial liquidity risk. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. The Fund will therefore acquire
illiquid OTC instruments (i) if the agreement pursuant to which the instrument
is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Investment Adviser anticipates the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
Derivatives traded in OTC
9
<PAGE> 47
markets only with financial institutions which have substantial capital or which
have provided the Fund with a third-party guaranty or other credit enhancement.
Other Investment Policies and Practices
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require
the Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so. The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace.
Securities Lending. The Fund may lend securities with a value not exceeding
33 1/3% of its total assets. In return, the Fund receives collateral in an
amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
This limitation is a fundamental policy and it 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. The Fund receives
securities as collateral for the loaned securities and the Fund and the borrower
negotiate a rate for the loan premium to be received by the Fund for the loaned
securities, which increases the Fund's yield. The Fund may receive a flat fee
for its loans. The loans are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days. The
Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent the value of the collateral
falls below the market value of the borrowed securities.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under a repurchase agreement or a purchase and sale contract, the
counterparty agrees, upon entering into the contract, to repurchase the security
at a mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period although it
may be affected by currency fluctuations. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate of return, the rate of return to the Fund
shall be dependent upon intervening fluctuations of the market value of such
securities and the accrued interest on the securities. In such event, the Fund
would have rights against the seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the seller to
perform.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on foreign securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's
10
<PAGE> 48
investment objectives and such investor's ability to accept the risks associated
with investing in foreign securities, including the risk of loss of principal.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more than
50% of the outstanding shares). 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 331/3% 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, 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 without approval of the Fund's shareholders.
Under non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment
Company Act, at any time its shares are owned by another investment company
that is part of the same group of investment companies as the Fund.
11
<PAGE> 49
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (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.
d. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets, taken at market value, and then
only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund will
not purchase securities while borrowings exceed 5% of its total assets,
except (a) to honor prior commitments or (b) to exercise subscription rights
when outstanding borrowings have been obtained exclusively for settlements of
other securities transactions.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
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
exceed 15% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund which are illiquid or are not otherwise readily
marketable. However, if 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.,
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 Commission staff of
its position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, 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
Merrill Lynch or any of its affiliates acting as principal.
The Fund's investment restrictions contain an exception that permits the
Fund to purchase securities pursuant to the exercise of subscription rights,
subject to the condition that such purchase will not result in the Fund ceasing
to be treated as a regulated investment company as required by the Code.
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 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.
12
<PAGE> 50
Portfolio Turnover
The Investment Adviser will effect portfolio transactions without regard to
the time the securities have been held, if, in its judgment, such transactions
are advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, financial or economic
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions and the Fund's portfolio turnover
rate may vary greatly from year to year or during periods within a year. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of U.S. government securities and all other securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. A high portfolio turnover may
result in negative tax consequences, such as an increase in capital gain
dividends. High portfolio turnover may also involve correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees of the Fund consists of seven individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Trustees"). The Trustees are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors or trustees of investment companies by the
Investment Company Act.
Information about the Trustees, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (58) -- President and Trustee(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director
thereof since 1991; Executive Vice President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; President of Princeton Administrators,
L.P. since 1988.
Donald Cecil (72) -- Trustee(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (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 (72) -- Trustee(2)(3) -- 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),
Harman International Industries, Inc. and Ethan Allen Interiors, Inc.
Charles C. Reilly (68) -- Trustee(2)(3) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television from 1986 to 1997.
Richard R. West (61) -- Trustee(2)(3) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company), Vornado Operating Company,
Inc. and Alexander's, Inc. (real estate company).
Arthur Zeikel (67) -- Trustee(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
13
<PAGE> 51
Edward D. Zinbarg (64) -- Trustee(2)(3) -- 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.
Robert C. Doll (45) -- Senior Vice President(1)(2) -- Senior Vice President
of the Investment Adviser and FAM since 1999; Senior Vice President of Princeton
Services since 1999; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999
and Executive Vice President thereof from 1991 to 1999.
Clive D. Lang (49) -- Senior Vice President and Portfolio Manager(1) --
Vice President of the Investment Adviser since 1997; associated with Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K.") since 1997 and prior to that
was the Chief Investment Officer of Panagora Asset Management Limited.
Donald C. Burke (39) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of the Investment Adviser from 1997 to 1999; Vice President of the
Investment Adviser from 1990 to 1997; Director of Taxation of the Investment
Adviser since 1990; Vice President of PFD since 1999.
Robert Harris (47) -- Secretary (1)(2) -- First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1984 to 1997 and attorney associated with the Investment Adviser since 1980;
Secretary of PFD since 1982.
- ------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a trustee, director or officer of certain other
investment companies for which the Investment Adviser or FAM acts as the
investment adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
As of September 1, 1999, the Trustees and officers of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee of the Fund, Mr. Glenn, a Trustee and
officer of the Fund, and the other officers of the Fund owned an aggregate of
less than 1% of the outstanding shares of common stock of ML & Co.
Compensation of Trustees
The Fund pays each non-interested Trustee a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates each member of the
Audit and Nominating Committee (the "Committee"), which consists of the
non-interested Trustees at a rate of $500 per Committee meeting attended. The
Fund pays the Chairman of the Committee an additional fee of $250 per Committee
meeting attended. The Fund reimburses each non-interested Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended May 31, 1999 and the aggregate compensation
paid to them from all registered investment companies advised by the Investment
Adviser and its affiliate, FAM ("MLAM/FAM-advised funds"), for the calendar year
ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Fund and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds(1)
- ----- ----------- ------------ ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil ..................... Trustee $8,500 None None $277,808
Roland M. Machold(2) ............. Trustee $4,542 None None $ 39,208(2)
Edward H. Meyer .................. Trustee $7,000 None None $214,558
Charles C. Reilly ................ Trustee $7,500 None None $362,858
Richard R. West .................. Trustee $7,500 None None $346,125
Edward D. Zinbarg ................ Trustee $7,500 None None $133,959
</TABLE>
- ----------------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios); Mr.
Mr. Machold (19 registered investment companies consisting of 19
portfolios);
<PAGE> 52
Meyer (34 registered investment companies consisting of 34 portfolios); Mr.
Reilly (59 registered investment companies consisting of 72 portfolios);
Mr. West (61 registered investment companies consisting of 85 portfolios);
and Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
(2) Mr. Machold was elected a Trustee of the Fund and director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998. Mr. Machold
resigned all such positions on August 20, 1999.
14
<PAGE> 53
Trustees of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives -- Class A and
Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Trustees, 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. The Investment Adviser performs certain of the other
administrative services and provides all the office space, facilities, equipment
and necessary personnel for management of the Fund.
Investment Advisory Fee. The Fund has entered into an investment advisory
agreement with the Investment Adviser (the "Investment Advisory Agreement"),
pursuant to which the Investment Adviser receives for its services to the Fund
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The table below sets forth information about the total management
fees paid by the Fund to the Investment Adviser for the periods indicated.
<TABLE>
<CAPTION>
Investment Advisory
Fiscal Year Ended May 31, Fee
----------------------- ----
<S> <C>
1999 ............................. $2,109,287
1998 ............................. $4,596,696
1997 ............................. $7,799,527
</TABLE>
Sub-Advisory Fee. The Investment Adviser has entered into a a sub-advisory
agreement with MLAM U.K. pursuant to which MLAM U.K. provides investment
advisory services to the Investment Adviser with respect to the Fund. The table
below sets forth information about the sub-advisory fees paid by the Investment
Adviser to MLAM U.K. for the periods indicated.
<TABLE>
<CAPTION>
Investment Advisory
Fiscal Year Ended May 31, Fee
----------------------- ----
<S> <C>
1999 ............................. $ 97,386
1998 ............................. $ 612,740
1997 ............................. $1,042,511
</TABLE>
Payment of Fund Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Trustees of the Fund who are
affiliated persons of the Investment Adviser. The Fund pays all other expenses
incurred in the operation of the Fund, including among other things: taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports, prospectuses and statements of additional
information, except to the extent paid by Merrill Lynch Funds Distributor, a
division of PFD (the "Distributor"); charges of the custodian and sub-custodian,
and the transfer agent; expenses of redemption of shares; SEC fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of non-interested Trustees; accounting and pricing costs (including the daily
calculations 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 for 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. The Distributor
will pay certain promotional expenses of the Fund incurred in connection with
the offering of shares of the Fund. 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."
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, 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 exercise a controlling influence over its
management or policies.
15
<PAGE> 54
The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., 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 will continue in effect for a period of two
years from the date of execution and will remain in effect from year to year if
approved annually (a) by the 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 contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Code of Ethics
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
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 pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance 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 that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund 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).
16
<PAGE> 55
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers 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 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 (also known as service 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 contingent deferred sales charges ("CDSCs"), distribution fees
and account maintenance fees that are imposed on Class B and Class C shares, as
well as the account maintenance fees that are imposed on Class D shares, are
imposed directly against those classes and not against all assets of the Fund
and, accordingly, such charges do 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 are calculated in the same
manner at the same time and differ only to the extent that account maintenance
and distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Investment Adviser or FAM. Funds
advised by the Investment Adviser or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "Select Pricing Funds."
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 Fund or the Distributor. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.
Initial Sales Charge Alternatives -- Class A and Class D Shares
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
charges and, in the case of Class D shares, the account maintenance fee.
Although some investors who previously purchased Class A shares may no longer be
eligible to purchase Class A shares of other Select Pricing Funds, those
previously purchased Class A shares, together with Class B, Class C and Class D
share holdings, will count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge 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.
17
<PAGE> 56
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or 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.
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
who currently own Class A shares in a shareholder account are entitled to
purchase additional Class A shares of the Fund in that account. Certain
employee-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 and U.S.
branches of foreign banking institutions provided that the program has $3
million or more initially invested in Select Pricing Funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and certain
purchases made in connection with certain fee-based programs. 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. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions are met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other Select Pricing
Funds.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
Class A Shares
---------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained By Paid To Redemption of
May 31, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
1999 $1,301 $ 67 $1,234 $ 0
1998 $1,469 $ 117 $1,352 $ 0
1997 $6,553 $ 439 $6,114 $ 0
</TABLE>
<TABLE>
<CAPTION>
Class D Shares
---------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
May 31, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
1999 $ 9,602 $ 635 $ 8,967 $ 0
1998 $ 29,382 $1,851 $ 27,531 $ 0
1997 $ 98,162 $5,823 $ 92,339 $ 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
18
<PAGE> 57
Reduced Initial Sales Charges
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.
Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of any other Select Pricing Funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent 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 Intent may be included under a
subsequent Letter of Intent 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 Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the 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 Intent (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least 5.0% of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intent must be at least 5.0% 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 further reduced percentage
sales charge that would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class A or Class D shares at net asset value,
based on the number of employees or number of employees eligible to participate
in the plan, the
19
<PAGE> 58
aggregate amount invested by the plan in specified investments and/or the
services provided by Merrill Lynch to the plan. Additional information regarding
purchases by employer-sponsored retirement or savings plans and certain other
arrangements is available toll-free from Merrill Lynch Business Financial
Services at (800) 237-7777.
Purchase Privilege Of Certain Persons. Trustees Of The Fund, members of the
Boards of other MLAM/FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase class a shares of the fund at net asset value. The fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that 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
shares 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 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 a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that 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 ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that 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 shares of such
other mutual fund 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.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch
20
<PAGE> 59
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing Class
A shares and the other requirements pertaining to the reinvestment privilege are
met. In order to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.
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 Select Pricing Funds.
Because no initial sales charges are deducted at the time of the 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 that do not qualify for
the 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.
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. See "Pricing of Shares -- Determination of Net Asset Value" below.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that 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. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
four-year period. 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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
------------------------------- ----------------
<S> <C>
0-1 ..................................... 4.0%
1-2 ..................................... 3.0%
2-3 ..................................... 2.0%
3-4 ..................................... 1.0%
4 and thereafter ........................ None
</TABLE>
21
<PAGE> 60
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a 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 or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived on redemptions of
shares by certain eligible 401(a) and 401(k) plans. The CDSC may also be waived
for any Class B shares that are purchased by eligible 401(k) or eligible 401(a)
plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC may be waived for any Class B shares that were acquired and held at the
time of the redemption in an Employee Access(SM) Account available through
employers providing eligible 401(k) plans. The Class B CDSC may also be waived
for any Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
Class B CDSC may also be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee Based Programs" and "-- Systematic Withdrawal
Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class B shares with a waiver of the CDSC upon
redemption, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan. Such
Class B shares will convert into Class D shares approximately ten years after
the plan purchases the first share of any Select Pricing Fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.
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 the average daily 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 value 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 the Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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 on to the holding period
for the shares acquired. The Conversion Period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
22
<PAGE> 61
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.
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.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. 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. 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. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends and then of shares held longest during the one-year
period. 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. The Class C CDSC
may be waived in connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plans. See "Shareholder Services -- Systematic Withdrawal Plan." The
Class C CDSC of the fund and certain other MLAM-advised mutual funds may be
waived with respect to Class C shares purchased by an investor with the net
proceeds of a tender offer made by certain MLAM-advised closed end funds,
including Merrill Lynch Senior Floating Rate Fund II, Inc. Such waiver is
subject to the requirement that the tendered shares shall have been held by the
investor for a minimum of one year and to such other conditions as are set forth
in the prospectus for the related closed end fund.
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
Class B Shares*
---------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended May 31, by Distributor Merrill Lynch
----------------- --------------- --------------
<S> <C> <C>
1999 $ 321,632 $ 321,632
1998 $ 868,213 $ 868,213
1997 $2,672,821 $2,672,821
</TABLE>
- --------------
* Additional Class B CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
<TABLE>
<CAPTION>
Class C Shares
---------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended May 31, by Distributor Merrill Lynch
----------------- --------------- --------------
<S> <C> <C>
1999 $ 2,037 $ 2,037
1998 $ 3,787 $ 3,787
1997 $19,009 $19,009
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. 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 the dealer's 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.
See "Distribution Plans" below. 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.
Distribution Plans
Reference is made to "Fees and Expenses" 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
23
<PAGE> 62
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 Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pay 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 with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the Distribution Plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pay 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that each 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 non-interested Trustees
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. 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 distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
As of December 31, 1998, the fully allocated accrual expenses of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual revenues by
approximately $1,371,000 (.72% of Class B net assets at that date). As of May
31, 1999, direct cash revenues
24
<PAGE> 63
for the period since the commencement of operations of Class B shares exceeded
direct cash expenses by $28,234,183 (19.51% of Class B net assets at that date).
As of December 31, 1998, the fully allocated accrual expenses of the Distributor
and Merrill Lynch for the period since the commencement of operations of Class C
shares exceeded the fully allocated accrual revenues by approximately $321,000
(3.65% of Class C net assets at that date). As of May 31, 1999, direct cash
revenues for the period since the commencement of operations of Class C shares
exceeded direct cash expenses by $739,943 (11.69% of Class C net assets at that
date).
For the fiscal year ended May 31, 1999, the Fund paid the Distributor
$2,041,156 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $204.7
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended May 31, 1999, the Fund paid the
Distributor $94,029 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $9.4
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, 1999, the Fund paid the
Distributor $114,287 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$45.8 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the 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, 1999
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, with respect to the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
Data Calculated as of May 31, 1999
-----------------------------------
(in thousands)
Allowable
Eligible Allowable Interest on
Gross Aggregate Unpaid
Sales(1) Sales Charges(2) Balance(3)
-------- ---------------- -----------
<S> <C> <C> <C>
Class B Shares for the
period July 30, 1993
(commencement of operations)
to May 31, 1999
Under NASD Rule as Adopted ........ $1,177,297 $73,244 $27,722
Under Distributor's Voluntary
Waiver .......................... $1,177,297 $73,244 $ 6,224
Class C Shares, for the period
October 21, 1994 (commencement
of operations) to May 31, 1999
Under NASD Rule as Adopted ........ $ 62,865 $ 1,881 $ 1,284
</TABLE>
<TABLE>
<CAPTION>
Annual
Distribution
Amounts Fee at
Maximum Previously Aggregate Current Net
Amount Paid to Unpaid Asset
Payable Distributor(4) Balance Level(5)
------- -------------- --------- -----------
<S> <C> <C> <C> <C>
Class B Shares for the
period July 30, 1993
(commencement of operations)
to May 31, 1999
Under NASD Rule as Adopted ........ $100,966 $38,201 $62,765 $1,085
Under Distributor's Voluntary
Waiver .......................... $ 79,468 $38,201 $41,267 $1,085
Class C Shares, for the period
October 21, 1994 (commencement
of operations) to May 31, 1999
Under NASD Rule as Adopted ........ $ 3,165 $ 897 $ 2,268 $ 47
</TABLE>
- ------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(footnotes continue on following page)
25
<PAGE> 64
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales charge
payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior
to the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Fund
Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The CDSC is
booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
(5) 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 (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or the NYSE is closed (other than customary weekend
and holiday closings), for any period during which an emergency exists as
defined by the 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 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 in part on the market value of the securities held
by the Fund at such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
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. Redemption requests should not be
sent to the Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature on the redemption request may require a guarantee by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. In the event a signature guarantee is required, notarized
signatures are not sufficient. In general, signature guarantees are waived on
redemptions of less than $50,000 as long as the following requirements are met:
(i) all requests require the signature(s) of all persons in whose name(s) shares
are recorded on the Transfer Agent's register; (ii) all checks must be mailed to
the stencil address of record on the Transfer Agent's register and (iii) the
stencil address must not have changed within 30 days. Certain rules may apply
regarding certain account types such as but not limited to UGMA/UTMA accounts,
Joint Tenancies With Rights of Survivorship, contra broker transactions, and
institutional accounts. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
26
<PAGE> 65
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
usually exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to the regular close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and
such request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of business on the NYSE, in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday after the close of business on the NYSE on each
day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m.,
Eastern time. 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
NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser and Distributor
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
27
<PAGE> 66
accruals of the account maintenance fees applicable with respect to the Class D
shares; moreover, the per share net asset value of the Class B and Class C
shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market. Long
positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other investments, including financial futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are stated at fair value as
determined in good faith by or under the direction of the Trustees of the Fund.
Such valuations and procedures will be reviewed periodically by the Trustees.
Generally, trading in non-U.S. 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 business on the NYSE. 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 business on the NYSE. 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 business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
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 and number of shares outstanding on May 31, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets ................................. $19,539,653 $144,680,835 $6,327,941 $35,210,111
=========== ============ ========== ===========
Number of Shares Outstanding ............... 2,133,003 15,783,791 700,487 3,827,337
=========== ============ ========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding) ............................. $ 9.16 $ 9.17 $ 9.03 $ 9.20
Sales Charge (for Class A and Class D
shares: 5.25% of offering price; 5.54%
of net asset value per share)* ........... 0.51 ** ** 0.51
============= ============== ============ =============
Offering Price ............................. $ 9.67 $ 9.17 $ 9.03 $ 9.71
============= ============== ============ =============
</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 Charges Alternatives -- Class B and Class C Shares" herein.
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<PAGE> 67
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities and does not use any particular broker or
dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest spread or commission available. In
addition, consistent with the Conduct Rules of the NASD and policies established
by the Board of Trustees of the Fund, the Investment Adviser 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; however, whether or not a
particular broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research services to the Investment Adviser may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company, industry or economic sector. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. If in the judgment of the Investment
Adviser the Fund will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Investment Adviser exercises investment
discretion. Conversely, the Fund may be the primary beneficiary of the
supplemental research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is 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, will be subject to negotiated commission
rates. The Fund's ability and decisions to purchase or sell portfolio securities
of foreign issuers 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 in United States dollars, the Fund intends to manage
its portfolio so as to give reasonable assurance that it will be able to obtain
United States dollars to the extent necessary to meet anticipated redemptions.
Under present conditions, it is not believed that these considerations will have
any significant effect on its portfolio strategy.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
Aggregate Brokerage Commissions Paid
Fiscal Year Ended May 31, Commissions Paid to Merrill Lynch
--------------------------- ----------------- -----------------
<S> <C> <C>
1999 .................................................... $1,231,792 $30,307
1998 .................................................... $2,431,457 $56,208
1997 .................................................... $2,513,397 $81,635
</TABLE>
For the fiscal year ended May 31, 1999, the brokerage commissions paid to
Merrill Lynch represented 2.46% of the aggregate brokerage commissions paid
and involved 1.79% of the Fund's dollar amount of transactions involving
payment of brokerage commissions.
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<PAGE> 68
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Fund may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Trustees of the Fund that either
comply with rules adopted by the Commission or with interpretations of the
Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the United
States national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
The Board of Trustees of the Fund has considered the possibility of seeking
to recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the Fund to
the Investment Adviser. 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.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate when
one or more clients of the Investment Adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate acts as manager 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 an affiliate 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The statements
will also show any other activity in the account since the preceding statement.
Shareholders will also receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
dividends. A shareholder with an account held at the Transfer Agent may make
additions to his or
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<PAGE> 69
her Investment Account at any time by mailing a check directly to the Transfer
Agent. A shareholder may also maintain an account through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name may be opened automatically at
the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
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. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in the account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second Select Pricing Fund, but does
not hold Class A shares of the second fund in his or her account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second Select Pricing 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 D shares are exchangeable with shares of the
same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
for Class A shares of Summit, ("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 charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or
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<PAGE> 70
Class D shares on which the dividend was paid. Based on this formula, Class A
and Class D shares generally may be exchanged into the Class A or Class D
shares, respectively, of the other funds with a reduced sales charge or without
a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the CDSC 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's Class B shares for two and a half
years. The 2% CDSC that generally would apply to a redemption would not apply to
the exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "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 Special Value Fund Class
B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who exchanged Select Pricing
Fund shares for shares of such other money market funds and subsequently wish to
exchange those money market fund shares for shares of the Fund will be subject
to the CDSC schedule applicable to such Fund shares, if any. The holding period
for the money market fund shares will not count toward satisfaction of the
holding period requirement for reduction of the CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Exchanges by Participants in the MFA Program. 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 Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset
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<PAGE> 71
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 Select Pricing Fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other Select Pricing Funds with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND (1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge an initial
establishment fee and an annual fee for each account. Information with respect
to these plans is available on request from Merrill Lynch.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to RothIRA plans and education savings plans.
Investors considering participation in any retirement or education savings plan
should review specific tax laws relating thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any such plan.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made 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. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
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<PAGE> 72
Alternatively, an investor that maintains 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) or CBA(R) Automated Investment
Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than reinvested in shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
the class of shares to be redeemed. Redemptions will be made at net asset value
as determined after the close of business on the NYSE (generally, the NYSE
closes at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day
of the last month of each quarter, whichever is applicable. If the NYSE is not
open for business on such date, the shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares." Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill Lynch Financial
Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal
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<PAGE> 73
to at least one year's scheduled withdrawals or $1,200, whichever is greater.
Automatic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net investment
income, if any. Dividends from such net investment income will be paid at least
annually. All net realized capital gains, if any, will be distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the year. If in any fiscal year, the
Fund has net income from certain foreign currency transactions, such income will
be distributed at least annually.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. A shareholder whose account is maintained
at the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends on Class D shares will be lower than the per share dividends on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains that it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders").
The Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Certain categories of
capital gains are taxable at different rates. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders with
a
35
<PAGE> 74
written notice designating the amount of any capital gain dividends as well as
any amount of capital gain dividends in the different categories of capital gain
referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January 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 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 United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. The Fund also must meet these holding period requirements,
and if the Fund fails to do so, it will not be able to "pass through" to
shareholders the ability to claim a credit or a deduction for the related
foreign taxes paid by the Fund. If the Fund satisfies the holding period
requirements and if more than 50% in the value of its 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 United States
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 United
States income taxes. No deductions for foreign taxes, moreover, may be claimed
by noncorporate shareholders who do not itemize deductions. A shareholder that
is a nonresident alien individual or a foreign corporation may be subject to
United States 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 United States tax for the foreign taxes treated as having been paid
by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit. For this purpose, the Fund will allocate foreign taxes
and foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allowable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the
36
<PAGE> 75
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non- equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, 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, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, 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
37
<PAGE> 76
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
that 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 formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and 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 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 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. In advertisements distributed
to investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares (such as investors in certain retirement plans) or to
reduced sales loads in the case of Class A and Class
38
<PAGE> 77
D shares, the performance data may take into account the reduced, and not the
maximum, sales charge or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses is deducted. See "Purchase of Shares."
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
Class A Shares Class C Shares
---------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended May 31, 1999 .................. (5.58)% $ 944.20 (2.46)% $ 975.40
Inception (October 21, 1994) to
May 31, 1999 .............................. 1.42% $ 1,067.20 1.57% $ 1,074.30
</TABLE>
<TABLE>
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended May 31
1999 ...................................... (0.35)% $ 996.50 (1.50)% $ 985.00
1998 ...................................... (6.02)% $ 939.80 (6.96)% $ 930.40
1997 ...................................... 10.76% $ 1,107.60 9.71% $ 1,097.10
1996 ...................................... 16.49% $ 1,164.90 15.35% $ 1,153.50
Inception (October 21, 1994) to
May 31, 1995 .............................. (6.78)% $ 932.20 (7.36)% $ 926.40
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
May 31, 1999 .............................. 6.72% $ 1,067.20 7.43% $ 1,074.30
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Class D Shares
---------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended May 31, 1999 .................. (5.18)% $ 948.20 (5.91)% $ 940.90
Five Years Ended May 31, 1999 ................ 1.79% $ 1,092.50 1.48% $ 1,076.10
Inception (July 30, 1993) to
May 31, 1999 .............................. 3.90% $ 1,249.90 3.74% $ 1,238.60
</TABLE>
<TABLE>
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended May 31,
1999 ...................................... (1.36)% $ 986.40 (0.70)% $ 993.00
1998 ...................................... (7.01)% $ 929.90 (6.18)% $ 938.20
1997 ...................................... 9.70% $ 1,097.00 10.50% $ 1,105.00
1996 ...................................... 15.41% $ 1,154.10 16.26% $ 1,162.60
1995 ...................................... (5.91)% $ 940.90 (5.11)% $ 948.90
Inception (July 30, 1993) to
May 31, 1994 .............................. 14.40% $ 1,144.00 15.10% $ 1,151.00
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (July 30, 1993) to
May 31, 1999 .............................. 24.99% $ 1,249.90 23.86% $ 1,238.60
</TABLE>
39
<PAGE> 78
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares,"
the total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
or may not take into account the CDSC, and therefore may reflect greater total
return since, due to the reduced sales charges or the waiver of CDSCs, a lower
amount of expenses may be deducted.
On occasion, the Fund may compare its performance to various indices
including the Standard & Poor's 500 Index, the Dow Jones Industrial Average, or
to performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc. ("Morningstar"), CDA Investment Technology, Inc., Money
Magazine, U.S. News &World Report, Business Week, Forbes Magazine, Fortune
Magazine or other industry publications. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, from time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements 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.
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.
GENERAL INFORMATION
Description of Shares
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 Declaration of Trust of the Fund permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest, par value $0.10 per share, of different classes and to
divide or combine the shares of each class into a greater or lesser number of
shares without thereby changing the proportionate beneficial interest in the
Fund. At the date of this Statement of Additional Information, the shares of the
Fund are divided into Class A, 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. Upon liquidation of the Fund,
shareholders of each class are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders, except for any expenses
which may be attributable only to one class. Shares have no preemptive rights.
The rights of redemption, exchange and conversion are described elsewhere herein
and in the Prospectus. Shares are fully paid and nonassessable by the Fund.
The Declaration of Trust of the Fund 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 of Trust 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.
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
40
<PAGE> 79
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 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.
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 approval by the non-interested Trustees of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
Custodian
Brown Brothers Harriman & Co. (the "Custodian"), 40 Water Street, Boston,
Massachusetts 02109, acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized, among other things, to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside of the United
States and with certain foreign banks and securities depositories. The Custodian
is responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's 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 "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
Legal Counsel
Brown & Wood LLP, 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.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co. under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
41
<PAGE> 80
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of a class of the Fund's shares as of September 1, 1999
<TABLE>
<CAPTION>
Percentage
Name Address and Class
- ---------------------------------------- --------------------------- -----------------
<S> <C> <C>
Merrill Lynch 3rd Country National 2 Raffles Link 21.1% of Class A
Marina Bayfront
Singapore 039392
Merrill Lynch Corporate Benefits 265 Davidson Ave. #4 20% of Class A
TTEE FBO DEF COM Hedge Somerset NJ 08873
Merrill Lynch Trust Co. P.O. Box 30532 15% of Class A
Trustee FBO Bryiane New Brunswick NJ 08989
L.P. Savings & Retirement Plan
Executive Management Team Plan 1997 265 Davidson Ave. #4 6% of Class A
Somerset NJ 08873
95 Defcom Hedge FBO ML&Co/PFS 265 Davidson Ave. #4 5.4% of Class A
Somerset NJ 08873
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
42
<PAGE> 81
CODE #: 16748-09-99
<PAGE> 1
MERRILL LYNCH
INTERNATIONAL
EQUITY FUND
FUND LOGO
Annual Report
May 31, 1999
Officers and Trustees
Terry K. Glenn, President and Trustee
Donald Cecil, Trustee
Roland M. Machold, Trustee
Edward H. Meyer, Trustee
Charles C. Reilly, Trustee
Richard R. West, Trustee
Arthur Zeikel, Trustee
Edward D. Zinbarg, Trustee
Clive D. Lang, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and
Treasurer
Ira P. Shapiro, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
International
Equity Fund
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH INTERNATIONAL EQUITY FUND
International
Stock Market
Performance
Bar Graph Depicting Total Return in US Dollars* of the Fund's Top
Country Positions For the Three-Month Period Ended May 31, 1999
Switzerland - 6.4%
Italy - 4.7%
Spain - 3.6%
Germany - 2.7%
United Kingdom + 1.2%
Netherlands + 1.3%
France + 2.1%
Sweden + 5.4%
Canada +11.5%
Japan +11.9%
<PAGE> 2
Source: Morgan Stanley Capital International World (Ex-US) Index.
[FN]
*For the three-month period ended May 31, 1999, total investment return in US
dollars for the Morgan Stanley Capital International World (Ex-US) Index was
+3.15%.
Merrill Lynch International Equity Fund, May 31, 1999
DEAR SHAREHOLDER
Fiscal Year in Review
Once again we are looking back upon a year of remarkable events in the world's
equity markets. Over the 12 months ended May 31, 1999, the unmanaged Morgan
Stanley Capital International (MSCI) World (Ex-US) Index returned +3.88% in US
dollar terms. Over the same period, the unmanaged MSCI Emerging Markets Index
returned +3.46% in US dollar terms.
However, these results mask wide divergences between some of the world's equity
markets. Within the developed market universe, the Pacific Basin, excluding
Japan, rose by +23.6%, while Japan itself gained 20.8%. These advances were
matched in the Asian emerging markets, which collectively rose by 27.6%.
(References to markets are measured by Morgan Stanley indexes and are in US
dollar terms). Outside Japan, the gains marked the early stages of recovery from
the crises that had severely hit these markets over the previous 12 months. The
economies in the region benefited from global monetary easing, initiated in the
United States with two interest rate cuts in October 1998, and followed by
similar cuts in nearly all other major countries.
Within the Asian region, improving trade figures, greater currency stability and
falling interest rates formed a base for recovery. The recovery was also
assisted by International Monetary Fund (IMF) funding and, in many countries, a
clear political will to adhere to the conditions set by the IMF for improving
the domestic financial systems. Most notable among the successes was South Korea
where the government's efforts were also rewarded with significant re-rating of
their sovereign debt. This market rose by 184.1% over the year to May 31, 1999.
Among the largest gains in the developed markets were the +52.6% and +49.4%
increases recorded by Singapore and Hong Kong, respectively.
Notwithstanding the outperformance produced by Asian stock markets, problems
remain in that there is still too much production capacity and the ever-present
threat of deflation. These issues hang over the whole region, including Japan.
However, Japan has also been showing some sporadic signs of recovery, such as in
the housing sector, triggered by the various stimulative packages implemented by
the government. In contrast, Japanese exports have not been helped by the
extreme volatility in the yen during the latter half of calendar year 1998,
reaching a trough of YEN 147/US$1 in mid-August 1998 and appreciating by over
24% to YEN 111/US$1 in early January 1999. Much of the early yen appreciation
followed the narrowing of Japanese government bond yields relative to US
Treasury securities.
In contrast with Asia, equity markets in other major regions performed poorly
over the year as a whole. Continental European developed markets actually fell
by 4.2% over the year, while the United Kingdom rose by 5.8%. Eastern European
and Middle Eastern emerging markets were just in positive territory, but Latin
American emerging markets fell by 4.8%. The Russian debt default in August 1998
overshadowed Eastern European equity markets for much of the fiscal year.
In January 1999, Europe saw the introduction of the euro as a common currency
for 11 countries, including Germany, France, Italy, the Netherlands and Spain.
This region had performed particularly well in the 12 months leading up to the
launch of the new currency and had reached extremely high valuation levels amid
great optimism regarding the benefits of the single currency. However, the
collapse of the Russian financial markets led to massive losses for more
European banks and sharp falls on European equity markets. The region's stock
markets have underperformed for much of the fiscal year, a trend that has been
exacerbated for US dollar-based investors by a 12% depreciation of the euro
since its launch through May month-end.
The Latin American equity markets were strong relative performers from June 1998
through August 1998. Subsequently, the current account deficits in most of these
countries and defaults on some Brazilian local government bonds impacted both
currencies (Brazil was forced to float the real in January) and equity markets.
However, Latin American markets rallied sharply after the real's devaluation,
aided by signs that the recession in Brazil may be a
<PAGE> 3
brief one.
Throughout all of these events, the US economy continued to grow and prosper.
The strength of the US equity market underpinned the US consumer-spending
boom--a boom so strong that for the first time in over 20 years the US savings
ratio became negative. Until recently, the complete absence of tangible signs of
inflation, combined with the need for the US economic engine to power the rest
of the world, helped keep US bond yields on a flat to downward trend. However,
this downward bias was reversed by May month-end, with the US central bank
acknowledging that the next change in interest rates is more likely to be
upward.
Total returns for Merrill Lynch International Equity Fund's Class A, Class B,
Class C and Class D Shares for the 12 months ended May 31, 1999 were -0.35%,
- -1.36%, -1.50% and -0.70%, respectively. This compares with the return for the
unmanaged MSCI World (Ex-US) Index of +3.88% over the same period. (Fund results
do not reflect sales charges, and would be lower if sales charges were included.
Complete performance information can be found on pages 4--6 of this report to
shareholders.)
For the first part of the fiscal year, Merrill Lynch International Equity Fund
maintained a significant emerging markets exposure. This emerging markets
exposure negatively impacted performance from mid-July 1998 until early October
1998. However, at the end of July, we moved to align the Fund's holdings more
closely with a new benchmark, the unmanaged MSCI World (Ex-US) Index. This US
dollar-based Index is comprised of developed markets around the world and is
commonly used as a benchmark by international equity funds. As a result of this
change in our benchmark, we began to reduce the Fund's holdings in emerging
markets.
For most of the year under review, the Fund was underweighted in Continental
Europe, which benefited performance. However, the bias toward value stocks in
our European investments in the second half of 1998 was a significant drag on
the Fund's performance. We became more positive on the UK market in late 1998
and increased exposure there, based on the belief that investors had
underestimated both the scope of interest rate cuts and the impact these would
have on ensuring that the UK economy would avoid recession. In May, we reversed
this position since it became clear that investors had caught up with the
reality of a stronger economy. Around the same time, we increased exposure to
Germany because we believed that the general pessimism toward the German economy
was overdone considering the weaker currency, lower interest rates and easier
fiscal policy at a time of rising global demand expectations.
The Fund has been almost neutral in Japan for most of the period (although it
had a much higher weighting than most international funds) and moved to an
overweight position in March, just as the market began a period of
outperformance. We believed that investor perception toward the Japanese market
would begin to improve, despite the many well-known pressures that are faced
there. In addition to an improving stock market, the yen proved the strongest of
the major currencies over this period, despite consensus expectations to the
contrary.
The change in Federal Reserve Board policy in October, followed by virtually
every other central bank, sparked a major rally in global markets in late 1998,
which has been extended in 1999 by consistent upgrading of forecasts for the
world economy. Our low cash position throughout this period benefited the Fund's
performance.
Portfolio Matters
During the quarter ended May 31, 1999, the Fund continued to experience a sharp
improvement in performance relative to its benchmark, a trend that began in
November 1998. For example, the Fund's Class A Shares returned +7.89% for the
six-month period ended May 31, 1999, while the MSCI World (Ex-US) Index returned
+4.43%. In the first quarter of 1999, we became positive on the prospects for
the global economy. As a result, we began to raise exposure to commodity stocks
and commodity-linked economies. At the same time, we focused on purchasing value
stocks (as opposed to growth stocks) as well as smaller-capitalization stocks
around the world. All of these decisions continued to enhance the Fund's
performance during the quarter ended May 31, 1999, as was the case during the
prior three-month period.
The improvement in the Fund's performance relative to its benchmark also
coincided with the completion of various changes in our portfolio management
strategy, which we initiated in April 1998. These changes included the resetting
of the benchmark and more closely coordinating our bottom-up stock selection
process with the top-down asset allocation process. This approach has enabled us
to implement a more integrated investment strategy, which we are pleased is
beginning to result in improved absolute and relative returns for the Fund.
Over recent months some trends have started to emerge in global equity markets.
We expect a continuation for the time being of the
<PAGE> 4
upswing in those asset classes that were out of favor for so long, such as
industrial cyclical sectors and value stocks, especially in Continental Europe.
The emerging markets of Asia have already started their recoveries. There are
also signs that commodity markets are beginning to pick up. However, we
currently do not expect inflation to re-emerge as a major problem for global
equity markets.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Clive D. Lang)
Clive D. Lang
Senior Vice President and
Portfolio Manager
July 15, 1999
Merrill Lynch International Equity Fund, May 31, 1999
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 5.25%
and bear no ongoing distribution or account maintenance fees. Class A Shares
are available only to eligible investors, as detailed in the Fund's
prospectus. If you were a Class A shareholder on October 21, 1994, your Class
A Shares were redesignated to Class D Shares on October 21, 1994. However, in
the case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a
distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Average
Annual Total Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid to
each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Total Return
Based on a
$10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class C Shares compared to growth of an investment in the Morgan Stanley
Capital International World (Ex-US) Index and the Financial Times/S&P--Actuaries
World (Ex-US) Index.
Beginning and Ending Values are:
<PAGE> 5
<TABLE>
<CAPTION>
10/21/94** 5/99
ML International Equity Fund++--
<S> <C> <C>
Class A Shares* $ 9,475 $10,673
ML International Equity Fund++--
Class C Shares* $10,000 $10,743
Morgan Stanley Capital International
World (Ex-US) Index++++ $10,000 $13,931
Financial Times/S&P--
Actuaries World (Ex-US) Index+++++ $10,000 $13,532
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class B Shares
and Class D Shares compared to growth of an investment in the Morgan Stanley
Capital International World (Ex-US) Index and the Financial Times/S&P--Actuaries
World (Ex-US) Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
7/30/93** 5/99
ML International Equity Fund++--
<S> <C> <C>
Class B Shares* $10,000 $12,499
ML International Equity Fund++--
Class D Shares* $ 9,475 $12,385
Morgan Stanley Capital International
World (Ex-US) Index++++ $10,000 $16,245
Financial Times/S&P--
Actuaries World (Ex-US) Index++++ $10,000 $15,618
</TABLE>
[FN]
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of operations.
++Merrill Lynch International Equity Fund invests in a diversified portfolio
of equity securities of issuers located in countries other than the United
States.
++++During the Fund's fiscal year ended May 31, 1999, the Fund's primary
performance benchmark was changed from a Composite Index (based on the
Financial Times/Standard & Poor's (FT/S&P)--Actuaries World (Ex-US) Index
and the IFC Investables Index of emerging equity markets) to the Morgan
Stanley Capital International World (Ex-US) Index, expressed in US dollar
terms. This unmanaged market capitalization-weighted Index is comprised of
a representative sampling of stocks in 21 countries (excluding the United
States) and is widely used as a benchmark by internationally invested
equity funds. The starting date for the Index in the Class A and Class C
Shares graph is from 10/31/94.
++++++This unmanaged capitalization-weighted Index is comprised of over 1,632
companies in 28 countries, excluding the United States.
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<S> <C> <C>
Year Ended 3/31/99 -1.62% -6.78%
Inception (10/21/94) through 3/31/99 +2.56 +1.33
</TABLE>
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
<CAPTION>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
<S> <C> <C>
Year Ended 3/31/99 -2.71% -6.48%
Five Years Ended 3/31/99 +2.25 +2.25
Inception (7/30/93) through 3/31/99 +3.91 +3.91
</TABLE>
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE> 6
<TABLE>
<CAPTION>
% Return % Return
Without CDSC With CDSC**
Class C Shares*
<S> <C> <C>
Year Ended 3/31/99 -2.77% -3.71%
Inception (10/21/94) through 3/31/99 +1.50 +1.50
</TABLE>
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
<S> <C> <C>
Year Ended 3/31/99 -1.96% -7.11%
Five Years Ended 3/31/99 +3.04 +1.94
Inception (7/30/93) through 3/31/99 +4.72 +3.73
</TABLE>
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch International Equity Fund, May 31, 1999
PERFORMANCE DATA (concluded)
Recent
Performance
Results
<TABLE>
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML International Equity Fund Class A Shares* -0.35% +6.64% +12.64%
ML International Equity Fund Class B Shares* -1.36 +6.38 +24.99
ML International Equity Fund Class C Shares* -1.50 +6.36 +7.43
ML International Equity Fund Class D Shares* -0.70 +6.60 +30.72
Morgan Stanley Capital International World (Ex-US) Index** +3.88 +3.15 +39.31/+62.45
</TABLE>
*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in the Fund's net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the ex-dividend date. The Fund's since inception periods are Class A
& Class C Shares, from 10/21/94 to 5/31/99 and Class B & Class D Shares, from
7/30/93 to 5/31/99.
**An unmanaged capitalization-weighted index comprised of a representative
sampling of stocks in 21 countries, excluding the United States. Since
inception total returns are for the periods from 10/31/94 to 5/31/99 and from
7/31/93 to 5/31/99, respectively.
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
Shares Value Percent of
AFRICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
South Gold Mines 16,750 ++Anglo American PLC $ 554,329 $ 760,715 0.4%
Africa 22,500 AngloGold Limited (ADR)(a) 474,181 452,812 0.2
Total Investments in Africa 1,028,510 1,213,527 0.6
EUROPE
Austria Banking 8,000 Bank Austria AG 475,077 410,476 0.2
Building Materials 1,200 Wienerberger Baustoffindustrie AG 222,217 210,672 0.1
& Components
Total Investments in Austria 697,294 621,148 0.3
Belgium Equity Basket 26,200 MSCI Belgium OPALS 'B' (c) 2,108,576 2,052,508 1.0
Total Investments in Belgium 2,108,576 2,052,508 1.0
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Denmark Equity Basket 5,900 MSCI Denmark OPALS 'B' (c)(d) 824,643 816,678 0.4
Total Investments in Denmark 824,643 816,678 0.4
Finland Equity Basket 6,000 MSCI Finland OPALS 'B' (c) 1,182,540 1,632,000 0.8
Total Investments in Finland 1,182,540 1,632,000 0.8
France Aerospace & Military 10,000 Thomson CSF 320,258 322,487 0.2
Technology
Automobiles 2,500 PSA Peugeot Citroen 471,467 370,975 0.2
Banking 7,000 Banque Nationale de Paris (BNP) 620,881 591,052 0.3
7,000 Compagnie Financiere de Paribas (CFP) 385,970 760,760 0.4
2,500 Societe Generale 'A' 473,888 455,097 0.2
------------ ------------ ----
1,480,739 1,806,909 0.9
Building Materials 4,900 Compagnie de Saint Gobain 798,256 770,635 0.4
& Components 5,600 Lafarge SA (Ordinary) 545,276 505,613 0.2
------------ ------------ ----
1,343,532 1,276,248 0.6
Business & Public 2,000 Cap Gemini SA 305,732 288,629 0.1
Services 6,900 Suez Lyonnaise des Eaux 1,294,400 1,145,748 0.6
17,100 Vivendi 1,285,332 1,268,735 0.6
17,100 Vivendi (Rights)(e) 0 17,691 0.0
------------ ------------ ----
2,885,464 2,720,803 1.3
Electrical & 8,800 Schneider SA 510,583 524,172 0.3
Electronics
Energy Equipment 6,000 Coflexip 468,504 490,314 0.2
& Services
Energy Sources 7,000 Elf Aquitaine SA 907,905 1,015,322 0.5
9,200 ++Total SA 'B' 1,018,195 1,120,031 0.5
------------ ------------ ----
1,926,100 2,135,353 1.0
Food & Household 3,100 Groupe Danone SA 775,231 855,228 0.4
Products
Health & Personal 800 L'Oreal 416,060 482,790 0.2
Care 7,500 Rhone-Poulenc SA 360,390 356,606 0.2
------------ ------------ ----
776,450 839,396 0.4
Industrial Components 6,500 Compagnie Generale des Etablissements
Michelin 'B' 303,446 287,187 0.1
Insurance 13,500 Axa 1,625,130 1,558,879 0.8
Manufacturing 31,600 ++Sanofi-Synthelabo SA 1,273,280 1,334,089 0.7
Merchandising 6,600 Carrefour SA 772,515 867,643 0.4
5,300 Pinault-Printemps-Redoute SA 839,432 904,437 0.4
850 Promodes 511,743 556,044 0.3
------------ ------------ ----
2,123,690 2,328,124 1.1
Metals--Steel 30,000 Usinor SA 375,250 409,431 0.2
Recreation/Other 1,500 LVMH (Louis Vuitton Moet Hennessy) 269,594 418,679 0.2
Consumer Goods
Telecommunications 18,282 France Telecom SA 1,222,342 1,404,195 0.7
Total Investments in France 18,151,060 19,082,469 9.3
Germany Automobiles 31,000 DaimlerChrysler AG 2,620,035 2,680,686 1.3
11,000 Volkswagen AG 853,181 682,803 0.3
------------ ------------ ----
3,473,216 3,363,489 1.6
Banking 25,461 Deutsche Bank AG 1,691,074 1,330,337 0.7
16,400 HypoVereinsbank AG 1,208,965 887,748 0.4
------------ ------------ ----
2,900,039 2,218,085 1.1
Chemicals 23,300 BASF AG 1,015,132 908,199 0.4
26,200 Bayer AG 1,063,036 1,021,237 0.5
9,000 Hoechst AG 401,392 401,593 0.2
------------ ------------ ----
2,479,560 2,331,029 1.1
</TABLE>
<PAGE> 8
Merrill Lynch International Equity Fund, May 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
EUROPE Shares Value Percent of
(continued) Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Germany Electrical & 23,500 Siemens AG $ 1,611,964 $ 1,583,959 0.8%
(concluded) Electronics
Equity Basket 12,000 MSCI European Auto Sector
Insurance OPALS 'B' (c) 1,086,120 990,000 0.5
6,650 Allianz AG (Registered Shares) 2,007,417 1,820,704 0.9
5,350 Axa Colonia Konzern AG 589,391 503,168 0.2
------------ ------------ ----
2,596,808 2,323,872 1.1
Merchandising 950 Karstadt AG 443,706 393,129 0.2
Metals--Steel 50,500 ++Thyssen Krupp AG 1,094,511 997,400 0.5
Telecommunications 44,400 Deutsche Telekom AG 1,447,242 1,774,724 0.9
12,750 Mannesmann AG 1,483,713 1,745,411 0.8
------------ ------------ ----
2,930,955 3,520,135 1.7
Transportation 25,000 Deutsche Lufthansa AG (Registered
--Airlines Shares) 594,697 538,175 0.3
Utilities-- 18,500 RWE AG 897,802 828,398 0.4
Electrical & Gas 10,400 RWE AG (Preferred) 312,319 305,391 0.1
17,500 Veba AG 1,116,987 1,000,326 0.5
------------ ------------ ----
2,327,108 2,134,115 1.0
Total Investments in Germany 21,538,684 20,393,388 9.9
Greece Telecommunications 10,500 Hellenic Telecommunication
Organization SA (OTE) 300,227 228,070 0.1
Total Investments in Greece 300,227 228,070 0.1
Hungary Banking 22,799 OTP Bank Rt. (GDR)(b) 1,090,598 986,057 0.5
Energy Sources 41,194 MOL Magyar Olaj-es Gazipari Rt.
(GDR)(b) 1,028,196 988,656 0.5
Health & Personal 3,500 EGIS Rt. 124,535 73,091 0.0
Care
Total Investments in Hungary 2,243,329 2,047,804 1.0
Ireland Banking 27,500 Bank of Ireland 599,634 517,427 0.2
Building Materials & 21,000 CRH PLC 229,577 362,732 0.2
Components
Total Investments in Ireland 829,211 880,159 0.4
Italy Banking 60,000 Istituto Bancario San Paolo di Torino 1,080,426 811,965 0.4
230,000 Unicredito Italiano SpA 1,283,688 1,083,978 0.5
------------ ------------ ----
2,364,114 1,895,943 0.9
Energy Sources 310,000 ENI SpA 2,109,005 1,940,461 0.9
Insurance 50,000 Assicurazioni Generali 2,155,175 1,781,725 0.9
Telecommunications 170,000 Telecom Italia SpA 1,808,038 1,755,182 0.9
272,230 Telecom Italia SpA--RNC 1,369,324 1,482,143 0.7
------------ ------------ ----
3,177,362 3,237,325 1.6
Total Investments in Italy 9,805,656 8,855,454 4.3
Netherlands Appliances & 20,300 ++Koninklijke (Royal) Philips
Household Electronics NV 1,321,586 1,744,810 0.8
Durables
Banking 64,000 ABN AMRO Holding NV 1,352,150 1,421,200 0.7
Business & 31,500 TNT Post Group NV 923,025 793,312 0.4
Public Services
Energy Sources 28,300 Royal Dutch Petroleum Company 1,267,201 1,579,225 0.8
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Financial Services 38,000 ING Groep NV 1,906,054 2,035,138 1.0
Food & Household 9,821 Unilever NV 'A' 883,923 654,291 0.3
Products
Telecommunications 20,000 KPN NV 932,963 967,670 0.5
Total Investments in the Netherlands 8,586,902 9,195,646 4.5
Norway Equity Basket 10,500 MSCI Norway OPALS 'B' (c)(d) 907,305 926,730 0.4
Total Investments in Norway 907,305 926,730 0.4
Poland Banking 14,000 Bank Rozwoju Eksportu SA (BRE) 454,573 376,571 0.2
Multi-Industry 7,000 Elektrim Spolka Akcyjna SA 96,855 81,825 0.0
Total Investments in Poland 551,428 458,396 0.2
Portugal Equity Basket 23,200 MSCI Portugal OPALS 'B' (c)(d) 1,908,523 1,574,120 0.8
Total Investments in Portugal 1,908,523 1,574,120 0.8
Spain Banking 72,000 Banco Santander Central Hispano, SA 1,349,127 1,504,800 0.7
Construction & 8,400 ++Dragados & Construcciones, SA 273,191 290,991 0.2
Housing 4,650 Fomento de Construcciones y
Contratas, SA 285,018 267,745 0.1
------------ ------------ ----
558,209 558,736 0.3
Energy Sources 29,400 Repsol, SA 541,637 533,351 0.3
Equity Basket 8,800 MSCI Spain OPALS 'B' (c)(d) 1,035,760 1,033,736 0.5
Telecommunications 30,600 ++Telefonica, SA 1,372,142 1,470,302 0.7
612 ++Telefonica, SA (New Shares) 0 29,406 0.0
------------ ------------ ----
1,372,142 1,499,708 0.7
Utilities-- 64,000 Endesa, SA 1,534,158 1,365,021 0.7
Electrical & Gas
Total Investments in Spain 6,391,033 6,495,352 3.2
Sweden Appliances & 32,000 Electrolux AB 'B' 320,540 621,341 0.3
Household
Durables
Automobiles 13,000 Volvo AB 'B' 342,974 330,496 0.2
Banking 20,000 Skandinaviska Enskilda Banken (SEB) 'A' 256,142 242,566 0.1
19,000 Svenska Handelsbanken 'A' 799,284 687,988 0.4
------------ ------------ ----
1,055,426 930,554 0.5
Electrical & 63,000 Telefonaktiebolaget LM Ericsson 'B' 1,638,313 1,686,122 0.8
Electronics
Equity Basket 8,000 MSCI Sweden OPALS 'B' (c)(d) 1,620,141 1,722,000 0.8
Forest Products 10,000 Svenska Cellulosa AB (SCA) 'B' 260,930 233,236 0.1
& Paper
Merchandising 28,000 Hennes & Mauritz AB 'B' 621,203 630,204 0.3
Total Investments in Sweden 5,859,527 6,153,953 3.0
</TABLE>
Merrill Lynch International Equity Fund, May 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
EUROPE Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Switzerland Banking 3,450 Credit Suisse Group (Registered
Shares) $ 391,197 $ 601,085 0.3%
3,000 UBS AG (Registered Shares) 679,122 871,795 0.4
------------ ------------ ----
1,070,319 1,472,880 0.7
Food & Household 550 Nestle SA (Registered Shares) 1,121,182 992,604 0.5
</TABLE>
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Products
Health & Personal 950 Novartis AG (Registered Shares) 1,819,986 1,384,089 0.7
Care 130 Roche Holding AG 1,531,761 1,381,197 0.6
------------ ------------ ----
3,351,747 2,765,286 1.3
Insurance 190 Schweizerische Rueckversicherungs-
Gesellschaft (SwissRe) (Registered
Shares) 475,839 361,887 0.2
600 Zurich Allied AG 388,861 354,241 0.2
------------ ------------ ----
864,700 716,128 0.4
Telecommunications 4,150 ++Swisscom AG (Registered Shares) 1,464,565 1,500,657 0.7
Total Investments in Switzerland 7,872,513 7,447,555 3.6
United Aerospace & 128,000 British Aerospace PLC 938,080 843,896 0.4
Kingdom Military
Technology
Banking 32,000 Abbey National PLC 727,686 660,975 0.3
40,000 Bank of Scotland 390,811 556,577 0.3
32,000 Barclays PLC 960,990 969,943 0.5
32,724 HSBC Holdings PLC 872,235 1,092,491 0.5
86,000 Lloyds TSB Group PLC 1,046,912 1,136,051 0.6
37,500 National Westminster Bank PLC 762,141 859,844 0.4
------------ ------------ ----
4,760,775 5,275,881 2.6
Beverages & 55,000 Cadbury Schwepps PLC 418,012 372,739 0.2
Tobacco 147,000 Diageo PLC 1,552,799 1,545,246 0.7
------------ ------------ ----
1,970,811 1,917,985 0.9
Broadcasting & 82,500 WPP Group PLC 691,724 665,779 0.3
Publishing
Building Materials 65,000 RMC Group PLC 650,705 866,970 0.4
& Components
Business & 80,000 Securicor PLC 731,416 717,338 0.3
Public Services 137,500 Shanks & McEwan Group PLC 439,604 512,984 0.3
------------ ------------ ----
1,171,020 1,230,322 0.6
Construction & 50,000 The Berkeley Group PLC 472,917 551,613 0.3
Housing
Data Processing & 82,500 Computacenter PLC 593,469 541,606 0.3
Reproduction
Energy 60,000 British Energy PLC 690,635 535,601 0.2
Energy Sources 227,500 BP Amoco PLC 3,442,237 4,068,929 2.0
Financial Services 52,000 ++Halifax 733,039 671,095 0.3
20,000 Schroders PLC 463,483 415,992 0.2
------------ ------------ ----
1,196,522 1,087,087 0.5
Food & Household 142,285 Unilever PLC 1,506,372 1,250,769 0.6
Products
Health & 35,000 AstraZeneca Group PLC 1,459,753 1,390,402 0.7
Personal Care 49,000 Glaxo Wellcome PLC 1,340,866 1,374,598 0.7
124,000 Nycomed Amersham PLC 847,113 882,549 0.4
101,100 SmithKline Beecham PLC 1,180,981 1,317,714 0.6
------------ ------------ ----
4,828,713 4,965,263 2.4
Industrial 110,000 BBA Group PLC 687,759 778,503 0.4
Components
Insurance 60,000 Prudential Corporation PLC 891,134 791,153 0.4
177,273 Royal & Sun Alliance Insurance
Group PLC 1,687,434 1,449,050 0.7
25,515 Sun Life and Provincial Holdings PLC 130,968 192,732 0.1
------------ ------------ ----
2,709,536 2,432,935 1.2
Leisure & Tourism 30,000 Bass PLC 430,432 442,412 0.2
90,000 Carlton Communications PLC 914,642 716,937 0.4
------------ ------------ ----
1,345,074 1,159,349 0.6
Machinery & 30,000 GKN PLC 451,084 500,775 0.2
Engineering
Merchandising 220,000 ASDA Group PLC 516,140 623,507 0.3
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
14,000 Dixons Group PLC 287,876 251,292 0.1
130,000 The Great University Stores PLC 1,443,447 1,386,319 0.7
75,000 J Sainsbury PLC 473,055 455,742 0.2
625,000 Tesco PLC 1,834,371 1,818,863 0.9
------------ ------------ ----
4,554,889 4,535,723 2.2
Metals-- 24,000 Rio Tinto PLC (Registered Shares) 292,913 351,624 0.2
Nonferrous
Miscellaneous 137,500 Rexam PLC 454,432 543,808 0.3
Materials
& Commodities
Multi-Industry 126,321 BTR Siebe PLC 891,688 575,444 0.3
Telecommunications 165,000 British Telecommunications PLC 2,697,243 2,750,301 1.3
50,000 Cable & Wireless PLC 587,713 616,462 0.3
130,000 Vodafone Group PLC 2,297,366 2,474,975 1.2
------------ ------------ ----
5,582,322 5,841,738 2.8
Transportation 47,000 British Airways PLC 293,807 337,149 0.2
--Airlines
Utilities-- 130,000 BG PLC 748,224 714,495 0.3
Electrical & Gas 50,000 National Power PLC 402,782 389,292 0.2
50,000 Scottish Power PLC 490,957 430,723 0.2
------------ ------------ ----
1,641,963 1,534,510 0.7
Total Investments in the
United Kingdom 41,819,447 42,393,259 20.6
Total Investments in Europe 131,577,898 131,254,689 63.8
LATIN
AMERICA
Brazil Equity Basket 55,000 MSCI Brazil OPALS (c) 2,325,000 2,072,950 1.0
Total Investments in Brazil 2,325,000 2,072,950 1.0
Chile Financial Services 24,750 ++Genesis Chile Fund 657,113 730,125 0.4
Total Investments in Chile 657,113 730,125 0.4
</TABLE>
Merrill Lynch International Equity Fund, May 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
LATIN
AMERICA Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
Mexico Foreign 1,923,000 Mexican Par Bond (Rights)(h) $ 0 $ 0 0.0%
Government US$ 1,250,000 United Mexican States, 'C', 5.87438%
Bonds due 12/31/2019 (i) 1,028,957 1,037,519 0.5
Total Investments in Mexico 1,028,957 1,037,519 0.5
Total Investments in Latin America 4,011,070 3,840,594 1.9
MIDDLE
EAST
Israel Multi-Industry 8,109 Koor Industries Limited (ADR)(a) 189,021 174,850 0.1
Total Investments in the Middle East 189,021 174,850 0.1
NORTH
AMERICA
Canada Aerospace & 27,760 Bombardier Inc. 'B' 414,903 432,305 0.2
Military
Technology
Banking 3,360 Bank of Montreal 152,087 128,985 0.1
7,210 Royal Bank of Canada 373,444 330,959 0.2
5,140 The Toronto-Dominion Bank 251,695 271,943 0.1
------------ ------------ ----
777,226 731,887 0.4
Beverages & 12,090 Seagram Company 546,887 633,070 0.3
Tobacco
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Broadcasting & 17,980 ++Rogers Communications, Inc. 'B' 303,365 371,705 0.2
Publishing
Business & Public 34,890 Laidlaw Inc. 266,696 246,757 0.1
Services
Electrical & 6,470 ++Newbridge Networks Corporation 231,614 178,854 0.1
Electronics
Energy Sources 8,590 Alberta Energy Company Ltd. 250,523 248,266 0.1
22,520 ++Renaissance Energy Ltd. 249,931 286,382 0.1
9,120 Suncor Energy, Inc. 317,446 344,520 0.2
------------ ------------ ----
817,900 879,168 0.4
Forest Products 21,410 Abitibi-Consolidated Inc. 211,012 219,851 0.1
& Paper
Gold Mines 18,210 Placer Dome Inc. 232,730 203,090 0.1
Merchandising 6,510 Canadian Tire Corp. 'A' 182,127 194,348 0.1
Metals--Nonferrous 14,730 Inco Limited 192,638 210,357 0.1
Telecommunications 8,160 BCE Inc. 347,449 376,509 0.2
15,450 Nortel Networks Corporation 895,401 1,161,508 0.5
7,190 Teleglobe Inc. 225,453 218,071 0.1
------------ ------------ ----
1,468,303 1,756,088 0.8
Total Investments in North America 5,645,401 6,057,480 2.9
PACIFIC
BASIN/ASIA
Australia Banking 41,200 National Australia Bank Limited 636,110 668,759 0.3
45,000 Westpac Banking Corporation Limited 263,144 308,815 0.2
------------ ------------ ----
899,254 977,574 0.5
Beverages & Tobacco 44,000 Foster's Brewing Group Limited 128,992 124,926 0.1
Broadcasting & 93,800 The News Corporation Limited 622,921 776,868 0.4
Publishing 31,500 The News Corporation Limited
(Preferred) 176,160 240,941 0.1
19,500 Publishing & Broadcasting Limited 131,298 122,836 0.0
------------ ------------ ----
930,379 1,140,645 0.5
Building Materials 81,000 Pioneer International Limited 186,121 188,645 0.1
& Components
Business & Public 6,000 Brambles Industries Limited 126,371 160,423 0.1
Services
Chemicals 31,500 Orica Limited 172,256 174,544 0.1
Energy Sources 51,000 Broken Hill Proprietary Company
Limited 405,710 524,752 0.2
23,600 Woodside Petroleum Limited 132,030 147,444 0.1
------------ ------------ ----
537,740 672,196 0.3
Gold Mines 80,000 ++Newcrest Mining 128,357 149,158 0.1
93,000 Normandy Mining Limited 87,548 67,533 0.0
------------ ------------ ----
215,905 216,691 0.1
Insurance 23,500 ++AMP Limited 292,275 256,433 0.1
42,800 National Mutual Holdings Limited 77,827 70,839 0.0
33,800 QBE Insurance Group Limited 124,451 132,672 0.1
------------ ------------ ----
494,553 459,944 0.2
Merchandising 18,800 Coles Myer Limited 88,247 98,552 0.0
35,000 Woolworths Limited 121,337 117,004 0.1
------------ ------------ ----
209,584 215,556 0.1
Metals--Nonferrous 200,000 M.I.M. Holdings Limited 95,962 108,597 0.1
67,500 WMC Limited 258,654 250,820 0.1
------------ ------------ ----
354,616 359,417 0.2
Real Estate 24,700 Lend Lease Corporation Limited 310,759 313,609 0.1
18,700 Westfield Holdings Limited 88,767 110,714 0.1
------------ ------------ ----
399,526 424,323 0.2
Telecommunications 33,000 ++AAPT Limited 115,947 119,601 0.0
115,600 ++Telstra Corporation Limited 494,695 573,241 0.3
------------ ------------ ----
</TABLE>
<PAGE> 13
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
610,642 692,842 0.3
Total Investments in Australia 5,265,939 5,807,726 2.8
Japan Appliances & 10,100 Sony Corporation 905,955 950,588 0.5
Household
Durables
Automobiles 115,000 Fuji Heavy Industries, Ltd. 586,805 752,693 0.4
39,000 Toyota Motor Corporation 1,059,274 1,066,280 0.5
------------ ------------ ----
1,646,079 1,818,973 0.9
Banking 144,000 The Asahi Bank, Ltd. 656,226 685,998 0.3
Beverages & Tobacco 74 Japan Tobacco, Inc. 480,177 741,839 0.4
</TABLE>
Merrill Lynch International Equity Fund, May 31, 1999
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
Japan Broadcasting & 16,000 Nippon Broadcasting System,
(concluded) Publishing Incorporated $ 780,977 $ 689,312 0.4%
1,350 Nippon Television Network Corp. 406,228 469,760 0.2
------------ ------------ ----
1,187,205 1,159,072 0.6
Building Materials 116,000 Sekisui Chemical Co., Ltd. 610,575 718,873 0.4
& Components
Business & 39,000 Ricoh Co., Ltd. 429,053 432,974 0.2
Public Services
Chemicals 94,000 Kaneka Corporation 484,904 822,403 0.4
24,000 Shin-Etsu Chemical Co., Ltd. 445,484 745,650 0.4
144,000 Toray Industries, Inc. 774,583 700,315 0.3
------------ ------------ ----
1,704,971 2,268,368 1.1
Construction & 161,000 Nishimatsu Construction Co., Ltd. 785,715 888,368 0.4
Housing
Convertible US$ 1,070,000 MBL International Finance (Bermuda),
Bonds 3% due 11/30/2002 1,305,400 1,182,350 0.6
Data Processing & 79,000 Fujitsu Limited 1,067,091 1,322,121 0.6
Reproduction
Electrical & 118,000 Hitachi Ltd. 1,097,970 869,113 0.4
Electronics 29,000 Square Co., Ltd. 1,056,789 915,410 0.5
------------ ------------ ----
2,154,759 1,784,523 0.9
Electronic 5,000 Keyence Corporation 558,407 724,938 0.4
Components & 15,000 Murata Manufacturing Co., Ltd. 503,007 828,915 0.4
Instrumentation 38 ++NTT Mobile Communication Network,
Inc. (d) 1,416,297 2,081,027 1.0
7,000 Rohm Company Ltd. 391,282 918,061 0.4
------------ ------------ ----
2,868,993 4,552,941 2.2
Financial 13,000 Jafco Co., Ltd. 730,187 523,447 0.3
Investment
Company
Financial 123,000 Daiwa Securities Group Inc. 564,717 650,157 0.3
Services 120,000,000 ++Sanwa International Finance Ltd.
(Convertible Preferred) 1,054,922 1,028,998 0.6
130 Shohkoh Fund & Co., Ltd. 77,649 72,809 0.0
12,700 Takefuji Corporation 935,797 1,120,588 0.5
------------ ------------ ----
2,633,085 2,872,552 1.4
Health & 48,000 Fujisawa Pharmacturical Co., Ltd. 433,172 755,195 0.4
Personal Care 29,000 Sankyo Company, Ltd. 674,883 683,554 0.3
9,000 Taisho Pharmaceutical Company, Ltd. 175,974 288,567 0.1
19,000 Takeda Chemical Industries 642,885 845,319 0.4
------------ ------------ ----
1,926,914 2,572,635 1.2
Industrial 28,000 Bridgestone Corp. 506,856 735,377 0.4
Components 131,000 NSK Limited 775,673 628,409 0.3
------------ ------------ ----
</TABLE>
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1,282,529 1,363,786 0.7
Insurance 136,000 Mitsui Marine and Fire Insurance
Company, Ltd. 728,750 685,070 0.3
Machinery & 118,000 Komatsu Ltd. 677,422 701,939 0.4
Engineering 4,400 THK Co., Ltd. 75,388 81,657 0.0
------------ ------------ ----
752,810 783,596 0.4
Merchandising 2,000 Art Vivant Co., Ltd. 51,315 51,367 0.0
12,000 Ito-Yokado Co., Ltd. 704,348 716,819 0.4
46,000 Uny Co., Ltd. 772,655 691,715 0.3
------------ ------------ ----
1,528,318 1,459,901 0.7
Metals--Steel 324,000 Nippon Steel Corporation 891,751 681,823 0.3
Multi-Industry 54,000 Ibiden Co., Ltd. 750,040 876,885 0.4
Non Index 660,099 Nikkei (Warrants)(g) 521,969 280,009 0.1
Real Estate 85,000 Mitsui Fudosan Co., Ltd. 899,272 710,563 0.3
Telecommunications 85 Nippon Telegraph & Telephone
Corporation (NTT) 699,606 830,986 0.4
Transportation-- 134 East Japan Railway Company 627,606 777,133 0.4
Road & Rail 116,000 Nippon Express Co., Ltd. 684,211 663,132 0.3
------------ ------------ ----
1,311,817 1,440,265 0.7
Wholesale & 81,000 Mitsui & Co., Ltd. 594,130 518,749 0.2
International Trade 6,400 Softbank Corporation 863,586 737,034 0.4
------------ ------------ ----
1,457,716 1,255,783 0.6
Total Investments in Japan 31,916,963 34,844,289 16.9
New Broadcasting 127,270 ++Sky Network Television Limited 242,815 200,220 0.1
Zealand & Publishing
Energy Sources 90,270 Fletcher Challenge Energy 216,512 216,883 0.1
Forest Products 321,410 Fletcher Challenge Paper 307,541 273,459 0.1
& Paper
Telecommunications 81,970 Telecom Corporation of New Zealand
Limited 418,870 353,529 0.2
Total Investments in New Zealand 1,185,738 1,044,091 0.5
Philippines Equity Basket 15,000 MSCI Philippines OPALS 'B' (c)(d) 679,350 716,400 0.4
Total Investments in the
Philippines 679,350 716,400 0.4
Singapore Equity Basket 64,000 MSCI Singapore OPALS 'B' (c) 2,566,120 2,956,160 1.5
Telecommunications 151,000 Singapore Telecommunications, Ltd. 220,962 254,804 0.1
Total Investments in Singapore 2,787,082 3,210,964 1.6
South Appliances & 568 ++Samsung Electronics (GDR)(b)(d) 12,680 20,959 0.0
Korea Household Durables
Telecommunications 946 SK Telecom Co. Ltd. (ADR)(a)(d) 14,546 13,474 0.0
Total Investments in South Korea 27,226 34,433 0.0
Thailand Equity Basket 11,000 MSCI Thailand OPALS (c) 1,182,775 1,084,820 0.5
Total Investments in Thailand 1,182,775 1,084,820 0.5
Total Investments in the Pacific
Basin/Asia 43,045,073 46,742,723 22.7
</TABLE>
Merrill Lynch International Equity Fund, May 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SOUTHEAST Shares Value Percent of
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
ASIA Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
India Beverages & Tobacco 200 ITC Ltd. $ 2,905 $ 4,735 0.0%
Chemicals 308 Reliance Industries Ltd. 1,595 1,114 0.0
Health & Personal Care 200 ++Reckitt & Coleman of India Ltd. 1,712 2,132 0.0
Total Investments in Southeast Asia 6,212 7,981 0.0
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
<S> <C> <C> <C> <C> <C>
US Government US$ 10,150,000 Federal Home Loan Banks, 4.68%
& Agency due 6/01/1999 10,146,042 10,146,042 5.0
Obligations* 1,500,000 US Treasury Bills, 4.22% due
7/22/1999 (f) 1,490,505 1,490,625 0.7
Total Investments in Short-Term
Securities 11,636,547 11,636,667 5.7
</TABLE>
<TABLE>
<CAPTION>
OPTIONS Nominal Value Covered Premiums
PURCHASED by Options Purchased Paid
<S> <C> <C> <C> <C> <C>
Call Options 47,000 OCBC, expiring March 2000 at USD 0.01 222,280 298,779 0.1
Purchased 40,000 DBS, expiring March 2000 at USD 0.01 221,090 321,280 0.2
50,000 UOB, expiring March 2000 at USD 0.01 219,443 286,050 0.1
50,000 SIA, expiring March 2000 at USD 0.01 221,375 355,400 0.2
Currency Put 12,000,000 Japanese Yen, expiring October 1999
Options at YEN 150 107,400 1,200 0.0
Purchased
Put Options 1,935 CAC 40, expiring June 1999 at USD
Purchased 37.73 73,633 50,552 0.0
Total Options Purchased 1,065,221 1,313,261 0.6
Total Investments 198,204,953 202,241,772 98.3
</TABLE>
<TABLE>
<CAPTION>
OPTIONS Nominal Value Covered Premiums
WRITTEN by Options Written Received
<S> <C> <C> <C> <C> <C>
Currency Call 12,000,000 Japanese Yen, expiring October
Options 1999 at YEN 96.45 (107,400) (21,600) (0.0)
Written
Total Options Written (107,400) (21,600) (0.0)
Total Investments,
Net of Options Written $198,097,553 202,220,172 98.3
============
Interest Rate Swaps (138,566) (0.1)
Variation Margin on Financial Futures Contracts** (81,578) 0.0
Unrealized Appreciation on Forward Foreign Exchange Contracts*** 27,246 0.0
Other Assets Less Liabilities 3,731,266 1.8
------------ ------
Net Assets $205,758,540 100.0%
============ ======
</TABLE>
*US Government & Agency Obligations are traded on a discount basis;
the interest rates shown reflect the discount rate paid at the time
of purchase by the Fund.
**Financial futures contracts sold as of May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
<S> <C> <C> <C> <C>
37 FT-SE 100 LIFFE June 1999 $3,698,628
11 All Ordinaries Index Sydney FE June 1999 515,968
4 TSE--35 Index Toronto SE June 1999 526,352
----------
Total Financial Futures Contracts Sold
(Total Contract Price--$4,784,944) $4,740,948
==========
</TABLE>
Financial futures contracts purchased as of May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
20 Taiwan MSCI Index SIMEX June 1999 $ 630,600
68 Nikkei 225 Index SIMEX June 1999 4,491,549
57 OMX Index OML June 1999 513,000
24 CAC 40 MATIF June 1999 1,075,180
-----------
Total Financial Futures Contracts Purchased
(Total Contract Price--$6,997,339) $ 6,710,329
===========
</TABLE>
***Forward foreign exchange contracts as of May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Foreign Unrealized
Currency Expiration Appreciation
Sold Date (Note 1c)
<S> <C> <C> <C>
PHP 24,610,000 June 1999 $ 649
SG$ 1,400,000 June 1999 3,933
YEN 738,664,000 July 1999 22,664
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$7,642,931) $ 27,246
==========
</TABLE>
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
(c)Optimized Portfolio As Listed Securities (OPALS) are investments
that are exchange quoted and provide an equivalent investment
exposure to that of the specific Morgan Stanley Capital
International (MSCI) country/sector index.
(d)The security may be offered and sold to 'qualified institutional
buyers' under Rule 144A of the Securities Act of 1933.
(e)The rights may be exercised until 6/25/1999.
(f)Security held as collateral in connection with open financial
futures contracts.
(g)Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under certain
conditions until the expiration date.
(h)The rights may be exercised until 6/30/2003.
(i)Brady Bonds are securities that have been issued to refinance
commercial bank loans and other debt. The risk associated with
these instruments is the amount of any uncollateralized principal
or interest payments since there is a high default rate of
commercial bank loans by countries issuing these securities.
++Non-income producing security.
See Notes to Financial Statements.
Merrill Lynch International Equity Fund, May 31, 1999
STATEMENT OF ASSETS AND LIABILITIES
As of May 31, 1999
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$197,139,732) (Note 1a) $ 200,928,511
Options purchased, at value (cost--$1,065,221) (Notes 1a & 1c) 1,313,261
Unrealized appreciation on forward foreign exchange contracts
(Note 1c) 27,246
Foreign cash (Note 1b) 416,308
Cash 1,084,017
Receivables:
Securities sold $ 6,158,342
Dividends 1,527,061
Beneficial interest sold 94,140
Forward foreign exchange contracts (Note 1c) 54,745
Interest 18,890 7,853,178
--------------
Prepaid registration fees and other assets (Note 1f) 584,106
--------------
Total assets 212,206,627
--------------
Liabilities: Options written, at value (premiums received--$107,400)
(Notes 1a & 1c) 21,600
Interest rate swaps, at value (Notes 1c & 3) 138,566
Payables:
Securities purchased 4,642,154
Beneficial interest redeemed 832,537
Distributor (Note 2) 129,562
Investment adviser (Note 2) 124,698
Forward foreign exchange contracts (Note 1c) 102,773
Variation margin (Note 1c) 81,578
Interest rate swap contracts (Notes 1c & 3) 5,929 5,919,231
--------------
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C>
Accrued expenses and other liabilities 368,690
--------------
Total liabilities 6,448,087
--------------
Net Assets: Net assets $ 205,758,540
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized $ 213,300
Class B Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 1,578,379
Class C Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 70,049
Class D Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized 382,734
Paid-in capital in excess of par 259,340,650
Accumulated realized capital losses on investments and foreign
currency transactions--net (3,000,383)
Accumulated distributions in excess of realized capital gains
on investments and foreign currency transactions--net (Note 1g) (56,646,573)
Unrealized appreciation on investments and foreign currency
transactions--net 3,820,384
--------------
Net assets $ 205,758,540
==============
Net Asset Class A--Based on net assets of $19,539,653 and 2,133,003
Value: shares of beneficial interest outstanding $ 9.16
==============
Class B--Based on net assets of $144,680,835 and 15,783,791
shares of beneficial interest outstanding $ 9.17
==============
Class C--Based on net assets of $6,327,941 and 700,487 shares
of beneficial interest outstanding $ 9.03
==============
Class D--Based on net assets of $35,210,111 and 3,827,337
shares of beneficial interest outstanding $ 9.20
==============
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended May 31, 1999
<S> <C> <C> <C>
Investment Income Dividends (net of $558,607 foreign withholding tax) $ 5,963,622
(Notes 1d & 1e): Interest and discount earned 1,934,055
--------------
Total income 7,897,677
--------------
Expenses: Investment advisory fees (Note 2) $ 2,109,287
Account maintenance and distribution fees--Class B (Note 2) 2,041,156
Transfer agent fees--Class B (Note 2) 683,550
Custodian fees 292,910
Accounting services (Note 2) 192,999
Transfer agent fees--Class D (Note 2) 134,308
Printing and shareholder reports 131,445
Account maintenance fees--Class D (Note 2) 114,287
Professional fees 104,485
Account maintenance and distribution fees--Class C (Note 2) 94,029
Transfer agent fees--Class A (Note 2) 63,169
Trustees' fees and expenses 40,336
Registration fees (Note 1f) 35,419
Transfer agent fees--Class C (Note 2) 32,995
Pricing fees 26,785
Organization expenses (Note 1f) 4,110
Other 14,159
--------------
Total expenses 6,115,429
--------------
Investment income--net 1,782,248
--------------
Realized & Realized loss from:
Unrealized Loss on Investments--net (5,085,323)
Investments & Foreign currency transactions--net (820,717) (5,906,040)
Foreign Currency --------------
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1b, 1c, Investments--net (12,338,951)
1e & 3): Foreign currency transactions--net (2,052,133) (14,391,084)
-------------- --------------
Net realized and unrealized loss on investments and foreign
currency transactions (20,297,124)
--------------
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C>
Net Decrease in Net Assets Resulting from Operations $ (18,514,876)
==============
</TABLE>
See Notes to Financial Statements.
Merrill Lynch International Equity Fund, May 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 1,782,248 $ 1,123,347
Realized gain (loss) on investments and foreign currency
transactions--net (5,906,040) 19,117,687
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (14,391,084) (74,763,524)
-------------- --------------
Net decrease in net assets resulting from operations (18,514,876) (54,522,490)
-------------- --------------
Distributions to Realized gain on investments--net:
Shareholders Class A -- (3,212,433)
(Note 1g): Class B -- (35,928,520)
Class C -- (1,650,362)
Class D -- (8,612,883)
In excess of realized gain on investments--net:
Class A (938,942) (2,887,423)
Class B (8,734,187) (32,293,544)
Class C (406,931) (1,483,391)
Class D (2,160,659) (7,741,497)
-------------- --------------
Net decrease in net assets resulting from distributions
to shareholders (12,240,719) (93,810,053)
-------------- --------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (191,371,781) (195,416,794)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (222,127,376) (343,749,337)
Beginning of year 427,885,916 771,635,253
-------------- --------------
End of year* $ 205,758,540 $ 427,885,916
============== ==============
*Undistributed investment income--net (Note 1h) $ -- $ 1,123,347
============== ==============
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
For the
The following per share data and ratios have Period
been derived from information provided in Oct. 21,
the financial statements. 1994++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1999++++ 1998++++ 1997++++ 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.57 $ 12.58 $ 11.94 $ 10.25 $ 11.73
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .13 .12 .12 .16 .26
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net (.18) (1.08) 1.09 1.53 (1.05)
-------- -------- -------- -------- --------
Total from investment operations (.05) (.96) 1.21 1.69 (.79)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.24) -- (.15)
In excess of investment income--net -- -- (.01) -- --
Realized gain on investments--net -- (1.08) (.32) -- (.54)
In excess of realized gain on
investments--net (.36) (.97) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.36) (2.05) (.57) -- (.69)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.16 $ 9.57 $ 12.58 $ 11.94 $ 10.25
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (.35%) (6.02%) 10.76% 16.49% (6.78%)+++
</TABLE>
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.33% 1.16% 1.11% 1.06% 1.23%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.54% 1.08% 1.04% 1.47% 4.64%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 19,540 $ 33,960 $ 44,624 $116,628 $ 74,478
Data: ======== ======== ======== ======== ========
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95%
======== ======== ======== ======== ========
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch International Equity Fund, May 31, 1999
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
The following per share data and ratios have
been derived from information provided in the
financial statements. Class B
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.62 $ 12.42 $ 11.76 $ 10.19 $ 11.44
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .04 --+++ .01 .04 .02
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (.19) (1.04) 1.08 1.53 (.69)
-------- -------- -------- -------- --------
Total from investment operations (.15) (1.04) 1.09 1.57 (.67)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.10) -- (.04)
In excess of investment income--net -- -- (.01) -- --
Realized gain on investments--net -- (.93) (.32) -- (.54)
In excess of realized gain on
investments--net (.30) (.83) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.30) (1.76) (.43) -- (.58)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.17 $ 9.62 $ 12.42 $ 11.76 $ 10.19
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (1.36%) (7.01%) 9.70% 15.41% (5.91%)
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 2.39% 2.20% 2.14% 2.09% 2.13%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .41% (.01%) .08% .37% .23%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $144,681 $311,520 $583,213 $945,368 $961,941
Data: ======== ======== ======== ======== ========
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95%
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Class C
For the
The following per share data and ratios have Period
been derived from information provided in Oct. 21,
the financial statements. 1994++++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.49 $ 12.26 $ 11.65 $ 10.10 $ 11.62
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .03 --+++ --+++ .05 .24
Realized and unrealized gain (loss) on
investments and foreign currency transactions
--net (.19) (1.02) 1.08 1.50 (1.09)
-------- -------- -------- -------- --------
Total from investment operations (.16) (1.02) 1.08 1.55 (.85)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.14) -- (.13)
In excess of investment income--net -- -- (.01) -- --
Realized gain on investments--net -- (.92) (.32) -- (.54)
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
In excess of realized gain on
investments--net (.30) (.83) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.30) (1.75) (.47) -- (.67)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.03 $ 9.49 $ 12.26 $ 11.65 $ 10.10
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (1.50%) (6.96%) 9.71% 15.35% (7.36%)+++++
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 2.40% 2.21% 2.15% 2.09% 2.30%**
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .40% (.01%) .04% .45% 4.26%**
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,328 $ 14,717 $ 24,774 $ 46,985 $ 25,822
Data: ======== ======== ======== ======== ========
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95%
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have
been derived from information provided in
the financial statements. Class D
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999++ 1998++ 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.63 $ 12.59 $ 11.94 $ 10.27 $ 11.51
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .11 .09 .10 .13 .10
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (.20) (1.07) 1.09 1.54 (.68)
-------- -------- -------- -------- --------
Total from investment operations (.09) (.98) 1.19 1.67 (.58)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.21) -- (.12)
In excess of investment income--net -- -- (.01) -- --
Realized gain on investments--net -- (1.04) (.32) -- (.54)
In excess of realized gain on invest-
ments--net (.34) (.94) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.34) (1.98) (.54) -- (.66)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.20 $ 9.63 $ 12.59 $ 11.94 $ 10.27
======== ======== ======== ======== ========
Total Investment Based on net asset value per share (.70%) (6.18%) 10.50% 16.26% (5.11%)
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.59% 1.42% 1.36% 1.31% 1.34%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.23% .77% .86% 1.13% .85%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 35,210 $ 67,689 $119,024 $175,151 $188,583
Data: ======== ======== ======== ======== ========
Portfolio turnover 132.43% 107.50% 60.56% 71.86% 63.95%
======== ======== ======== ======== ========
</TABLE>
*Total investment returns exclude the effects of sales loads.
**Annualized.
++Based on average shares outstanding.
++++Commencement of operations.
+++Amount is less than $.01 per share.
+++++Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch International Equity Fund, May 31, 1999
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's financial statements are prepared in accordance with
generally accepted accounting principles which may require the use of management
accruals and estimates. 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
<PAGE> 21
same terms and conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Trustees as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
or purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities are valued at amortized cost, which
approximates market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not available are valued at fair value as determined in
good faith by or under the direction of the Fund's Board of Trustees.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt, and currency markets. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell financial futures
contacts 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 operations is recorded from the date the
Fund enters into such contracts.
* Interest rate swaps--The Fund is authorized to enter into equity swap
agreements, which are over-the-counter contracts in which one party agrees to
make periodic payments based on the change in market value of a specified equity
security, basket of equity securities or equity index in return for periodic
payments based on a fixed or variable interest rate of the change in market
value of a different equity security, basket of equity securities or equity
index. Swap agreements may be used to obtain exposure to an equity or market
without owning or taking physical custody of securities in circumstances in
which direct investment is restricted by local law or is otherwise impractical.
<PAGE> 22
* 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).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization 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. Distributions in excess of realized
capital gains are due primarily to differing tax treatments for post-October
losses.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $2,905,595 have been reclassified between accumulated
net realized capital losses and undistributed net investment income and $62 has
been reclassified between paid-in capital in excess of par and undistributed net
investment income. These reclassifications have no effect on net assets or net
asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has
entered into an Investment Advisory Agreement with Merrill Lynch Asset
Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services,
Inc. ("PSI"), an indirect wholly- owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or the "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee of
0.75%, on an annual basis, of the average daily value of the Fund's net assets.
MLAM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursuant to which
MLAM pays MLAM U.K. a fee in an amount to be determined from time to time by
MLAM and MLAM U.K. but in no event in excess of the amount that MLAM actually
receives. For the year ended May 31, 1999, MLAM paid MLAM U.K. a fee of $97,386
pursuant to such Agreement.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
</TABLE>
<PAGE> 23
<TABLE>
<S> <C> <C>
Class D 0.25% --
</TABLE>
Merrill Lynch International Equity Fund, May 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("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
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended May 31, 1999, MLFD earned underwriting discounts and direct
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ 67 $1,234
Class D $635 $8,967
</TABLE>
For the year ended May 31, 1999, MLPF&S received contingent deferred sales
charges of $11,000 and $2,037 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $30,307 in commissions on the execution of
portfolio security transactions for the Fund for the year ended May 31, 1999.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, the year
ended May 31, 1999 were $359,205,813 and $541,857,262, respectively.
Net realized gains (losses) the year ended May 31, 1999 and unrealized gains
(losses) as of May 31, 1999 were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Investments:
Long-term $ 4,403,791 $ 3,788,659
Short-term 8,623 120
Financial futures contracts (9,064,247) (243,014)
Interest rate swaps -- (138,566)
Options written 117,532 --
Options purchased (551,022) 354,240
------------ -------------
Total investments (5,085,323) 3,761,439
------------ -------------
Currency transactions:
Options purchased 755,300 (106,200)
Options written -- 85,800
Forward foreign exchange contracts (1,714,900) 27,246
Foreign currency transactions 138,883 52,099
------------ -------------
Total currency transactions (820,717) 58,945
------------ -------------
Total $ (5,906,040) $ 3,820,384
============ =============
</TABLE>
The Fund has entered into the following equity swaps as of May 31, 1999:
<TABLE>
<CAPTION>
Interest Paid
Notional Current Expiration
Amount Return Received Rate Type Date
<S> <C> <C> <C> <C>
$ 600,000 Price return++ 6.495% Variable* 10/28/1999
E 3,748,384 Price return plus
net dividends++++ 3.081% Variable** 11/22/1999
</TABLE>
<PAGE> 24
[FN]
++The Fund receives the price return of the Hang Seng China Affiliated
Corporations Index.
++++The Fund receives the price return plus net dividends of the European ex UK
Small--Cap Basket.
*3-month US$ LIBOR plus 1.50% at reset date.
**3-month 1 Euribor plus 0.50% at reset date.
Transactions in call options written for the year ended May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Nominal Value
Covered by Premiums
Written Options Received
<S> <C> <C>
Outstanding call options written at
beginning of year $ 862,711 $ 55,794
Options written 12,027,675 169,138
Options expired (890,386) (117,532)
----------- -------------
Outstanding call options
written at end of year $12,000,000 $ 107,400
=========== =============
</TABLE>
As of May 31, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $2,868,209, of which $14,327,007 related to appreciated securities
and $11,458,798 related to depreciated securities. At May 31, 1999, the
aggregate cost of investments, net of written options, for Federal income tax
purposes was $199,372,362.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$191,371,781 and $195,416,794 for the years ended May 31, 1999 and May 31, 1998,
respectively.
Transactions in shares of beneficial interest for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
<S> <C> <C>
Shares sold 2,821,668 $ 24,743,753
Shares issued to shareholders in
reinvestment of distributions 89,014 770,857
------------ --------------
Total issued 2,910,682 25,514,610
Shares redeemed (4,324,572) (38,209,253)
------------ --------------
Net decrease (1,413,890) $ (12,694,643)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
<S> <C> <C>
Shares sold 2,078,080 $ 21,677,428
Shares issued to shareholders in
reinvestment of distributions 633,646 5,506,383
------------ --------------
Total issued 2,711,726 27,183,811
Shares redeemed (2,710,923) (28,909,949)
------------ --------------
Net increase (decrease) 803 $ (1,726,138)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
<S> <C> <C>
Shares sold 1,609,034 $ 14,026,196
Shares issued to shareholders in
reinvestment of distributions 865,770 7,566,829
------------ --------------
Total issued 2,474,804 21,593,025
Shares redeemed (18,505,828) (160,465,559)
Automatic conversion of shares (557,225) (4,801,584)
------------ --------------
Net decrease (16,588,249) $ (143,674,118)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
<S> <C> <C>
Shares sold 5,510,516 $ 60,695,234
Shares issued to shareholders in
reinvestment of distributions 6,679,391 58,578,259
------------ --------------
</TABLE>
<PAGE> 25
<TABLE>
<S> <C> <C>
Total issued 12,189,907 119,273,493
Shares redeemed (26,306,021) (275,682,157)
Automatic conversion of shares (474,667) (5,290,768)
------------ --------------
Net decrease (14,590,781) $ (161,699,432)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
<S> <C> <C>
Shares sold 1,353,123 $ 11,684,660
Shares issued to shareholders in
reinvestment of distributions 42,444 365,869
------------ --------------
Total issued 1,395,567 12,050,529
Shares redeemed (2,246,127) (19,457,861)
------------ --------------
Net decrease (850,560) $ (7,407,332)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
<S> <C> <C>
Shares sold 1,734,570 $ 19,355,604
Shares issued to shareholders in
reinvestment of distributions 320,806 2,774,977
------------ --------------
Total issued 2,055,376 22,130,581
Shares redeemed (2,524,843) (27,261,896)
------------ --------------
Net decrease (469,467) $ (5,131,315)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class D Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
<S> <C> <C>
Shares sold 519,404 $ 4,483,336
Automatic conversion of shares 557,482 4,801,584
Shares issued to shareholders in
reinvestment of distributions 217,407 1,895,784
------------ --------------
Total issued 1,294,293 11,180,704
Shares redeemed (4,499,271) (38,776,392)
------------ --------------
Net decrease (3,204,978) $ (27,595,688)
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Class D Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
<S> <C> <C>
Shares sold 3,449,207 $ 39,786,340
Automatic conversion of shares 470,693 5,290,768
Shares issued to shareholders in
reinvestment of distributions 1,613,654 14,103,337
------------ --------------
Total issued 5,533,554 59,180,445
Shares redeemed (7,952,491) (86,040,354)
------------ --------------
Net decrease (2,418,937) $ (26,859,909)
============ ==============
</TABLE>
5. Commitments:
At May 31, 1999, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to sell foreign currency with an approximate value of $4,775,000.
6. Capital Loss Carryforward:
At May 31, 1999, the Fund had a net capital loss carryforward of approximately
$54,741,000, all of which expires in 2007. This amount will be available to
offset like amounts of any future taxable gains.
Merrill Lynch International Equity Fund, May 31, 1999
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, 1999, the related statements
<PAGE> 26
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1999, by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
International Equity Fund as of May 31, 1999, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 16, 1999
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch International Equity Fund during the fiscal year ended May 31, 1999:
<TABLE>
<CAPTION>
Non-Qualifying Total Foreign Taxes
Record Payable Ordinary Foreign Ordinary Paid or Long-Term
Date Date Income Source Income Income Withheld Capital Gains*
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
8/05/98 8/13/98 $ .246136$ .109231$ .355367$ .011337$ .000726
Class B Shares
8/05/98 8/13/98 $ .209948$ .093172$ .303120$ .011337$ .000726
Class C Shares
8/05/98 8/13/98 $ .209362$ .092911$ .302273$ .011337$ .000726
Class D Shares
8/05/98 8/13/98 $ .237544$ .105418$ .342962$ .011337$ .000726
</TABLE>
The foreign taxes paid or withheld represent taxes incurred by the Fund on
dividends received by the Fund from foreign sources. Foreign taxes paid or
withheld should be included in taxable income with an offsetting deduction from
gross income or as a credit for taxes paid to foreign governments. You should
consult your tax adviser regarding the appropriate treatment of foreign taxes
paid.
Please retain this information for your records.
[FN]
*All of the long-term capital gains distributions are subject to the
20% tax rate.
Merrill Lynch International Equity Fund, May 31, 1999
EQUITY PORTFOLIO CHANGES (unaudited)
For the Quarter Ended May 31, 1999
Additions
AAPT Limited
*ABB AG (Bearer) (New)
ASDA Group PLC
Abbey National PLC
Alberta Energy Company Ltd.
<PAGE> 27
Anglo American PLC
Art Vivant Co., Ltd.
BG PLC
Bank Austria AG
*The Bank of Tokyo-Mitsubishi, Ltd.
Barclays PLC
Bass PLC
The Berkeley Group PLC
Cap Gemini SA
Compagnie Generale des Etablissements
Michelin 'B'
Computacenter PLC
*Contact Energy Ltd.
*FirstRand Limited
Fletcher Challenge Energy
Fletcher Challenge Paper
GKN PLC
Genesis Chile Fund
Halifax
Hoechst AG
*Imperial Oil
KPN NV Komatsu Ltd.
*Korea Electric Power Corporation (ADR)
Laidlaw Inc.
MSCI Belgium OPALS 'B'
MSCI Brazil OPALS
MSCI Denmark OPALS 'B'
MSCI European OPALS 'B'
*MSCI German OPALS 'B'
MSCI Norway OPALS 'B'
MSCI Philippines OPALS 'B'
*MSCI South Korea OPALS 'B'
MSCI Thailand OPALS
Mitsui Marine and Fire Insurance
Company, Ltd.
National Power PLC
*Nedcor Limited
Nortel Networks Corporation
Pioneer International Limited
Publishing & Broadcasting Limited
*Railtrack Group PLC
Renaissance Energy Ltd.
Rexam PLC
Sankyo Company, Ltd.
Sanofi-Synthelabo SA
Schroders PLC
Shohkoh Fund & Co., Ltd.
*Siam Commercial Bank Public Company
Limited 'Foreign'
Singapore Telecommunications, Ltd.
Skandinaviska Enskilda Banken (SEB) 'A'
Societe Generale 'A'
Softbank Corporation
Square Co., Ltd.
Sun Life and Provincial Holdings PLC
Svenska Cellulosa AB (SCA) 'B'
THK Co., Ltd.
TNT Post Group NV
Telefonica, SA (New Shares)
*Thomson Travel Group PLC
Toray Industries, Inc.
The Toronto-Dominion Bank
Usinor SA
Volvo AB 'B'
WPP Group PLC
Wienerberger Baustoffindustrie AG
Woolworths Limited
Deletions
*ABB AG (Bearer) (New)
Adidas-Salomon AG
Alcatel
Alpha Credit Bank
Anritsu Corp.
Australia and New Zealand Banking
Group Ltd.
BIG Bank Gdanski SA (GDR)
Banco Central Hispanoamericano (BCH)
*The Bank of Tokyo-Mitsubishi, Ltd.
Banyu Pharmaceutical Co., Ltd.
British American Tobacco PLC
The British Land Company PLC
Cable & Wireless Optus Limited
Canal Plus
Carter Holt Harvey Limited
Cominco Ltd.
*Contact Energy Ltd.
Enbridge Inc.
Enterprise Oil PLC
<PAGE> 28
*FirstRand Limited
Fleming Japanese Investment Trust PLC
Fujikura Ltd.
Guardian Royal Exchange PLC
Heineken NV
Hellenic Bottling Co.
Hindustan Petroleum Corporation Ltd.
Hong Kong and China Gas Company Ltd.
Hutchison Whampoa Limited
*Imperial Oil
Imasco Limited
Imperial Tobacco Group PLC
Indian Petrochemicals Corp. Ltd.
Irish Permanent PLC
Kingfisher PLC
*Korea Electric Power Corporation (ADR)
Lagardere S.C.A.
MSCI France OPALS 'B'
*MSCI German OPALS 'B'
MSCI Hong Kong OPALS 'B'
MSCI Italy OPALS 'B'
*MSCI South Korea OPALS 'B'
Merkantildata ASA
Metro AG
Metro AG
Minorco SA (Minerals & Resources
Corporation Limited)
Mitsubishi Trust & Banking Corp.
NTT Data Corporation
National Bank Of Greece SA (GDR)
*Nedcor Limited
Next PLC
Noranda
Northern Telecom Ltd.
Pearson PLC
The Peninsular and Oriental Steam Navigation Company
Pernod Ricard
Pioneer Electronic Corporation
Power Corporation of Canada
Provident Financial PLC
*Railtrack Group PLC
Ranbaxy Laboratories Limited
Rolls-Royce PLC
Rothmans Holdings, Ltd.
SAP AG (Systeme, Anwendungen,
Produkte in der Datenverarbeitung)
Saga Petroleum ASA
Shell Transport & Trading Co. PLC
*Siam Commercial Bank Public Company
Limited 'Foreign'
State Bank of India
Steel Authority Of India
TABCORP Holdings Limited
TDK Corporation
Tata Chemicals Limited
*Thomson Travel Group PLC
Tokyu Corporation
Toyo Seikan Kaisha, Ltd.
TransCanada PipeLines Limited
Uniden Corp.
United Dominion Industries Limited
United Utilities PLC
Videsh Sanchar Nigam Ltd. (GDR)
Wolters Kluwer NV 'A'
[FN]
*Added and deleted in the same quarter.
PORTFOLIO INFORMATION (unaudited)
Worldwide
Investments as of
May 31, 1999
<TABLE>
<CAPTION>
Percent of
Ten Largest Equity Holdings Net Assets
<S> <C>
BP Amoco PLC 2.0%
MSCI Singapore OPALS 'B' 1.5
British Telecommunications PLC 1.3
DaimlerChrysler AG 1.3
Vodafone Group PLC 1.2
NTT Mobile Communication
Network, Inc. 1.0
MSCI Brazil OPALS 1.0
MSCI Belgium OPALS 'B' 1.0
ING Groep NV 1.0
ENI SpA 0.9
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
Percent of
Ten Largest Countries Net Assets
<S> <C>
United Kingdom 20.6%
Japan 16.9
Germany 9.9
France 9.3
Netherlands 4.5
Italy 4.3
Switzerland 3.6
Spain 3.2
Sweden 3.0
Canada 2.9
</TABLE>
<TABLE>
<CAPTION>
Percent of
Geographical Asset Mix* Net Assets
<S> <C>
Europe (Ex-United Kingdom and
Ireland) 42.8%
United Kingdom and Ireland 21.0
Japan 16.9
Pacific Basin (Ex-Japan) 5.8
North America 2.9
Other Emerging Markets 2.6
</TABLE>
[FN]
*Percent of net assets may not equal 100% and
excludes the impact of futures and options.
<TABLE>
<CAPTION>
Ten Largest Industries Percent of
(Equity Investments) Net Assets
<S> <C>
Telecommunications 10.6%
Banking 10.6
Energy Sources 6.3
Health & Personal Care 5.3
Insurance 4.9
Merchandising 4.7
Financial Services 3.3
Automobiles 2.9
Electrical & Electronics 2.9
Business & Public Services 2.7
</TABLE>
Financial Futures Contracts
<TABLE>
<CAPTION>
Percent of
Country Issue Exchange Net Assets
<S> <C> <C> <C>
Australia All Ordinaries Index Sydney FE (0.3)%
Canada TSE--35 Index Toronto SE (0.3)
Euro CAC 40 MATIF 0.5
Japan Nikkei 225 Index SIMEX 2.2
Sweden OMX Index OML 0.2
United Kingdom FT-SE 100 LIFFE (1.8)
-----
0.5%
=====
</TABLE>
<PAGE> 1
[MERRILL LYNCH LOGO HERE]
[PROSPECTUS GRAPHIC HERE]
Merrill Lynch Consults International Portfolio
[PROSPECTUS GRAPHIC HERE]
February 27, 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
[KEY FACTS GRAPHIC HERE]
<S> <C>
KEY FACTS
The Merrill Lynch Consults International Portfolio at a Glance.. 3
Risk/Return Bar Chart........................................... 5
Fees and Expenses............................................... 6
[DETAILS ABOUT THE FUND GRAPHIC HERE]
DETAILS ABOUT THE FUND
How the Fund Invests............................................ 8
Investment Risks................................................ 10
[YOUR ACCOUNT GRAPHIC HERE]
YOUR ACCOUNT
How to Buy, Sell and Transfer Shares............................ 16
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MANAGEMENT OF THE FUND
Merrill Lynch (Suisse) Investment Management S.A................ 22
Financial Highlights............................................ 23
[FOR MORE INFORMATION GRAPHIC HERE]
FOR MORE INFORMATION
Shareholder Reports............................................. Back Cover
Statement of Additional Information............................. Back Cover
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE> 3
[KEY FACTS GRAPHIC HERE]
THE MERRILL LYNCH CONSULTS INTERNATIONAL
PORTFOLIO AT A GLANCE
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
COMMON STOCK -- shares of ownership of a corporation.
PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets.
CONVERTIBLE SECURITIES --
corporate securities (usually preferred stock or bonds) that are exchangeable
for a fixed number of other securities (usually common stock) at a set price or
formula.
INDEXED SECURITIES -- derivative securities the values of which are linked to
equity securities or securities indices.
What are the Fund's objective and goals?
The investment objective of the Fund is to seek the highest total investment
return that is consistent with prudent risk through investment in a diversified
international portfolio of equity securities, other than United States equity
securities. In other words, it tries to choose investments that will both
provide high current income and increase in value, without undue risk. The Fund
cannot guarantee that it will achieve its goals.
What are the Fund's main investment strategies?
The Fund invests primarily in a diversified portfolio of equity securities of
companies located outside the United States that Fund management believes are
undervalued or have good prospects for earnings growth. A company's stock is
considered undervalued when its price is less than what Fund management
believes it is worth. A company whose earnings per share grow faster than
inflation and the economy in general usually has a higher stock price over time
than companies with slower earnings growth.
Equity securities include COMMON STOCKS, PREFERRED STOCKS, CONVERTIBLE
SECURITIES and INDEXED SECURITIES. The Fund will normally invest at least 65%
of its total assets in equity securities of companies located in at least three
foreign countries, and expects to invest at least 50% of its assets in
securities of companies located in Western Europe and the Far East. Fund
management believes that an internationally diversified portfolio may offer
higher total investment return than a portfolio of securities of one securities
market. This is because the securities markets of different countries may move
independently of one another and when they are combined into one portfolio,
risk may be reduced. Fund management will make investments based on its
assessment of international economic and market trends including its evaluation
of the condition and growth potential of various economies and securities
markets, currency and taxation considerations and other financial, social,
national and political factors.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore,
the value of Fund shares -- may go up or down. These changes may occur because
a stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the
Fund's investments goes down, you may lose money. Investments that Fund
management selects may underperform stock market indexes or other funds with
similar investment objectives and investment strategies.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
3
<PAGE> 4
THE MERRILL LYNCH CONSULTS INTERNATIONAL
PORTFOLIO AT A GLANCE
[KEY FACTS GRAPHIC HERE]
Key Facts
MERRILL LYNCH CONSULTS(R) SERVICE offers to assist clients in selecting and
retaining, from a roster of managers, one or more professional portfolio
managers who generally emphasize investment in United States securities.
MERRILL LYNCH STRATEGIC PORTFOLIO ADVISOR(R) SERVICE provides business and
individual clients with a comprehensive package of consulting, investment and
account services.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks -- including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
Who should invest?
You may buy shares of the Fund if you are a client of the MERRILL LYNCH
CONSULTS(R) SERVICE or of the MERRILL LYNCH STRATEGIC PORTFOLIO ADVISOR(R)
SERVICE.
The Fund may be an appropriate investment for you if you:
- Are investing with long term goals, such as retirement or funding a
child's education.
- Want a professionally managed and diversified international portfolio.
- Are looking for exposure to a variety of foreign markets.
- In seeking total investment return, you are willing to accept the risk
that the value of your investment may decline.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
4
<PAGE> 5
RISK/RETURN BAR CHART
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for each complete calendar year since the Fund's inception. The table compares
the Fund's average annual total returns for the periods shown with those of the
Morgan Stanley Capital International Europe, Asia, Far East (EAFE) Index. How
the Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
[RISK/BAR CHART GRAPHIC APPEARS HERE]
<TABLE>
<S> <C> <C> <C> <C> <C>
22.37% 1.94% 9.68% 5.01% 3.82% 2.91%
- -----------------------------------------------
1993 1994 1995 1996 1997 1998
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
14.04% (quarter ended June 30, 1997) and the lowest return for a quarter was
- - -18.22% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE
CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- ----------------- -------- ---------- ---------------
<S> <C> <C> <C>
Merrill Lynch Consults
International Portfolio 2.91% 4.64% 6.69%+
Morgan Stanley
Capital International
EAFE Index* 20.00% 9.19% 11.53%++
----------- ------ ----- --------
</TABLE>
* This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East. Past performance is not
predictive of future performance.
+ Inception date is September 14, 1992.
++ Since September 30, 1992.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
5
<PAGE> 6
FEES AND EXPENSES
[KEY FACTS GRAPHIC HERE]
Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating
the Fund.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.
This table shows the fees and expenses that you may pay if you buy and hold
shares of the Fund. Future expenses may be greater or less than those indicated
below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT): (A)
----------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) None
Maximum Sales Charge (Load)
imposed on Dividend Reinvestments None
Redemption Fee None
Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
MANAGEMENT FEE 0.75%
DISTRIBUTION AND/OR SERVICE (12B-1) FEES(B) 1.00%
Other Expenses (including transfer agency fees)(c) 0.70%
Administrative Fees (c) 0.25%
Total Annual Fund Operating Expenses(d) 2.70%
--------------------------------------- -----
</TABLE>
(a) Each client of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio Advisor(SM) Service is charged an annual fee of up
to 3% (charged on a quarterly basis) of the value of the client's portfolio.
This fee is not charged on the portion of the client's assets maintained in
the Fund. A client investing directly in the Fund will not be subject to the
3% charge at any time while the assets remain in the Fund.
(b) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in other
Fund materials.
(c) The Fund pays the Transfer Agent $11.00 per shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. The Fund also pays
a $0.20 monthly closed account charge, which is assessed upon all accounts
that close during the year. This fee begins the month following the month
the account is closed and ends at the end of the calendar year. For the
fiscal year ended October 31, 1998, the Fund paid the Transfer Agent fees
totaling $34,506. The Administrator provides accounting services to the
Fund at its cost. For the fiscal year ended October 31, 1998, the Fund
reimbursed the Administrator $150,624 for these services.
(d) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. This fee is currently waived
for clients of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio Advisor(SM) Service.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
6
<PAGE> 7
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C>
$273 $838 $1,430 $3,032
------ ------- ------- --------
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
7
<PAGE> 8
[DETAILS ABOUT THE FUND GRAPHIC HERE]
HOW THE FUND INVESTS
ABOUT THE
PORTFOLIO MANAGER
Christophe Velay is a Vice President and the portfolio manager of the Fund. Mr.
Velay has been a Portfolio Manager of Merrill Lynch Bank (Suisse) S.A. since
1986. Mr. Velay has been primarily responsible for the management of the
Fund's portfolio since 1998.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch (Suisse) Investment Management S. A.
The Fund's main goal is to provide the highest total investment return that is
consistent with prudent risk. The Fund tries to achieve its goal by investing
in a diversified portfolio of equity securities of companies located outside
the United States. In selecting securities, the Fund emphasizes those
securities that Fund management believes to be undervalued or have good
prospects for earnings growth.
The Fund will normally invest at least 65% of its total assets in equity
securities of companies located in at least three foreign countries, and
expects to invest at least 50% of its assets in securities of companies located
in Western Europe and the Far East. The Fund may also invest in capital markets
throughout the world (except in the United States). Equity securities consist
of:
- Common Stock
- Preferred Stock
- Securities Convertible into Common Stock, including American Depositary
Receipts and European Depositary Receipts
- Derivative securities, such as indexed and inverse securities, the
values of which are indexed or linked to the market values of other
equity securities or indices of equity securities, options and
futures.
The Fund considers a company to be "located" in the country where:
- it is legally organized,
- the primary trading market for its securities is located, or
- at least 50% of the company's (and its subsidiaries) non-current assets,
capitalization, gross revenues or profits have been located during one
of the last two fiscal years.
Under this definition, the Fund considers American Depositary Receipts to be
securities of companies located outside the United States. An investment in a
U.S. closed-end fund will be considered to be a non-U.S. investment if the
closed-end fund primarily invests in non-U.S. securities.
A company's stock is considered undervalued when the stock's current price is
less than Fund management believes a share of the company is worth. Fund
management feels a company's worth can be assessed by several factor, such as
- financial resources
- value of assets
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
8
<PAGE> 9
- sales and earnings growth
- product development
- quality of management
- overall business prospects
A company's stock may become undervalued when most investors fail to perceive
the company's strengths in one or more of these areas. A company whose earnings
per share grow faster than inflation and the economy in general usually has a
higher stock price over time than companies with slower earnings growth.
Fund management believes that an internationally diversified portfolio may
offer higher total investment return than a portfolio of securities of one
securities market. Historically, the securities markets of many countries
generally have moved independently of one another due to different economic,
financial, political and social factors. Fund management believes that when a
single portfolio combines securities of markets that are moving in different
directions, the total risk of the portfolio may be reduced, while the total
investment return of the portfolio may be increased. Exchange rates move
independently of the securities markets in a particular country, however, and
any gains made in a particular market may be adversely affected by changes in
exchange rates. Fund management will use a flexible investment approach and
will vary its policies as to geographic and industry diversification based on
its assessment of international economic and market trends. Its evaluation
could include the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other financial,
social, national and political factors.
The Fund may use derivative instruments including indexed and inverse
securities, options, futures and currency forwards. Derivatives are financial
instruments whose value is derived from another security, a commodity (such as
oil or gold) or an index such as the Morgan Stanley Capital International
Europe, Asia, Far East Index. The Fund may use indexed and inverse securities
to seek enhanced returns, hedge other positions, or vary portfolio leverage
with greater efficiency than would otherwise be possible under certain market
conditions. The Fund may purchase and sell options, futures and forward
currency contracts for hedging purposes. In addition, the Fund may write (or
sell) options on securities to earn income.
The Fund may invest in repurchase agreements, illiquid securities and may
engage in securities lending. As a temporary measure for defensive purposes or
to provide for redemptions, the Fund may hold cash or cash equivalents (in
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
9
<PAGE> 10
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
U.S. dollars or foreign currencies) and short term securities, including money
market securities, without limitation. Investments in short term securities can
be sold easily and have limited risk of loss but earn only limited returns.
Therefore, the Fund may not achieve its investment objective.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
STOCK MARKET AND SELECTION RISK -- Stock market risk is the risk that the stock
markets will go up or down in value, including the possibility that the markets
will go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform stock market indexes
or other funds with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may make
it difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain foreign markets may not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
10
<PAGE> 11
of capital controls, nationalization of companies or industries, expropriation
of assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK -- Securities in which the Fund invests are usually denominated
or quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for Fund management to
completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
11
<PAGE> 12
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures
and trade regulations also may involve certain risks (such as delays in payment
for or delivery of securities) not typically generated by the settlement of
U.S. investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Fund to carry out transactions. If the
Fund cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any
losses incurred.
Transactions effected on behalf of the Fund by the Investment Adviser may be
subject to Swiss federal transactional taxes of 0.15%.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
12
<PAGE> 13
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected:
- If the transition to euro, or EMU as a whole, does not proceed as
planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the euro as
a distinct currency.
Risks associated with certain types of securities in which the Fund may invest
include:
CONVERTIBLE SECURITIES -- Convertible securities are generally debt securities
or preferred stocks that may be converted into common stock. Convertible
securities typically pay current income as either interest (debt security
convertibles) or dividends (preferred stocks). A convertible's value usually
reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like
regular debt securities; that is, if market interest rates rise, the value of a
convertible usually falls. Since it is convertible into common stock, the
convertible also has the same types of market and issuer risk as the value of
the underlying common stock.
DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
13
<PAGE> 14
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
involve leverage can result in losses that greatly exceed the amount originally
invested.
LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes including anticipatory
hedges. The Fund may also use written options to earn income. Hedging is a
strategy in which the Fund uses a derivative to offset the risk that other Fund
holdings may decrease in value. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different manner than
anticipated by the Fund or if the cost of the derivative outweighs the benefit
of the hedge. Hedging also involves the risk that changes in the value of the
derivative will not match those of the holdings being hedged as expected by the
Fund, in which case any losses on the holdings being hedged may not be reduced.
There can be no assurance that the Fund's hedging strategy will reduce risk or
that hedging transactions will be either available or cost effective. The Fund
is not required to use hedging and may choose not to do so.
BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, options.
SECURITIES LENDING -- The Fund may lend securities to financial institutions,
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.
ILLIQUID SECURITIES -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
14
<PAGE> 15
RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market. Restricted securities may be illiquid. The Fund may get only limited
information about the issuer, so it may be less able to predict a loss. In
addition, if Fund management receives material adverse non-public information
about the issuer, the Fund will not be able to sell the security.
Rule 144A securities are restricted securities that can be resold to qualified
institutional buyers but not to the general public. Rule 144A securities may
have an active trading market, but carry the risk that the active trading
market may not continue.
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
15
<PAGE> 16
[YOUR ACCOUNT GRAPHIC HERE]
HOW TO BUY, SELL, AND TRANSFER SHARES
Shares of the Fund are offered for sale to clients of the Merrill Lynch
Consults(R) Service and Merrill Lynch Strategic Portfolio Advisor(R) Service by
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc., an affiliate of Merrill Lynch.
You will not pay a sales charge when you buy or sell shares, but you will pay
distribution fees of 0.75% and account maintenance fees of 0.25% each year
under a distribution plan that the Fund has adopted under Rule 12b-1 under the
Investment Company Act of 1940. The Distributor uses the money that it receives
from the distribution fees to cover the costs of marketing, advertising and
compensating the Merrill Lynch Financial Consultant who assists you in
purchasing Fund shares.
The chart below summarizes how to buy, sell and transfer through Merrill Lynch
or other securities dealers. Shares of the Fund may not be exchanged for shares
of any other fund. Because the selection of a mutual fund involves many
considerations, your Merrill Lynch Financial Consultant may help you with this
decision.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
16
<PAGE> 17
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES
- -------------- ------------
<S> <C>
Buy Shares Determine the amount of
your investment
------------------------------
Have your Merrill Lynch
Financial Consultant submit
your purchase order
------------------------------
Add to Your Purchase additional shares
Investment ------------------------------
Acquire additional shares
through the automatic
dividend reinvestment plan
------------------------------
Transfer Shares Transfer to a participating
to Another securities dealer
Securities Dealer ------------------------------
Transfer to a
non-participating securities
dealer
------------------------------
Terminate your Retain your shares of the
Merrill Lynch Fund with Merrill Lynch
Consults(R) Service
or the Merrill Lynch
Strategic Portfolio
Advisor(SM) Service
account
Transfer shares to another
securities dealer
------------------------------
Sell your shares
==============================
</TABLE>
<TABLE>
<CAPTION>
IF YOU WANT TO INFORMATION IMPORTANT FOR YOU TO KNOW
- -------------- -------------------------------------
<S> <C>
Buy Shares The minimum initial investment for the Fund is $5,000 for all
accounts.
---------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed within
fifteen minutes after the close of business on the New York Stock
Exchange will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase.
This fee is currently $5.35. This fee is currently waived for clients of
the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio Advisor(SM) Service.
---------------------------------------------------------------------------
Add to Your The minimum investment for additional purchases is $1,000.
Investment ---------------------------------------------------------------------------
All dividends and capital gains distributions are automatically
reinvested without a sales charge.
---------------------------------------------------------------------------
Transfer Shares Subject to the consent of Merrill Lynch, you may transfer your Fund
to Another shares to another securities dealer that has entered into an
Securities Dealer agreement with Merrill Lynch. All shareholder services will be
available for the transferred shares. You may only purchase
additional shares of funds previously owned before the transfer. All
future trading of these assets must be coordinated by the receiving
firm.
---------------------------------------------------------------------------
You must either:
- Transfer your shares to an account with the Transfer Agent; or
- Sell your shares.
---------------------------------------------------------------------------
Terminate your Shares of the Fund are only distributed to current clients of the Merrill
Merrill Lynch Lynch Consults(R) Service and of Merrill Lynch Strategic Portfolio
Consults(R) Service Advisor(SM) Service (other than reinvestment of dividends and capital
or the Merrill Lynch gains distributions of the Fund). If you wish to terminate the Merrill
Strategic Portfolio Lynch Consults(R) Service or the Merrill Lynch Strategic Portfolio
Advisor(SM) Service Advisor(SM) Service, your shares of the Fund may be retained in a Merrill
account Lynch brokerage account, subject to the consent of Merrill Lynch.
---------------------------------------------------------------------------
See "Transfer shares to another securities dealer" above.
---------------------------------------------------------------------------
See "Sell Your Shares" below.
===========================================================================
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
17
<PAGE> 18
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- -------------- ------------ -------------------------------------
<S> <C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within fifteen minutes after that
day's close of business on the New York Stock Exchange (the
New York Stock Exchange generally closes at 4:00 p.m. Eastern time).
Any redemption request placed after that time will be priced at the
net asset value at the close of business on the next business day.
Dealers must submit redemption requests to the Fund not more than
thirty minutes after the close of business on the New York Stock
Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. This fee is currently waived for clients of the Merrill Lynch
Consults(R) Service and of Merrill Lynch Strategic Portfolio Advisor(SM)
Service. No processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
========================================================================
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
18
<PAGE> 19
OTHER SERVICES
Clients of the Merrill Lynch Consults(R) Service and the Merrill Lynch
Strategic Portfolio Advisor(SM) Service are currently provided, without
incremental charge, the Merrill Lynch Asset Information and Measurement(R)
Service. This Service provides, through quarterly reports, the ability to
monitor and evaluate performance of a Merrill Lynch Consults(R) Service or
Merrill Lynch Strategic Portfolio Advisor(SM) Service account, including any
shares of the Fund held in the account, and analyzes the risk taken to achieve
the return. Shares of the Fund must be held in the account for a full quarterly
period to be subject to such evaluation.
If you are a client of the Merrill Lynch Consults(R) Service, you may receive
information regarding the possible change in risk posture to your domestic
account due to an investment in the Fund. Each domestic investment manager
employed by the Merrill Lynch Consults(R) Service is assigned a risk class,
based on its performance over the last 10 years, as calculated by Merrill Lynch
Consults(R) Service according to information provided by the manager. The Fund
is also assigned a risk class based on its performance over the last 10 years
compared to the EAFE Index, a market weighted, unmanaged index. This
information is provided only to clients who have domestic Merrill Lynch
Consults(R) Service accounts and own shares of the Fund in that account. The
Fund does not allocate its assets proportionately to the weightings of the EAFE
Index and may invest in countries that are not included in the EAFE Index.
Thus, the Fund's performance may not correlate to the EAFE Index. Projections
of risk posture based on a measurement of past performance of an investment
manager or of an index may not accurately predict future risk posture or
performance.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
19
<PAGE> 20
HOW SHARES ARE PRICED
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value. The Fund calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open, fifteen minutes after
the close of business on the Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in determining your price is the
next one calculated after your purchase or redemption order is placed. Foreign
securities owned by the Fund may trade on weekends or other days when the Fund
does not price its shares. As a result, the Fund's net asset value may change
on days when you will not be able to purchase or redeem the Fund's shares. If
an event occurs after the close of a foreign exchange that is likely to
significantly affect the Fund's net asset value, "fair value" pricing may be
used. This means that the Fund may value its foreign holdings at prices other
than their last closing prices, and the Fund's net asset value will reflect
this.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund will distribute any net investment income and any net realized long or
short term capital gains at least annually. If your account is with Merrill
Lynch and you would like to receive DIVIDENDS in cash, contact your Merrill
Lynch Financial Consultant. If your account is with the Transfer Agent and you
would like to receive dividends in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares, any gain on the transaction may be
subject to tax. The Fund intends to make distributions that will either be taxed
as ordinary income or capital gains. Capital gains dividends received by
individuals are generally taxed at different rates than ordinary income
dividends.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
20
<PAGE> 21
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital gains,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
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 United States may reduce or eliminate such taxes. The Fund
expects to make an election that will generally require shareholders to include
in income their share of foreign withholding taxes paid by the Fund.
Shareholders may be entitled to treat these taxes as taxes paid by them, and
therefore, deduct such taxes in computing their taxable income or, in some
cases, to use them as foreign tax credits against the U.S. income taxes
otherwise owed.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal income
tax law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
21
<PAGE> 22
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A.
Merrill Lynch (Suisse) Investment Management S.A., the Fund's Investment
Adviser, manages the Fund's investments and its business operations under the
overall supervision of the Fund's Board of Trustees. The Investment Adviser has
the responsibility for making all investment decisions for the Fund. The
Investment Adviser and the Fund have hired Merrill Lynch Asset Management U.K.
Limited, and Fund Asset Management, L.P. affiliates of the Investment Adviser
and the Fund, to manage the Fund's daily cash assets. The Fund does not pay any
incremental fee for these services, although the Investment Adviser may pay a
fee for services it receives. The Fund pays the Investment Adviser a fee at the
annual rate of 0.75% of the average daily net assets of the Fund.
The Investment Adviser is part of the Merrill Lynch Asset Management Group,
which had approximately $507 billion in investment company and other portfolio
assets under management as of January 1999. This amount includes assets managed
for Merrill Lynch affiliates.
Princeton Administrators L.P., an affiliate of the Investment Adviser, provides
administrative services to the Fund.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests, and this could hurt the Fund's investment returns.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Ernst & Young LLP, whose report, along with the Fund's financial
statements, are included in the Fund's annual report to shareholders, which is
available upon request.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
INCREASE (DECREASE) IN ------------------------------------------------------------------
NET ASSET VALUE: 1998+ 1997+ 1996+ 1995+ 1994+
- ---------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
Investment income (loss) -- net .05 .10 ( .05) ( .05) ( .12)
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net ( .40) .97 .76 ( .18) 1.26
Total from investment operations ( .35) 1.07 .71 ( .23) 1.14
Less dividends and distributions:
Investment income -- net ( .18) -- -- -- --
In excess of investment income -- net ( .11) ( .44) ( .44) -- --
Realized gain on investments -- net ( .46) ( .35) ( .46) ( .32) ( .05)
Total dividends and distributions ( .75) ( .79) ( .90) ( .32) ( .05)
Net asset value, end of year $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83
TOTAL INVESTMENT RETURN:
Based on net asset value per share ( 2.79)% 9.26% 5.93% ( 1.68)% 9.74%
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.70% 2.44% 2.37% 2.35% 2.27%
Investment income (loss) -- net .39% .84% ( .42)% ( .41)% ( .56)%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $60,442 $ 107,951 $174,921 $ 197,077 $272,487
Portfolio turnover 48.78% 28.62% 38.16% 17.31% 24.64%
------------------ ------ ------ ------ ------ ------
</TABLE>
+ Based on average shares outstanding.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
23
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MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE> 25
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MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
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MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE> 27
POTENTIAL
INVESTORS
Open an account (two options).
(1)
MERRILL LYNCH
FINANCIAL CONSULTANT
OR SECURITIES DEALER
Advises shareholders on their Fund investments.
DISTRIBUTORS
MERRILL LYNCH FUNDS DISTRIBUTORS,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
(2)
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.
THE FUND
THE BOARD OF TRUSTEES
OVERSEES THE FUND.
COUNSEL
SWIDLER BERLIN
SHEREFF FRIEDMAN, LLP
919 Third Avenue
New York, New York 10033-9998
Provides legal advice to the Fund.
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
202 Carnegie Center
Princeton, New Jersey 08543-5321
Audits the financial statements
of the Fund on behalf of the shareholders.
CUSTODIAN
BROWN BROTHERS HARRRIMAN & CO.
40 Water Street
Boston, Massachusetts 02109
Holds the Fund's assets for safekeeping.
INVESTMENT ADVISER
MERRILL LYNCH (SUISSE)
INVESTMENT MANAGEMENT S.A.
18 Rue De Contamines
1211 Geneva 3, Switzerland
Telephone Number
0041-22-703-1616
Manages the Fund's day-to-day activities.
ADMINISTRATOR
PRINCETON ADMINISTRATION, LP
800 Scudders Mill Road
Plainsboro, New Jersey 08536
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
Provides administrative services
to the Fund.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE> 28
[FOR MORE INFORMATION GRAPHIC HERE]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-6725
Code #16458-02-99
(c)Merrill Lynch (Suisse)
Investment Management S.A.
[MERRILL LYNCH LOGO HERE]
[PROSPECTUS GRAPHIC HERE]
Merrill Lynch Consults
International Portfolio
[PROSPECTUS GRAPHIC HERE]
February 27, 1999
<PAGE> 29
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
Merrill Lynch Consults International Portfolio, a Massachusetts business
trust (the "Fund"), is a diversified, open-end management investment company
that seeks the highest total investment return that is consistent with prudent
risk through investment in a diversified international portfolio of equity
securities, other than United States securities. Total investment return is the
aggregate of income and capital value changes. Distribution of shares of the
Fund is limited to current clients of the Merrill Lynch Consults(R) Service and
of the Merrill Lynch Strategic Portfolio Advisor(SM) Service. The Fund is
designed for Merrill Lynch Consults(R) Service and Merrill Lynch Strategic
Portfolio Advisor(SM) Service clients who seek to internationally diversify a
portion of their investment portfolio.
The Fund offers shares that may be purchased at a price equal to the next
determined net asset value per share. Shares of the Fund are not subject to any
sales charge, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets and an ongoing distribution
fee at an annual rate of 0.75% of average daily net assets. The Fund's
distributor is Merrill Lynch Funds Distributors, a division of Princeton Funds
Distributor, Inc.
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
February 27, 1999 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A. -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
The date of this Statement of Additional Information is February 27, 1999.
<PAGE> 30
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ........................................................ 3
Convertible Securities ................................................................. 4
Foreign Investment Risks ............................................................... 5
Derivatives ............................................................................ 6
Foreign Exchange Transactions .......................................................... 9
Risk Factors in Options, Futures and Currency Instruments .............................. 10
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives . 10
Additional Limitations on the Use of Derivatives ....................................... 11
Other Investment Policies, Practices, and Risk Factors ................................. 11
Investment Restrictions ................................................................ 13
Portfolio Turnover ..................................................................... 15
Management of the Fund ................................................................... 15
Trustees and Officers .................................................................. 15
Compensation of Trustees ............................................................... 16
Management and Advisory Arrangements ................................................... 17
Code of Ethics ......................................................................... 19
Purchase of Shares ....................................................................... 19
Distribution Plans ..................................................................... 20
Redemption of Shares ..................................................................... 21
Redemption ............................................................................. 22
Repurchase ............................................................................. 22
Pricing of Shares ........................................................................ 22
Determination of Net Asset Value ....................................................... 22
Computation of Offering Price Per Share ................................................ 23
Portfolio Transactions and Brokerage ..................................................... 24
Transactions in Portfolio Securities ................................................... 24
Shareholder Services ..................................................................... 25
Investment Account ..................................................................... 25
Automatic Dividend Reinvestment Plan.................................................... 26
Merrill Lynch Asset Information and Measurement(R) Service ............................. 26
Dividends and Taxes ...................................................................... 26
Dividends .............................................................................. 26
Taxes .................................................................................. 27
Tax Treatment of Forward Foreign Exchange Transactions ................................. 28
Special Rules for Certain Foreign Currency Transactions ................................ 29
Performance Data ......................................................................... 29
General Information ...................................................................... 30
Description of Shares .................................................................. 30
Independent Auditors ................................................................... 31
Custodian .............................................................................. 31
Transfer Agent ......................................................................... 31
Administrator .......................................................................... 32
Legal Counsel .......................................................................... 32
Reports to Shareholders ................................................................ 32
Shareholder Inquiries .................................................................. 32
Additional Information ................................................................. 32
Financial Statements ..................................................................... 32
</TABLE>
2
<PAGE> 31
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek the highest total
investment return that is consistent with prudent risk through investment in a
diversified international portfolio of equity securities, other than United
States equity securities. Total investment return is the aggregate of income
from and capital value changes in the Fund's portfolio securities. The
investment objective of the Fund described in this paragraph is a fundamental
policy that may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. There can be no assurance
that the Fund will achieve its investment objective.
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.
In pursuing the Fund's investment objective, its management will utilize a
fully-managed investment strategy that permits the Fund to take a flexible
approach and vary its policies as to geographic and industry diversification
based upon its evaluation of international economic and market trends. This
evaluation could include such factors as the condition and growth potential of
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political considerations.
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 may be reduced when the various markets are combined into a single
portfolio. Of course, any effects of 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.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities of companies located in at least three countries
other than the United States. It is expected that more than 50% of the Fund's
assets will be invested in equity securities of companies located in Western
Europe and the Far East, although the Fund may invest in capital markets
throughout the world (excluding the United States). For purposes of the Fund's
objective, equity securities include securities convertible into equity
securities and securities the values of which are indexed to the market values
of equity securities or indices of equity securities. A United States
closed-end investment company will be considered to be a non-United States
investment if it, in turn, primarily invests in non-United States securities.
The Fund reserves the right, as a temporary defensive measure and to provide
for redemptions, to hold cash or cash equivalents (in United States dollars or
foreign currencies) and short-term securities, including money market
securities. Transactions effected by the Fund may be subject to Swiss federal
transactional taxes of 0.15%. Merrill Lynch (Suisse) Investment Management S.A.
(the "Investment Adviser") believes that such transactional taxes will not
materially affect the performance of the Fund.
The Fund may invest in the securities of foreign issuers in the form of
depositary receipts, including American Depositary Receipts (ADRs) and European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs), or other
securities convertible into securities of foreign issuers. Depositary receipts
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 that evidence ownership of underlying securities issued
by a foreign corporation. EDRs are receipts issued in Europe that evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are
designed for use in the United States 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.
3
<PAGE> 32
As part of the Merrill Lynch Consults(R) Service, Merrill Lynch may
provide information to its clients regarding the possible change in risk
posture of a client's domestic Merrill Lynch Consults(R) Service account due to
an investment in the Fund. Risk classes are assigned to each domestic Merrill
Lynch Consults(R) Service investment manager based upon an approximation of its
10 year standard deviation (which is used as a measure of volatility) as
calculated by Merrill Lynch Consults(R) Service according to information
provided by the manager. A risk class is assigned to the Fund based upon an
approximation of the 10 year standard deviation of the Morgan Stanley Europe,
Asia, Far East Index ("EAFE Index"), a market weighted, unmanaged index, as a
general proxy for non-domestic equity investments. Any change in risk will be
estimated only as it relates to the client's domestic Merrill Lynch Consults(R)
Service account and the Fund shares held for that account and not for assets
held in other domestic Merrill Lynch Consults(R) Service accounts or outside of
the Merrill Lynch Consults(R) Service. The Fund, which commenced operations in
1992, does not allocate its assets proportionately to the weighting of the EAFE
Index and may invest in countries that are not included in the EAFE Index. As a
consequence, the Fund's performance may not correlate completely to the EAFE
Index. Projections of risk posture based on a measurement of past performance
of an investment manager or of an index may not accurately predict future risk
posture or performance.
CONVERTIBLE SECURITIES
Convertible securities entitle the holder to receive interest payments
paid on corporate debt securities or the dividend preference on a preferred
stock until such time as the convertible security matures or is redeemed or
until the holder elects to exercise the conversion privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared
to common stock dividends and decreased risks of decline in value relative to
the underlying common stock due to their fixed-income nature. As a result of
the conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible
securities held by the Fund are denominated in United States dollars, the
underlying equity securities may be quoted in the currency of the country where
the issuer is domiciled. With respect to convertible securities denominated in
a currency different from that of the underlying equity securities, the
conversion price may be based on a fixed exchange rate established at the time
the security is issued. As a result, fluctuations in the exchange rate between
the currency in which the debt security is denominated and the currency in
which the share price is quoted will affect the value of the convertible
security.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value
of the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to
a point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be
4
<PAGE> 33
subject to redemption at the option of the issuer at a price established in the
charter provision, indenture or other governing instrument pursuant to which
the convertible security was issued. If a convertible security held by the Fund
is called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security under certain
circumstances.
FOREIGN INVESTMENT RISKS
FOREIGN MARKET RISK. Because the Fund invests in foreign securities, the
Fund offers you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK. The economies of certain foreign markets often do
not compare favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources,
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK AND EXCHANGE RISK. Securities in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that currency loses
value because the currency is worth fewer U.S. dollars. Similarly when the U.S.
dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty
on European Union (the "Maastricht Treaty") seeks to set out a framework for
the European Economic and Monetary Union ("EMU") among the countries that
comprise the European Union ("EU"). Among other things, EMU establishes a
single common European currency (the "euro") that was introduced on January 1,
1999 and is expected to replace the existing national currencies of all EMU
participants by July 1, 2002. EMU took effect for the initial EMU participants
as of January 1, 1999, and was implemented over the weekend of January 1, 1999
through January 3, 1999 ("conversion weekend"). Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and thereafter,
were listed, traded, and made dividend and other payments only in euros.
5
<PAGE> 34
Because any participating country may opt out of EMU within the first
three years, it is possible that a significant participant could choose to
abandon EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
the participants' national currencies and a significant increase in exchange
rate volatility, a resurgence in economic protectionism, an undermining of
confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt and inflation
rates that were introduced in anticipation of EMU. Also, withdrawal from EMU at
any time after the conversion weekend by an initial participant could cause
disruption of the financial markets as securities redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on the Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to Fund shareholders under foreign or, in certain
limited circumstances, U.S. tax laws.
In addition, computer, accounting, and trading systems must be capable of
recognizing the euro as a distinct currency immediately after the conversion
weekend. Like other investment companies and business organizations, the Fund
could be adversely affected if the computer, accounting, and trading systems
used by the Investment Adviser, the Fund's service providers, or other entities
with which the Fund or its service providers do business have not properly
addressed this issue prior to January 4, 1999.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the United States securities laws do.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much detail as U.S. accounting standards, it may be harder for the Fund's
portfolio manager to completely and accurately determine a company's financial
condition.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES. The Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on the Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount the Fund can earn on its investments.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
DERIVATIVES
The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options and futures and to purchase and sell
foreign exchange, as described below.
6
<PAGE> 35
INDEXED AND INVERSE SECURITIES
The Fund may invest in securities the potential return of which is based
on the change in particular measurements of value or rate ("an index"). In
particular, the Fund may invest in securities the values of which are indexed
to the market values of equity securities, indices of equity securities,
currencies or currency units. As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of an equity securities index or a basket of equity securities, or based
on the relative changes of two equity securities indices. In addition, the Fund
may invest in securities the potential return of which is based inversely on
the change in an index (that is, a security the value of which will move in the
opposite direction of changes). For example, the Fund may invest in securities
that pay a higher rate of interest when a particular index decreases and pay a
lower rate of interest (or do not fully return principal) when the value of the
index increases. If the Fund invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of an
adverse movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Fund believes that indexed securities may provide portfolio management
flexibility that permits the Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING OPTIONS. For hedging purposes the Fund is authorized to
purchase put options on securities held in its portfolio or on securities
indices, the performance of which is substantially correlated with securities
held in its portfolio. When the Fund purchases a put option, in consideration
for an upfront payment (the "option premium") the Fund acquires a right to sell
to another party specified securities owned by the Fund at a specified price
(the "exercise price") on or before a specified date (the "expiration date"),
in the case of an option on securities, or to receive from another party a
payment based on the amount a specified securities index declines below a
specified level on or before the expiration date, in the case of an option on a
securities index. The purchase of a put option limits the Fund's risk of loss
in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the market
value of the portfolio holdings associated with the put option increases rather
than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
For hedging purposes, the Fund is also authorized to purchase call options
on securities indices the performance of which substantially correlates with
the performance of the types of securities it intends to purchase. When the
Fund purchases a call option on a securities index, in consideration for the
option premium the Fund acquires a right to receive from another party a
payment based on the amount a specified securities index increases beyond a
specified level on or before the expiration date. The purchase of a call option
on an index may protect the Fund from the risks associated with attempting to
identify specific securities in which to invest in a market the Fund believes
to be attractive (an "anticipatory hedge").
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
WRITING OPTIONS. The Fund is authorized to write (I.E., sell) call options
on securities held in its portfolio or on securities indices, the performance
of which is substantially correlated to securities held in its portfolio. When
the Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options on securities to earn income, through the receipt of option premiums.
The Fund may write call options on securities for hedging purposes. In the
event the party to which the Fund has written an option fails to exercise its
rights under the option because the value of the underlying securities is less
than
7
<PAGE> 36
the exercise price, the Fund will partially offset any decline in the value of
the underlying securities through the receipt of the option premium. By writing
a call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
The Fund may also write put options on securities indices for hedging
purposes. When the Fund writes a put option on a securities index, in return
for an option premium the Fund agrees to pay to another party an amount based
on any decline in a specified securities index below a specified level on or
before the expiration date. In the event the party to which the Fund has
written an option fails to exercise its rights under the option because the
value of the securities index has not declined below the specified level on or
before the expiration date, the Fund will profit by the amount of the option
premium. However, by writing a put option on the index, the Fund will be
obligated to make a cash payment reflecting any decline in the index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying index falls below the exercise price,
which loss potentially may substantially exceed the amount of option premium
received by the Fund for writing the put option. The Fund will write a put
option on a securities index only if the Fund is writing the put in connection
with trading strategies involving combinations of options -- for example, the
sale and purchase of options with identical expiration dates on the same index
but different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures, and Currency
Instruments" below. A call option will also be considered covered if the Fund
owns the securities it would be required to deliver upon exercise of the option
(or, in the case of option on a securities index, securities that substantially
correlate with the performance of such index) or owns a call option, warrant or
convertible instrument that is immediately exercisable for, or convertible
into, such security.
TYPES OF OPTIONS. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions" below.
FUTURES
The Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the prior
day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
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The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (I.E., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against possible variations in foreign
exchange rates. Such transactions may be affected 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.
Forward foreign exchange transactions are OTC contracts to purchase or
sell a specified amount of a specified currency or multinational currency unit
at a price and future date set at the time of the contract. Spot foreign
exchange transactions are similar but require current, rather than future,
settlement. The Fund will enter into foreign exchange transactions only for
purposes of hedging either a specific transaction or a portfolio position. The
Fund may enter into a foreign exchange transaction for purposes of hedging a
specific transaction by, for example, purchasing a currency needed to settle a
security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. The Fund may also hedge portfolio
positions through currency swaps, which are transactions in which one currency
is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through the use of currency options. Currency options are
similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated in
such currency.
RISK FACTORS IN HEDGING FOREIGN CURRENCY RISKS. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements that do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the
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Fund will only engage in hedging activities from time to time and may not be
engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange
rate movements, even if correctly anticipated, in the event that (i) the
currency exchange rate movement is so generally anticipated that the Fund is
not able to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing markets) and
it is not possible to engage in effective foreign currency hedging.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Derivatives for hedging purposes involves the risk of imperfect
correlation in movements in the value of the Derivatives and the value of the
instruments being hedged. If the value of the Derivative moves more or less
than the value of the hedged instruments the Fund will experience a gain or
loss which will not be completely offset by movements in the value of the
hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Derivative or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a Derivative without incurring
substantial losses, if at all.
Certain transactions in Derivatives (such as forward foreign exchange
transactions, futures transactions or sales of put options) may expose the Fund
to potential losses, that exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transactions, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
DERIVATIVES
Certain Derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, may be substantially less liquid than other instruments
in which the Fund may invest. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. The Fund will therefore acquire
illiquid OTC instruments (i) if the agreement pursuant to which the instrument
is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Investment Adviser anticipates the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding that are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding that have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceed 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable.
Because Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Derivatives traded in
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OTC markets only with financial institutions which have substantial capital or
that have provided the Fund with a third-party guaranty or other credit
enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF DERIVATIVES
The Fund may not use any Derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
OTHER INVESTMENT POLICIES, PRACTICES, AND RISK FACTORS
SECURITIES LENDING. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction (5)
below). In return, the Fund receives collateral in an amount equal to at least
100% of the current market value of the loaned securities in cash or securities
issued or guaranteed by the United States Government. The Fund receives
securities as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by the Fund for
the loaned securities, which increases the Fund's yield. The Fund may receive a
flat fee for its loans. The loans are terminable at any time and the borrower,
after notice, is required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees
in connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent the value of the collateral
falls below the market value of the borrowed securities.
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 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 insulates the Fund
from fluctuations in the market value of the underlying security during such
period, although, to the extent the repurchase agreement is not denominated in
U.S. dollars, the Fund's return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days (together with other illiquid securities).
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
The Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of the 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 security and the accrued interest on the security. 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.
ILLIQUID OR RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
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<PAGE> 40
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities.
144A SECURITIES. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities which the Fund's
management determines are as liquid as publicly registered non-investment grade
debt securities. The Board of Directors has adopted guidelines and delegated to
the Fund's management the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. 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.
BORROWING AND LEVERAGE
The Fund may borrow money from a bank but only as a temporary measure for
extraordinary or emergency purposes including to meet redemption or settle
securities transactions. Borrowing leverages the Fund, and creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will
have to pay on the borrowings, the Fund's return will be greater than if
leverage had not been used. Conversely, if the income or capital appreciation
from the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than if
leverage had not been used, and therefore the amount available for distribution
to shareholders as dividends and other distributions will be reduced. In the
latter case, the Investment Adviser in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it expects that the
benefits to the Fund's shareholders of maintaining the leveraged position will
outweigh the current reduced return.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
SUITABILITY. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Investment Adviser and
its affiliates. Because of its emphasis on an international portfolio of equity
securities other than United States equity securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in an international portfolio of equity securities other than United
States equity securities, including the risk of loss of principal.
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INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
1. Invest in the securities of any one issuer if, immediately after and
as a result of such investment, (i) the value of the holdings of the Fund
in the securities of such issuer exceeds 5% of the Fund's total assets,
taken at market value, except that such restriction shall not apply to
securities issued or guaranteed by the United States Government or any of
its agencies or instrumentalities; and (ii) the Fund owns more than 10% of
the outstanding voting securities of such issuer.
2. 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.
3. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of investments
for the purpose of exercising control or management.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of the Fund's total assets, taken at market value, would be invested in
such securities. Investments by the Fund in wholly-owned investment
entities created under the laws of certain countries will not be deemed an
investment in other investment companies.
5. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
6. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
7. Make short sales of securities or maintain a short position in
securities. This restriction does not apply to hedging transactions or
positions.
8. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts or
other securities shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities as set forth in (9)
below.
9. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans may be made only in
accordance with the guidelines set forth below.
10. Issue senior securities, borrow money or pledge its assets in excess
of 20% of its total assets taken at market value (including the amount
borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions. For the purpose of
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this restriction, collateral arrangements with respect to the writing of
options, and, if applicable, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are
deemed to be the issuance of a senior security.
11. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are otherwise not readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if at the time of acquisition more than 15% of its
net assets would be invested in such securities. Securities which the Fund
has the right to put to the issuer or a stand-by bank or broker and receive
the principal amount of redemption price thereof less transaction costs, on
no more than seven days' notice or when the Fund has the right to convert
such securities into a readily marketable security in which it could
otherwise invest upon not less than seven days' notice, are not subject to
this restriction. The Fund may purchase, without regard to the foregoing
limitation, securities which are not registered under the Securities Act of
1933, as amended (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers," as defined under Rule 144A under the
Securities Act ("Rule 144A securities"), provided that the Fund's Board of
Trustees determines that such securities are liquid.
12. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter in selling portfolio securities.
13. Purchase or sell interests in oil, gas or other mineral 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.
14. Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest or such currencies and the
United States dollar and purchase and sell stock index and currency options
and warrants, stock index futures, financial futures and currency futures
contracts and related options on such futures.
An exception to investment restriction (1) above 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. Far Eastern 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 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.
Subject to investment restriction (9) above, the Fund may from time to
time lend securities from its portfolio to brokers, dealers and financial
institutions such as banks and trust companies and receive collateral in cash
or securities issued or guaranteed by the United States government that will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. Such cash will be invested in short-term securities,
which will increase the current income of the Fund. Such loans will not be for
more than 30 days and will be terminable at any time. 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. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging 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.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each
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<PAGE> 43
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Board of
Trustees of the Fund to the extent necessary to comply with changes to the
Federal tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
PORTFOLIO TURNOVER
The Fund has not placed any limit on its rate of portfolio turnover and
securities may be sold without regard to the time they have been held when, in
the opinion of the Investment Adviser, investment considerations warrant such
action. As a result, the Fund's portfolio turnover rate may vary greatly from
year to year or during periods within a year. Also, the use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover than would otherwise be the case. The Fund
pays brokerage commissions in connection with writing call options and
effecting closing purchase transactions, as well as in connection with
purchases and sales of portfolio securities. A high rate of portfolio turnover
would result in correspondingly greater brokerage commission expenses.
Portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases and
sales of Government securities and of all other securities, including options,
whose maturity or expiration dates at the time of acquisition were one year or
less) by the monthly average value of the securities in the Fund during the
fiscal year.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
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 "non-interested Trustees"). The Trustees are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Trustees, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE (1)(2) -- Chairman of Merrill
Lynch Asset Management, L.P. ("MLAM") and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1997;
President of MLAM and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997 and Director thereof since 1993;
President of Princeton Services from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54) -- TRUSTEE (2)(3) -- 36 Popponosset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, the China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (59) -- TRUSTEE (2)(3) -- New York University --
Gallatin Division, 113-115 University Place, New York, New York 10003. John M.
Olin Professor of Humanities, New York University since 1993 and Professor
thereof since 1980; Dean, Gallatin Division of New York University from 1976 to
1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Trustee, Hudson Institute since 1980 and
15
<PAGE> 44
President in 1997; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech, L.P.
in 1996.
ROBERT R. MARTIN (71) -- TRUSTEE (2)(3) -- 513 Grand Hill, St. Paul
Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments,
Inc. from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to
1989; Director, Carnegie Capital Management from 1977 to 1985 and Chairman
thereof in 1979; Director, Securities Industry Association from 1981 to 1982
and Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (69) -- TRUSTEE (2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman,
The May Corporation (personal holding company) from 1972 to 1983; Director,
Signal Apparel Company since 1972.
ANDRE F. PEROLD (46) -- TRUSTEE (2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991, and TIBCO from 1994 to 1996.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT (1)(2) -- Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Funds Distributor, Inc.
("PFD") since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
ALAN J. ALBERT (51) -- SENIOR VICE PRESIDENT (1)(2) -- Managing Director
of Private Investment Management Group of Merrill Lynch Mercury Asset
Management since 1997; Senior Managing Director of Merrill Lynch Asset
Management U.K. Limited from 1993 to 1997; Vice President of MLAM since 1986.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER (1)(2) -- Senior Vice
President and Treasurer of FAM and MLAM since 1999; Senior Vice President and
Treasurer of Princeton Services since 1999; Vice President of PFD since 1999;
First Vice President of MLAM from 1997 to 1999; Vice President of MLAM from
1990 to 1997; Director of Taxation of MLAM since 1990.
CHRISTOPHE VELAY (42) -- VICE PRESIDENT AND PORTFOLIO MANAGER (1) --
Portfolio Manager of Merrill Lynch Bank (Suisse) S.A. since 1986.
LORRAINE D. MANDEL (50) -- SECRETARY (1)(2) -- Director (Legal Advisory)
of MLAM since 1998; Second Vice President and Assistant General Counsel,
General Reinsurance Corporation, 1992-1998.
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which MLAM or FAM acts as Investment Adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
As of February 1, 1999, the officers and Trustees of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
COMPENSATION OF TRUSTEES
The Fund pays each non-affiliated Trustee a fee of $2,500 per year plus
$250 per meeting attended, together with such Trustee's actual out-of-pocket
expenses relating to attendance at meetings. The Fund also compensates members
of its Audit Committee, which consists of all the non-affiliated Trustees, $500
per year plus $125 for each meeting attended.
The following table shows the compensation earned by the non-affiliated
Trustees for the fiscal year ended October 31, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
FAM and MLAM ("FAM/MLAM Advised Funds") for the calendar year December 31,
1998.
16
<PAGE> 45
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
TRUSTEE FROM FUND FUND EXPENSES TRUSTEES(1)
- ------- --------- ------------- -----------
<S> <C> <C> <C>
James H. Bodurtha ......... $4,500 None $148,500
Herbert I. London ......... 4,500 None 148,500
Robert R. Martin .......... 4,500 None 148,500
Joseph L. May ............. 4,500 None 148,500
Andre F. Perold ........... 4,500 None 148,500
</TABLE>
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
MANAGEMENT SERVICES. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Board of Trustees, 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. The Investment Adviser provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
MANAGEMENT FEE. The Fund has entered into an investment advisory agreement
with the Investment Adviser (the "Investment Advisory Agreement"), pursuant to
which the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.75% of the average daily net assets of the
Fund. The table below sets forth information about the total investment
advisory fees paid by the Fund to the Investment Adviser for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, INVESTMENT ADVISORY FEE
- ----------------------------- -----------------------
<S> <C>
1998 ........................ $ 683,792
1997 ........................ $1,061,746
1996 ........................ $1,525,916
</TABLE>
PAYMENT OF FUND EXPENSES. 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 ML & Co. or any of its affiliates. The Fund pays all
other expenses incurred in the operation of the Fund, including among other
things: taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements
of additional information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor"); charges of the custodian,
any sub-custodian and transfer agent; fees of Princeton Administrators, L.P.
(the "Administrator") expenses of redemption of shares; commission fees;
expenses of registering the shares under Federal, state or foreign laws; fees
and expenses of unaffiliated Trustees; accounting and pricing costs (including
the daily calculations of net asset value); insurance; interest; brokerage
costs; litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. As required by the Fund's distribution
agreement, its underwriters will pay certain of the promotional expenses of the
Fund incurred in connection with the offering of shares of the Fund.
ORGANIZATION OF THE INVESTMENT ADVISER. The Investment Adviser is a
subsidiary of Merrill Lynch Bank (Suisse), S.A. which is, in turn, an indirect
subsidiary of ML & Co., a financial services holding company and the parent of
Merrill Lynch, 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 exercise a controlling influence over its management or policies.
17
<PAGE> 46
The Investment Adviser has also entered into sub-advisory agreements with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") and Fund Asset
Management, L.P. ("FAM") pursuant to which MLAM U.K. and FAM provide investment
advisory services with respect to the management of the Fund's cash position.
The Fund does not pay any incremental fee for this service. For the fiscal
years ended October 31, 1996, 1997 and 1998, the Investment Adviser did not pay
any fees to MLAM U.K. and FAM for investment advisory services provided to the
Fund. The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co. ML & Co. and Princeton Services
are "controlling persons" of FAM because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Investment Advisory Agreement and each Sub-Advisory Agreement will remain
in effect from year to year 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 contract or interested
persons (as defined in the Investment Company Act) of any such party. The
Investment Advisory Agreement is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party or by vote of
a majority of the outstanding voting securities of the Fund. Each Sub-Advisory
Agreement also provides that it will terminate in the event of its assignment
or upon the termination of the Investment Advisory Agreement and further
provides that such agreement may be terminated on 60 days' written notice by
the Investment Adviser, the respective Sub-Adviser or by vote of the majority
of the outstanding voting securities of the Fund.
ADMINISTRATIVE SERVICES. Princeton Administrators, LP (the
"Administrator"), an indirect subsidiary of ML & Co., acts as the Fund's
administrator under the terms of the administration agreement between the
Administrator and the Fund (the "Administration Agreement"). The Administrator
performs or arranges for the performance of certain administrative services
(I.E., services other than investment advice and related portfolio activities)
necessary for the operation of the Fund, including maintaining the books and
records of the Fund, preparing reports and other documents required by United
States federal, state and other applicable laws and regulations to maintain the
registration of the Fund and its shares, and providing the Fund with
administrative office facilities. For the services rendered to the Fund and the
facilities furnished, the Fund pays the Administrator a monthly fee equal to
0.25% of the Fund's average daily net assets. For the fiscal year ended October
31, 1998, the total fee paid by the Fund to the Administrator was $227,924 for
these services. Also, accounting services are provided to the Fund by the
Administrator and the Fund reimburses the Administrator for its costs in
connection with such services on a semi-annual basis. For the fiscal year ended
October 31, 1998, the Fund reimbursed the Administrator $150,624 for these
services.
The principal address of the Administrator is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per shareholder account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co.
DISTRIBUTION EXPENSES. The Fund has entered into a distribution agreement
with Merrill Lynch Funds Distributor, a division of Princeton Funds
Distributor, Inc. (the "Distributor") in connection with the continuous
18
<PAGE> 47
offering of shares of the Fund (the "Distribution Agreement"). The Distribution
Agreement obligates the Distributor to pay certain expenses in connection with
the offering 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 Agreement is subject to the same
renewal requirements and termination provisions as the Investment Advisory
Agreement described above.
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 pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance 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 that at the time is being purchased or sold (as the case may be),
or to the knowledge of the employee is being considered for purchase or sale,
by any fund 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
Shares of the Fund are offered continuously for sale to clients of the
Merrill Lynch Consults(R) Service by Merrill Lynch Funds Distributor, Inc., an
indirect subsidiary of ML & Co., and Merrill Lynch. The minimum initial
purchase is $5,000, and the minimum subsequent purchase is $1,000. Shares of
the Fund are offered to clients of Merrill Lynch Strategic Portfolio Advisor(SM)
Service on the same terms as offered to clients of Merrill Lynch Consults(R)
Service. Merrill Lynch Strategic Portfolio Advisor(SM) Service is a service
designed by Merrill Lynch to provide business and individual clients with a
comprehensive package of consulting, investment and account services.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share. As to purchase orders received by
securities dealers, 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 ("NYSE") (the NYSE generally closes at 4:00 p.m., Eastern
time), on the day the orders are placed with the Distributor, provided the
orders are received by the Distributor within fifteen minutes after the close
of business on the NYSE. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. If the purchase orders are not received by
the Distributor within fifteen minutes after the close of business on the NYSE,
such orders shall be deemed received on the next business day. Any order may be
rejected by the Distributor or the Fund. The Fund or the Distributor may
suspend the continuous offering of the Fund's shares to the general public at
any time in response to conditions in the securities markets or otherwise and
may thereafter resume such offering from time to time. Neither the Distributor
nor the dealers are permitted to withhold placing orders to benefit themselves
by a price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Such fee is
presently waived for clients of the Merrill Lynch Consults(R) Service and of
the Merrill Lynch Strategic Portfolio Advisor(SM) Service.
19
<PAGE> 48
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the distribution plan pursuant to Rule 12b-1 under
the Investment Company Act (the "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor.
Pursuant to the Distribution Plan, the Fund pays the Distributor ongoing
distribution and account maintenance fees, which are accrued daily and paid
monthly, at the annual rates of 0.75% and 0.25%, respectively, of the average
daily net assets of the Fund. Pursuant to a sub-agreement with the Distributor,
Merrill Lynch also provides account maintenance activities and distribution
services to the Fund. The ongoing account maintenance fee compensates the
Distributor and Merrill Lynch for providing account maintenance activities to
the Fund's shareholders. The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing shareholder and distribution
services and bearing distribution-related expenses of the Fund, including
payments to financial consultants for selling shares of the Fund. For the
fiscal year ended October 31, 1998, the Fund paid the Distributor $911,697
pursuant to the Distribution Plan, of which $683,773 was paid to Merrill Lynch
for providing distribution-related services and $227,924 was paid to Merrill
Lynch for providing account maintenance activities to the Fund.
The Fund's Distribution Plan is subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of the Distribution
Plan, the non-interested Trustees must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plan to the Fund
and its shareholders. The Distribution Plan further provides that, so long as
the Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving the Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that the Distribution Plan will benefit the Fund and its
related shareholders. The Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the non-interested Trustees or by
the vote of the holders of a majority of the outstanding voting securities of
the Fund. The Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without shareholder approval, and all material
amendments are required to be approved by the vote of Trustees, including a
majority of the non-interested Trustees who have no direct or indirect
financial interest in the Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
the Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of the Distribution Plan or such report,
the first two years in an easily accessible place.
Among other things, the Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and distribution fees paid to the
Distributor. Payments under the Distribution Plan are based on a percentage of
average daily net assets regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues from the Distribution Plan may be
more or less than distribution-related expenses. Information with respect to
the distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan 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, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees and the expenses consist of financial consultant
compensation.
As of December 31, 1997, the last date at which such fully allocated
accrual data is available, the fully allocated accrual revenues of the
Distributor and Merrill Lynch since the Fund commenced operations on September
14, 1992 exceeded the fully allocated accrual expenses for such period by
approximately $1,848,000 (1.84% of net assets at that date). As of October 31,
1998, direct cash revenues for the period since commencement of operations
exceeded direct cash expenses by approximately $6,114,495 (10.12% of net assets
at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch and there is no assurance that
the Board of Trustees of the Fund will approve the continuance of
20
<PAGE> 49
the Distribution Plan from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plan. In their review of the
Distribution Plan, the Trustees will not be asked to take into consideration
expenses incurred in connection with the distribution of shares of other funds
for which the Distributor acts as distributor.
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee but not the
account maintenance fee. As applicable to the Fund, the maximum sales charge
rule limits the aggregate distribution fee payments payable by the Fund to (1)
6.25% of the eligible gross sales of shares of the Fund (defined to exclude
shares issued pursuant to dividend reinvestments), plus (2) interest on the
unpaid balance, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution
fee). To the extent payments would exceed the maximum permitted by the NASD,
the Fund will not make further payments of the distribution fee; 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 October 31,
1998 with respect to the shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period September 14, 1992 (commencement
of operations of the Fund) to October 31, 1998.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1998
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) SALES CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ------------ ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted ......... $386,707 $24,169 $9,608 $33,777 $7,087 $26,690 $453
</TABLE>
- -----------
(1) Purchase price of all eligible shares sold since September 14, 1992
(commencement of operations of the Fund) other than shares acquired through
dividend reinvestment.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments is amortizing the unpaid balance. No assurance can be given
that payments of the distribution fee will reach either the voluntary
maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. 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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the 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 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 in part on the net asset value of such shares at
such time.
21
<PAGE> 50
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to 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.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the Transfer
Agent's register. The signature(s) on the redemption requests must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (E.G., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (E.G., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on the NYSE on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund. Securities firms that 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
$5.35) to confirm a repurchase of shares to such customers. Such fee is
currently waived for clients of the Merrill Lynch Consults(R) Service and of
Merrill Lynch Strategic Portfolio(SM) Service. Repurchases made directly through
the Transfer Agent on accounts held at the Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem Fund shares as
set forth above.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
22
<PAGE> 51
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
on each day the NYSE is open for trading. The NYSE generally closes at 4:00
p.m., Eastern time. 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 NYSE is not open for trading on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held
by the Portfolio plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, the Administrator and Distributor, are accrued daily.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market.
Securities traded in the over-the-counter ("OTC") market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial 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 Trustees of
the Fund. Such valuations and procedures will be reviewed periodically by the
Trustees.
Generally, trading in non-U.S. 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 business on the NYSE. 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 business on the NYSE. 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 business on the
NYSE that 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.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for shares of the
Fund based on the value of the Fund's net assets and number of shares
outstanding on October 31, 1998 is set forth below.
<TABLE>
<S> <C>
Net Assets .................................................................... $ 60,441,797
============
Number of Shares Outstanding .................................................. 5,360,740
============
Net Asset Value Per Share (net assets divided by number of shares outstanding) $ 11.27
Sales Charge .................................................................. none
------------
Offering Price ................................................................ $ 11.27
============
</TABLE>
23
<PAGE> 52
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations
facilities and the firm's risk in positioning the securities involved. The
portfolio securities of the Fund generally are traded on a principal basis and
normally do not involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the Fund primarily consists of
dealer or underwriter spreads. While reasonable competitive spreads or
commissions are sought, the Fund will not necessarily be paying the lowest
spread or commission available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund may invest may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions
involving more widely traded securities.
Subject to obtaining the best net results, broker-dealers who provide
supplemental investment research (such as information concerning economic data
and market forecasts) to the Investment Adviser 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
under its Investment Advisory Agreement and the expense of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. Supplemental investment research obtained from such
broker-dealers might be used by the Investment Adviser in servicing all of its
accounts and all such research might not be used by the Investment Adviser in
connection with the Fund. Consistent with the Conduct Rules of the NASD and
policies established by the Trustees of the Fund, the Investment Adviser 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.
For the fiscal year ended October 31, 1998, brokerage commissions paid to
Merrill Lynch aggregated $30,933, which comprised 9.8% of the Fund's aggregate
brokerage commissions paid and involved 9.8% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year. For
the fiscal year ended October 31, 1997, brokerage commissions paid to Merrill
Lynch aggregated $59,811, which comprised 12.5% of the Fund's aggregate
brokerage commissions paid and involved 14.1% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year. For
the fiscal year ended October 31, 1996, brokerage commissions paid to Merrill
Lynch aggregated $107,010, which comprised 20.20% of the Fund's aggregate
brokerage commissions paid and involved 20.1% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year.
Aggregate brokerage commissions paid by the Fund are set forth in the following
table:
<TABLE>
<CAPTION>
BROKERAGE
FISCAL YEAR COMMISSIONS
ENDED OCTOBER 31, PAID
----------------- ----
<S> <C>
1998 $314,844
1997 $477,435
1996 $528,752
</TABLE>
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own accounts, affiliated persons of
the Fund, including Merrill Lynch and any of its affiliates, will not serve as
the Fund's dealer in such transactions. However, affiliated persons of the Fund
may serve as its broker in listed or over-the-counter transactions conducted on
an agency basis provided that, among other things, the fee or commission
received by such
24
<PAGE> 53
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures adopted by the Board of Trustees of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Trustees have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund. Securities may be held by, or be appropriate investments for, the
Fund as well as other funds or investment advisory clients of the Investment
Adviser or MLAM.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate act as manager, 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 an
affiliate 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Distribution of shares of the Fund (other than reinvestment of dividends
and capital gains distributions of the Fund) is limited to current clients of
the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio Advisor(SM) Service. Shareholders will receive statements of dividends
and capital gains.
If a client terminates the Merrill Lynch Consults(R) Service or the Merrill
Lynch Strategic Portfolio Advisor(SM) Service, the client's shares may be
retained in the client's Merrill Lynch brokerage account, subject to the consent
of Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name may be
opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
25
<PAGE> 54
Subject to the consent of Merrill Lynch, shareholders may transfer their
account to another securities dealer that has entered into an agreement with
Merrill Lynch. Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder either must redeem the shares so that the
cash proceeds can be transferred to the account at the new firm or continue to
maintain a retirement account at Merrill Lynch for those shares. Shareholders
interested in transferring their shares from Merrill Lynch may request their
new brokerage firm to maintain such shares in an account registered in the name
of the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for his or her shares and
then must turn the certificates over to the new firm for re-registration in the
new brokerage firm's name.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested in additional full and fractional
shares of the Fund. Such reinvestment will be at the net asset value of shares
of the Fund as of the close of business on the NYSE on the monthly payment date
for such dividends.
Shareholders may, at any time, by contacting the Merrill Lynch Consults(R)
Service or the Merrill Lynch Strategic Portfolio Advisor(SM) Service or their
financial consultant, or by written notification to Merrill Lynch if their
account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than reinvested in shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
MERRILL LYNCH ASSET INFORMATION AND MEASUREMENT(R) SERVICE
Clients of the Merrill Lynch Consults(R) Service and of the Merrill Lynch
Strategic Portfolio Advisor(SM) Service are currently provided, without
incremental charge, the Merrill Lynch Asset Information and Measurement(R)
Service ("AIM(R)"). AIM(R) currently provides, through quarterly reports, the
ability to monitor and evaluate performance of their Merrill Lynch Consults(R)
Service or Merrill Lynch Strategic Portfolio Advisor(SM) Service account,
including shares of the Fund held in the account, and analyzes the risk taken
to achieve the return. Shares of the Fund must be held in the account for a
full quarterly period to be subject to such evaluation.
DIVIDENDS AND TAXES
DIVIDENDS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized capital gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Shareholder Services -- Automatic Dividend
Reinvestment Plan" for information as to how to elect either dividend
reinvestment or cash payments.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as the Fund 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 that it
distributes to shareholders. The Fund intends to distribute substantially all
of such income. To qualify for this treatment, the Fund must, among other
things, (a) derive at least
26
<PAGE> 55
90% of its gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies and certain financial futures,
options and forward contracts (the "Income Test"); and (b) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of its assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount no greater than 5% of its assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
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 even though reinvested in Fund shares. Distributions made from
the Fund's net realized capital gains are taxable to a shareholder as long-term
capital gains, regardless of the length of time the shareholder has owned Fund
shares, and even though reinvested in Fund shares. Any loss upon the sale or
exchange of Fund Shares held for six months or less will be treated as long term
capital loss to the extent of any capital gains dividends received by the
shareholder.
Any net capital gains dividends (I.E., the excess of net capital gains from
the sale of assets held for more than 12 months over net short-term capital
losses, and including such gains from certain transactions in futures and
options) distributed to shareholders will be taxable as long-term capital gains
to the shareholders, whether or not reinvested and regardless of the length of
time a shareholder has owned his or her shares. The maximum capital gains rate
for individuals is 20% with respect to assets held for more than 12 months. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
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 gains dividends. It is not expected that
any portion of the dividends paid by the Fund will be eligible for the corporate
dividends received deduction. If the Fund pays a dividend that was declared in
the previous October, November or December to shareholders of record in such a
month, 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 the
dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens generally will be subject to a 30% United States
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. Non-resident shareholders
are urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Investment income received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Certain
shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. 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 to file an election with the Internal Revenue Service pursuant
to which shareholders of the Fund generally will be required to include their
proportionate share of such taxes in their United States income tax returns as
gross income, treat such proportionate share as taxes paid by them and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain restrictions and the shareholders and the Fund satisfying
certain minimum stock ownership holding periods, use them as foreign tax
credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. Foreign tax credits cannot be claimed by certain retirement
accounts. A shareholder that is a nonresident alien individual or a foreign
entity may be subject to United States 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 United States 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 gains dividends and
redemption payments ("backup withholding"). Generally,
27
<PAGE> 56
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Upon a sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. Such gain or
loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands. In the case of an individual, any such capital gain
will be treated as short-term capital gain if the shares were held for not more
than 12 months and long-term capital gain taxable at the maximum rate of 20% if
such shares were held for more than 12 months. In the case of a corporation,
any such capital gain will be treated as long-term capital gain, taxable at the
same rates as ordinary income, if such shares were held for more than 12
months. Any capital loss will be treated as long-term capital loss if the
shares were held for more than one year. 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).
When you sell shares in the Fund, you may realize a gain or loss.
Generally, any loss realized on a sale 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 Fund may invest in equity securities of investment companies (or
similar investment entities) organized under foreign law or of ownership
interests in special accounts, trusts or partnerships. 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 United States Federal income tax purposes. The
Fund may be subject to United States Federal income tax, and an additional tax
in the nature of interest, on a portion of distributions from such company and
on gain from the disposition of such shares (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 (treated as ordinary income) in a particular year in
excess of the distributions received from such PFICs.
TAX TREATMENT OF FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Unless the Fund is eligible to make and makes a special
election, such options, futures or forward foreign exchange 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 option, futures or forward
foreign exchange contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from transactions in
options, futures or forward foreign exchange contracts will be 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 or forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in forward foreign exchange contracts. Similarly, Code Section 1091, which deals
with "wash sales," may cause the Fund to postpone recognition of certain losses
for tax purposes; Code Section 1258, which deals with "conversion transactions,"
may apply to recharacterize certain capital gains as ordinary income for tax
purposes and Code Section 1259, which deals with "Constructive Sales" of
appreciated financial positions (E.G. stock), may treat the Fund as having
recognized income before the time that such income is economically recognized by
the Fund.
28
<PAGE> 57
SPECIAL RULES FOR OPTIONS, FUTURES AND FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from 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 forward foreign exchange
contracts will be valued for purposes of the RIC diversification requirements
applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from forward contracts
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. 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 dividends.
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 dividends, 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 each shareholder's basis in his Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Dividends and gains on the sale or exchange of shares of the Fund may also
be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign 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 quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data 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) any
maximum applicable sales charge 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 any 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. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
29
<PAGE> 58
Set forth in the table below is total return information for shares of the
Fund for the period indicated.
<TABLE>
<CAPTION>
EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
- ------ ----------------- ----------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
One Year Ended October 31, 1998 ........... (2.79%) $ 972.10
Five Years Ended October 31, 1998 ......... 3.95% $ 1,213.80
Inception (September 14, 1992) to
October 31, 1998 ........................ 5.95% $ 1,425.00
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
<S> <C> <C>
Year Ended October 31,
1998 ...................................... (2.79%) $ 972.10
1997 ...................................... 9.26% $ 1,092.60
1996 ...................................... 5.93% $ 1,059.30
1995 ...................................... (1.68%) $ 983.20
1994 ...................................... 9.74% $ 1,097.40
1993 ...................................... 22.29% $ 1,222.90
Inception (September 14, 1992) to
October 31, 1992 ........................ (4.00)% $ 960.00
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C>
Inception (September 14, 1992) to
October 31, 1998 ........................ 42.50% $ 1,425.00
</TABLE>
On occasion, the Fund may compare its performance to that of the Morgan
Stanley Europe, Asia, Far East Index, Standard & Poor's 500 Index, the Dow
Jones Industrial Average or 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
and FORTUNE MAGAZINE or other industry publications. When comparing its
performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. In addition, from time to time the Fund may
include its risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature.
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.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund is an unincorporated business trust organized on June 26, 1992
under the laws of Massachusetts. It is a diversified, open-end management
investment company. The Trustees are authorized to issue an unlimited number of
full and fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional classes of shares of the Trust. The Trust has received an order from
the Commission permitting the issuance and sale of two classes of shares.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Trustees and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Trustees; (ii) approval of an investment
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<PAGE> 59
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Voting rights for Trustees
are not cumulative. Shares issued are fully paid and nonassessable and have no
preemptive or conversion rights. Redemption rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities. Share certificates are issued by the Transfer Agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may cause a meeting of shareholders to be held for the purpose of
voting on the removal of Trustees at the request of 10% of the outstanding
shares of the Fund. A Trustee may be removed at a special meeting of
shareholders by a vote of a majority of the votes entitled to be cast for the
election of Trustees.
The Declaration of Trust of the Fund contemplates that the Fund may be
terminated, solely upon a vote of the Board of Trustees of the Fund, and without
a vote of shareholders, within five years after it commences operations if the
Fund does not have net assets in excess of $100 million. Shareholders should be
aware that their investment in the Fund may be liquidated in such event. Among
other consequences, this could result in a taxable event for shareholders.
The Declaration of Trust establishing the Fund, dated June 26, 1992 and
amended on July 31, 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 Consults
International Portfolio" refers to the Trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent or 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.
INDEPENDENT AUDITORS
Ernst & Young LLP, 202 Carnegie Center, Princeton, New Jersey 08543-5321,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors 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 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 United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's 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 "How to Buy,
Sell and Transfer -- Through the Transfer Agent" in the Prospectus.
ADMINISTRATOR
Princeton Administrators, LP, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, acts as the Fund's administrator. See "Management and Advisory
Arrangements -- Administrator Services."
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022 is counsel for the Fund.
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<PAGE> 60
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund
sends to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of February 1, 1999.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
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CODE #16459-02-99
<PAGE> 1
EXHIBIT 17(d)
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Robert
Harris as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Merrill Lynch Consults International Portfolio (the
"Fund") held of record by the undersigned on November 30, 1999, at a Special
Meeting of Shareholders of the Fund to be held on January 20, 2000 or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return this card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 2
1. To approve the Agreement and Plan of Reorganization between Merrill Lynch
Consults International Portfolio and Merrill Lynch International Equity Fund
2. In their discretion, the named proxies may vote to transact such other
business as properly may come before the meeting or any adjournment thereof.
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized
persons.
Dated:
---------------------------------------
X
---------------------------------------
Signature
X
---------------------------------------
Signature, if held jointly
