<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 13, 1999
SECURITIES ACT FILE NO. 333-90007
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
------------------------
[X] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] 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 trust with transferable shares 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: December 13, 1999
<PAGE> 4
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 trust with transferable shares 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 sometimes is referred to herein as the "Combined
Fund" or the "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
(continued on the following page)
------------------------
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.
------------------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS DECEMBER 13, 1999.
<PAGE> 5
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, without
charge, by writing either Consults International Portfolio or International
Equity Fund at the address above, or by calling 1-800-MER-FUND.
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 December 13, 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.
------------------------
<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............................................. 20
Purchase, Redemption and Exchange of Shares............ 23
Performance............................................ 26
Shareholder Rights..................................... 27
Dividends.............................................. 27
Tax Information........................................ 27
Portfolio Transactions................................. 27
Portfolio Turnover..................................... 28
Additional Information................................. 28
THE REORGANIZATION.......................................... 30
General................................................ 30
Procedure.............................................. 30
Terms of the Agreement and Plan........................ 31
Potential Benefits to Shareholders as a Result of the
Reorganization........................................ 32
Tax Consequences of the Reorganization................. 33
Capitalization......................................... 34
INFORMATION CONCERNING THE MEETING.......................... 34
Date, Time and Place of Meeting........................ 34
Solicitation, Revocation and Use of Proxies............ 35
Record Date and Outstanding Shares..................... 35
Security Ownership of Certain Beneficial Owners and
Management of Consults International Portfolio and
International Equity Fund............................. 35
Voting Rights and Required Vote........................ 35
ADDITIONAL INFORMATION...................................... 36
LEGAL PROCEEDINGS........................................... 36
LEGAL OPINIONS.............................................. 37
EXPERTS..................................................... 37
SHAREHOLDER PROPOSALS....................................... 37
</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 16, 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
("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, the Trustees considered that after the Reorganization, Consults
International Portfolio shareholders will remain invested in an open-end fund
with a diversified international portfolio of equity securities that will pay,
after the Reorganization, 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. The
Trustees also considered that, 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 a
majority 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 and the shares of
Consults International Portfolio will be valued at net asset value for the
purposes of the exchange by the shareholders of Consults International Portfolio
of such shares for the Corresponding Shares, the holders of the shares of
Consults International Portfolio will not be diluted as a result 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 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
3
<PAGE> 9
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 THE 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 for clients 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 of Pro Forma
International Equity Fund 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
(footnotes continued on following page)
5
<PAGE> 11
(e) (12b-1) fees than the maximum sales charge that you would have paid if you
held one of the other 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 5 for the relevant Fund, (2) a 5%
annual return throughout the period 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 Pro Forma
International Equity 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 "The Reorganization -- Potential
Benefits to Shareholders as a Result of the Reorganization," "Comparison of the
Funds -- Management," " -- Purchase, Redemption and Exchange of Shares."
6
<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 in 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
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<PAGE> 14
that may increase the 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 net 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
9
<PAGE> 15
be sold easily and have limited risk of loss but
earn only limited returns. 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
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<PAGE> 16
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 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 Interna-
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<PAGE> 17
tional Portfolio and 2.36% for International
Equity Fund Class C shares. 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 the risks set forth below.
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.
DEPOSITARY RECEIPTS
International Equity 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. International Equity 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.
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 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 a Fund buys illiquid
17
<PAGE> 23
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.
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.
18
<PAGE> 24
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 -- 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.
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.
19
<PAGE> 25
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
MONTHS ENDED
APRIL 30, FOR THE YEAR ENDED OCTOBER 31,
1999+ ---------------------------------------------------
(UNAUDITED) 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.
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.
Information about the Trustees of International Equity 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 is P.O. Box
9011, Princeton, New Jersey 08543-9011.
TERRY K. GLENN(59)-(1)(2) -- Executive Vice President of MLAM and FAM
(which terms as used herein include their corporate predecessors) since 1983;
President of Princeton Funds Distributor, Inc. 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.
20
<PAGE> 26
DONALD CECIL(72)-(2)(3)(4) -- 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)-(2)(3)(4) -- 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 Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
CHARLES C. REILLY(68)-(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 since 1986.
RICHARD R. WEST(61)-(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)-(1)(2) -- 300 Woodland Avenue, Westfield, New Jersey
07090. Chairman of MLAM 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.
EDWARD D. ZINBARG(64)-(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.
- ---------------
(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.
(4) Messrs. Cecil and Meyer will retire as Trustees of International Equity Fund
effective December 31, 1999.
Compensation of Trustees. International Equity Fund pays each 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 from all registered investment
21
<PAGE> 27
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 (35 registered investment companies consisting of 35 portfolios); Mr.
Meyer (35 registered investment companies consisting of 35 portfolios); Mr.
Reilly (60 registered investment companies consisting of 72 portfolios); Mr.
West (62 registered investment companies consisting of 86 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 --
22
<PAGE> 28
Advisory and Administration Arrangements and Fees" in the Consults International
Portfolio Statement and "Management of the Fund -- Management and Advisory
Arrangements" in the International Equity Fund 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 include 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. Accordingly, Fund management believes 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.
23
<PAGE> 29
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 Class C
shares of the Combined Fund acquired through 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
24
<PAGE> 30
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 NYSE (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 and will continue to be
waived for such clients after completion of the Reorganization.
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 NYSE (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 NYSE 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 and will continue to be
waived for such clients after completion of the Reorganization. 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 will 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 systematic withdrawal plan. You can
choose to receive systematic payments from your International Equity Fund
account either by check or through direct deposit to your bank account on a
monthly or quarterly basis. If you hold your International Equity 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.
Consults International Portfolio does not offer a systematic withdrawal
plan.
25
<PAGE> 31
Exchange of Shares. You can exchange your shares of International Equity
Fund for shares of many other Merrill Lynch mutual funds. You must have held the
shares used in the exchange for at least fifteen calendar days before you can
exchange to another fund.
Each class of International Equity 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 of which you do not hold Class A shares, you will
exchange into Class D shares of such fund.
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 ("Summit").
Class B or C shares of International Equity 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.
Consults International Portfolio does not offer any exchange privileges.
Other Shareholder Services and Investment Plans. International Equity Fund
offers a number of other shareholder services and investment plans.
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.
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.
26
<PAGE> 32
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 that 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.
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
27
<PAGE> 33
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 of 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. Shareholders of each class of shares of International
Equity Fund have an exchange privilege with certain other Select Pricing Funds
(funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(sm)
System) and 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. In addition, shareholders of International Equity Fund may elect to
receive systematic withdrawals from, or provide systematic additions to, their
investment account. These services as well as the exchange privilege, are not
offered to shareholders of Consults International Portfolio. For a description
of these shareholder services, see "Shareholder Services" in the International
Equity Fund Statement.
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 the Pro Forma International Equity
Fund. Deloitte & Touche LLP's principal business address is Princeton Forrestal
Village, 116-300 Village Blvd., 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 Reorganization is completed,
it is currently anticipated that the Custodian will serve as the custodian of
the Combined Fund.
28
<PAGE> 34
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. If the Reorganization is
completed, it is currently anticipated that the Transfer Agent will serve as the
Transfer Agent of the Combined Fund.
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, respectively. 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.
Each Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of each Fund contains an express
disclaimer of shareholder liability for acts or obligations of that Fund and
provides for indemnification and reimbursement of expenses out of that Fund's
property for any shareholder held personally liable for the obligations of that
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Funds themselves
would be unable to meet their obligations. Given the nature of the Funds' assets
and operations, the possibility of any of the Funds being unable to meet their
obligations is remote and, in the opinion of Massachusetts counsel to the Funds,
the risk to the Funds' shareholders is remote.
The Declaration of Trust of each Fund further provides that no Trustee,
officer, employee or agent of that Fund is liable to that Fund or to any
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of that Fund, except as such liability
may arise from his or her own bad faith, willful misfeasance, gross negligence,
or reckless disregard of their duties. It also provides that all third persons
shall look solely to the Funds' property for satisfaction of claims arising in
connection with the affairs of each Fund. With the exceptions stated, the
Declaration of Trust of each Fund provides that a Trustee, officer, employee or
agent is entitled to be indemnified against all liability in connection with the
affairs of that Fund.
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.
29
<PAGE> 35
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 after the close of business on the NYSE on the
business day prior to the date on which the Reorganization takes place
("Valuation Time") 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 and the
shares of Consults International Portfolio will be valued at net asset value for
the purposes of the exchange by the shareholders of Consults International
Portfolio of such shares for the Corresponding Shares, the holders of the shares
of Consults International Portfolio will not be diluted as a result 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 a majority 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.
30
<PAGE> 36
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 that 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 date the Reorganization takes
place (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 Exchange Date. 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. After the Exchange Date, the Combined Fund shall bear 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.
31
<PAGE> 37
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 TOTAL NET ASSETS OF
CONSULTS TOTAL NET ASSETS OF CLASS C SHARES OF
INTERNATIONAL INTERNATIONAL INTERNATIONAL
DATE PORTFOLIO DATE EQUITY FUND 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
32
<PAGE> 38
September 30, 1999). Accordingly, since the expenses of the Pro Forma
International Equity 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
33
<PAGE> 39
regarding the effect of the Reorganization in light of their individual
circumstances. As the foregoing relates 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 the Pro Forma International
Equity Fund, as adjusted to give effect to the Reorganization, and (v) the
capitalization of Class C shares of the 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, CONSULTS INTERNATIONAL PORTFOLIO,
THE PRO FORMA INTERNATIONAL EQUITY FUND (AS A WHOLE) AND CLASS C SHARES OF THE
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 $46,225,188
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 Pro Forma International Equity
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.
34
<PAGE> 40
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 2,894,224,537 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 shares
of Consults International Portfolio.
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 (10 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 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.
35
<PAGE> 41
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 to
approve or disapprove 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 $5,000,
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.
36
<PAGE> 42
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Consults International Portfolio by Swidler Berlin Shereff Friedman,
LLP, The Chrysler Building, 405 Lexington 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 of International Equity Fund 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 for Class C shares
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 Princeton Forrestal
Village, 116-300 Village Blvd., 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
37
<PAGE> 43
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> 44
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> 45
<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> 46
<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> 47
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> 48
"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 thereto 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; 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> 49
"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, Exhibits and Schedules. 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> 50
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 March 3, 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, and the assumption of the Assumed Liabilities by, 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 trust with transferable shares
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 trust with
transferable shares 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'
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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. 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
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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.
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 2,999,381.151 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 trust with transferable shares
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 trust with
transferable shares 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
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times since its inception and intends to continue to so qualify both until
consummation of the Reorganization and thereafter.
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.
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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 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 3,338,279.791, 15,265,947.696, 852,435,640, and
3,745,949.476 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 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.
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"), The Chrysler
Building, 405 Lexington Avenue, New York, New York 10174, 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 trust with transferable shares 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 certificates 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 trust with transferable
shares 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 within three days prior to 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. Such delegation is evidenced by the respective
signatures of CIP and IEF hereon.
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
I-18
<PAGE> 65
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> 66
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: Terry K. Glenn
With a copy to: Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
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> 67
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) after the Exchange Date, IEF shall pay all other expenses
incurred in connection with the Reorganization, 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> 68
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> 69
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
December 13, 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 Annual Report to Shareholders for the year ended
October 31, 1998 and Semi-Annual Report to Shareholders for the six months ended
April 30, 1999 are also incorporated herein by reference. Consults International
Portfolio's Annual Report to Shareholders for the year ended October 31, 1998
and Semi-Annual Report to Shareholders for the six months ended April 30, 1999
accompany this Statement of Additional Information.
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-11
Pro Forma Combined Statement of Operations for International
Equity Fund and Consults International Portfolio for the
year ended May 31, 1999 (unaudited)....................... F-13
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS DECEMBER 13, 1999.
<PAGE> 70
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 trust with transferable shares. 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" or the "Pro Forma International Equity 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> 71
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ 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-Redoute 904,437 682,594 1,587,031
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> 72
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Germany Automobiles 31,000 DaimlerChrysler AG 2,680,686 -- 2,680,686
11,000 Volkswagen AG 682,803 -- 682,803
----------- ----------- -----------
3,363,489 -- 3,363,489
--------------------------------------------------------------------------------------------------------------
Banking 25,461 Deutsche Bank AG 1,330,337 -- 1,330,337
36,600 HypoVereinsbank 887,748 1,093,446 1,981,194
----------- ----------- -----------
2,218,085 1,093,446 3,311,531
--------------------------------------------------------------------------------------------------------------
Chemicals 23,300 BASF AG 908,199 -- 908,199
26,200 Bayer AG 1,021,237 -- 1,021,237
9,000 Hoechst AG 401,593 -- 401,593
----------- ----------- -----------
2,331,029 -- 2,331,029
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 23,500 Siemens AG 1,583,959 -- 1,583,959
--------------------------------------------------------------------------------------------------------------
Equity Basket 12,000 MSCI European OPALS 990,000 -- 990,000
'B'(c)
--------------------------------------------------------------------------------------------------------------
Insurance 6,650 Allianz AG 1,820,704 -- 1,820,704
(Registered Shares)
5,350 Axa Colonia Konzern 503,168 -- 503,168
AG
----------- ----------- -----------
2,323,872 -- 2,323,872
--------------------------------------------------------------------------------------------------------------
Merchandising 950 Karstadt AG 393,129 -- 393,129
--------------------------------------------------------------------------------------------------------------
Metals -- Steel 50,500 +Thyssen Krupp AG 997,400 -- 997,400
--------------------------------------------------------------------------------------------------------------
Telecommunications 44,400 Deutsche Telekom AG 1,774,724 -- 1,774,724
12,750 Mannesmann AG 1,745,411 -- 1,745,411
----------- ----------- -----------
3,520,135 -- 3,520,135
--------------------------------------------------------------------------------------------------------------
Transportation -- Airlines 25,000 Deutsche Lufthansa 538,175 -- 538,175
AG (Registered
Shares)
--------------------------------------------------------------------------------------------------------------
Utilities -- Electric & Gas 18,500 RWE AG 828,398 -- 828,398
10,400 RWE AG (Preferred) 305,391 -- 305,391
17,500 Veba AG 1,000,326 -- 1,000,326
----------- ----------- -----------
2,134,115 -- 2,134,115
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 20,393,388 1,093,446 21,486,834
GERMANY
- -----------------------------------------------------------------------------------------------------------------------------------
Greece Telecommunications 10,500 Hellenic 228,070 -- 228,070
Telecommunications
Organization SA
(OTE)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 228,070 -- 228,070
GREECE
- -----------------------------------------------------------------------------------------------------------------------------------
Hungary Banking 22,799 OTP Bank Rt. 986,057 -- 986,057
(GDR)(b)
--------------------------------------------------------------------------------------------------------------
Energy Sources 41,194 MOL Magyar Olaj-es 988,656 -- 988,656
Gazipari Rt.
(GDR)(b)
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 3,500 EGIS Rt 73,091 -- 73,091
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 2,047,804 -- 2,047,804
HUNGARY
- -----------------------------------------------------------------------------------------------------------------------------------
Ireland Banking 27,500 Bank of Ireland 517,427 -- 517,427
--------------------------------------------------------------------------------------------------------------
Building Materials & 21,000 CRH PLC 362,732 -- 362,732
Components
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 880,159 -- 880,159
IRELAND
- -----------------------------------------------------------------------------------------------------------------------------------
Italy Banking 60,000 San Paolo-IMI SpA 811,965 -- 811,965
230,000 Unicredito Italiano 1,083,978 -- 1,083,978
SpA
----------- ----------- -----------
1,895,943 -- 1,895,943
--------------------------------------------------------------------------------------------------------------
Energy Sources 310,000 ENI SpA 1,940,461 -- 1,940,461
--------------------------------------------------------------------------------------------------------------
Insurance 50,000 Assicurazioni 1,781,725 -- 1,781,725
Generali
--------------------------------------------------------------------------------------------------------------
Natural Gas -- Utilities 140,000 Italgas SpA -- 601,293 601,293
--------------------------------------------------------------------------------------------------------------
Telecommunications 272,230 Telecom Italia SpA 1,482,143 -- 1,482,143
(Registered)
356,000 Telecom Italia SpA 1,755,182 1,920,376 3,675,558
----------- ----------- -----------
3,237,325 1,920,376 5,157,701
--------------------------------------------------------------------------------------------------------------
Tires & Rubber 240,000 Pirelli SpA 674,652 674,652
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 8,855,454 3,196,321 12,051,775
ITALY
- -----------------------------------------------------------------------------------------------------------------------------------
Netherlands Appliances & Household 25,300 +Koninklijke (Royal) 1,744,810 429,756 2,174,566
Durables Philips Electronics
NV
--------------------------------------------------------------------------------------------------------------
Banking 64,000 ABN AMRO Holding NV 1,421,200 -- 1,421,200
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-2
<PAGE> 73
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Broadcasting & Publishing 28,000 Wolters Kluwer NV 1,127,973 1,127,973
'A'
--------------------------------------------------------------------------------------------------------------
Business & Public Services 31,500 TNT Post Group NV 793,312 -- 793,312
--------------------------------------------------------------------------------------------------------------
Chemicals 28,400 Akzo Nobel NV 1,181,184 1,181,184
--------------------------------------------------------------------------------------------------------------
Energy Sources 28,300 Royal Dutch 1,579,225 -- 1,579,225
Petroleum Company
--------------------------------------------------------------------------------------------------------------
Financial Services 38,000 ING Groep NV 2,035,138 -- 2,035,138
--------------------------------------------------------------------------------------------------------------
Food & Household Products 9,821 Unilever NV 'A' 654,291 -- 654,291
--------------------------------------------------------------------------------------------------------------
Telecommunications 20,000 KPN NV 967,670 -- 967,670
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 9,195,646 2,738,913 11,934,559
NETHERLANDS
- -----------------------------------------------------------------------------------------------------------------------------------
Norway Equity Basket 10,500 MSCI Norway OPALS 926,730 -- 926,730
'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 926,730 -- 926,730
NORWAY
- -----------------------------------------------------------------------------------------------------------------------------------
Poland Banks 14,000 Bank Rozwoju 376,571 -- 376,571
Eksportu SA (BRE)
--------------------------------------------------------------------------------------------------------------
Trading Companies & 7,000 Elektrim Spolka 81,825 -- 81,825
Distributors Akcyjna SA
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 458,396 -- 458,396
POLAND
- -----------------------------------------------------------------------------------------------------------------------------------
Portugal Equity Basket 23,200 MSCI Portugal OPALS 1,574,120 -- 1,574,120
'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 1,574,120 -- 1,574,120
PORTUGAL
- -----------------------------------------------------------------------------------------------------------------------------------
Spain Banking 72,000 Banco Santander 1,504,800 -- 1,504,800
Central Hispano, SA
--------------------------------------------------------------------------------------------------------------
Construction & Housing 8,400 +Dragados & 290,991 -- 290,991
Construcciones, SA
--------------------------------------------------------------------------------------------------------------
4,650 Fomento de 267,745 -- 267,745
Construcciones y
Contratas SA
----------- ----------- -----------
558,736 -- 558,736
--------------------------------------------------------------------------------------------------------------
Electric Utilities 104,000 Endesa SA 1,365,021 853,138 2,218,159
--------------------------------------------------------------------------------------------------------------
Energy Sources 98,400 Repsol, SA 533,351 1,251,743 1,785,094
--------------------------------------------------------------------------------------------------------------
Equity Basket 8,800 MSCI Spain OPALS 1,033,736 -- 1,033,736
'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
Telecommunications 30,600 +Telefonica SA 1,470,302 -- 1,470,302
612 +Telefonica SA (New 29,406 -- 29,406
Shares)
----------- ----------- -----------
1,499,708 -- 1,499,708
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 6,495,352 2,104,881 8,600,233
SPAIN
- -----------------------------------------------------------------------------------------------------------------------------------
Sweden Appliances & Household 102,000 Electrolux AB 'B' 621,341 1,359,184 1,980,525
Durables
--------------------------------------------------------------------------------------------------------------
Automobiles 13,000 Volvo AB 'B' 330,496 -- 330,496
--------------------------------------------------------------------------------------------------------------
Banking 20,000 Skandinaviska 242,566 -- 242,566
Enskilda Banken
(SEB) 'A'
19,000 Svenska 687,988 -- 687,988
Handelsbanken 'A'
----------- ----------- -----------
930,554 -- 930,554
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 100,000 Telefonaktiebolaget 1,686,122 990,262 2,676,384
LM Ericsson 'B'
--------------------------------------------------------------------------------------------------------------
Equity Basket 8,000 MSCI Sweden OPALS 1,722,000 -- 1,722,000
'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
Forest Products & Paper 10,000 Svenska Cellulosa AB 233,236 -- 233,236
(SCA) 'B'
--------------------------------------------------------------------------------------------------------------
Merchandising 28,000 Hennes & Mauritz AB 630,204 -- 630,204
'B'
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 6,153,953 2,349,446 8,503,399
SWEDEN
- -----------------------------------------------------------------------------------------------------------------------------------
Switzerland Banking 8,450 Credit Suisse Group 601,085 871,137 1,472,222
(Registered Shares)
3,000 UBS AG (Registered 871,795 -- 871,795
Shares)
----------- ----------- -----------
1,472,880 871,137 2,344,017
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 1,950 Novartis AG 1,384,089 1,456,936 2,841,025
(Registered Shares)
130 Roche Holding AG 1,381,197 -- 1,381,197
----------- ----------- -----------
2,765,286 1,456,936 4,222,222
--------------------------------------------------------------------------------------------------------------
Food & Household Products 1,400 Nestle SA 992,604 1,534,024 2,526,628
(Registered Shares)
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE> 74
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insurance 190 Schweizerische 361,887 -- 361,887
Rueckversicherungs-
Gesellschaft
(Registered Shares)
600 Zurich Allied AG 354,241 -- 354,241
----------- ----------- -----------
716,128 -- 716,128
--------------------------------------------------------------------------------------------------------------
Telecommunications 4,150 Swisscom AG 1,500,657 -- 1,500,657
(Registered Shares)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 7,447,555 3,862,097 11,309,652
SWITZERLAND
- -----------------------------------------------------------------------------------------------------------------------------------
United Kingdom Aerospace & Military 128,000 British Aerospace 843,896 -- 843,896
Technology PLC
--------------------------------------------------------------------------------------------------------------
Banking 32,000 Abbey National PLC 660,975 -- 660,975
40,000 Bank of Scotland 556,577 -- 556,577
32,000 Barclays PLC 969,943 -- 969,943
32,724 HSBC Holdings PLC 1,092,491 -- 1,092,491
86,000 Lloyds TSB Group PLC 1,136,051 -- 1,136,051
37,500 National Westminster 859,844 -- 859,844
Bank PLC
----------- ----------- -----------
5,275,881 -- 5,275,881
--------------------------------------------------------------------------------------------------------------
Beverages 55,000 Cadbury Schweppes 372,739 -- 372,739
PLC
295,500 Diageo PLC 1,545,246 1,561,014 3,106,260
----------- ----------- -----------
1,917,985 1,561,014 3,478,999
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 82,500 WPP Group PLC 665,779 -- 665,779
--------------------------------------------------------------------------------------------------------------
Building Materials & 65,000 RMC Group PLC 866,970 -- 866,970
Components
--------------------------------------------------------------------------------------------------------------
Business & Public Services 80,000 Securicor PLC 717,338 -- 717,338
137,500 Shanks & McEwan 512,984 -- 512,984
Group PLC
----------- ----------- -----------
1,230,322 -- 1,230,322
--------------------------------------------------------------------------------------------------------------
Construction & Housing 50,000 The Berkeley Group 551,613 -- 551,613
PLC
--------------------------------------------------------------------------------------------------------------
Data Processing & 82,500 Computacenter PLC 541,606 -- 541,606
Reproduction
--------------------------------------------------------------------------------------------------------------
Energy 60,000 British Energy PLC 535,601 -- 535,601
--------------------------------------------------------------------------------------------------------------
Energy Sources 309,500 BP Amoco PLC 4,068,929 1,466,603 5,535,532
--------------------------------------------------------------------------------------------------------------
Financial Services 75,000 Allied Zurich PLC 955,916 955,916
52,000 +Halifax 671,095 -- 671,095
20,000 Schroders PLC 415,992 -- 415,992
----------- ----------- -----------
1,087,087 955,916 2,043,003
--------------------------------------------------------------------------------------------------------------
Food & Household Products 142,285 Unilever PLC 1,250,769 -- 1,250,769
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 35,000 AstraZeneca Group 1,390,402 -- 1,390,402
PLC
80,000 Glaxo Wellcome PLC 1,374,598 869,644 2,244,242
124,000 Nycomed Amersham PLC 882,549 -- 882,549
101,100 SmithKline Beecham 1,317,714 -- 1,317,714
PLC
----------- ----------- -----------
4,965,263 869,644 5,834,907
--------------------------------------------------------------------------------------------------------------
Industrial Components 110,000 BBA Group PLC 778,503 -- 778,503
--------------------------------------------------------------------------------------------------------------
Insurance 160,000 Prudential 791,153 1,318,588 2,109,741
Corporation PLC
177,273 Royal & Sun Alliance 1,449,050 -- 1,449,050
Insurance Group PLC
25,515 Sun Life and 192,732 -- 192,732
Provincial Holdings
PLC
----------- ----------- -----------
2,432,935 1,318,588 3,751,523
--------------------------------------------------------------------------------------------------------------
Leisure & Tourism 30,000 Bass PLC 442,412 -- 442,412
90,000 Carlton 716,937 -- 716,937
Communications PLC
----------- ----------- -----------
1,159,349 -- 1,159,349
--------------------------------------------------------------------------------------------------------------
Machinery & Engineering 30,000 GKN PLC 500,775 -- 500,775
--------------------------------------------------------------------------------------------------------------
Merchandising 220,000 ASDA Group PLC 623,507 -- 623,507
14,000 Dixons Group PLC 251,292 -- 251,292
130,000 The Great Universal 1,386,319 -- 1,386,319
Stores PLC
75,000 J Sainsbury PLC 455,742 -- 455,742
625,000 Tesco PLC 1,818,863 -- 1,818,863
----------- ----------- -----------
4,535,723 -- 4,535,723
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE> 75
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Metals -- Nonferrous 24,000 Rio Tinto PLC 351,624 -- 351,624
(Registered Shares)
--------------------------------------------------------------------------------------------------------------
Miscellaneous Materials & 137,500 Rexam PLC 543,808 -- 543,808
Commodities
--------------------------------------------------------------------------------------------------------------
Multi-Industry 126,321 BTR Siebe PLC 575,444 -- 575,444
--------------------------------------------------------------------------------------------------------------
Retail 80,000 Boots Company PLC -- 1,045,263 1,045,263
--------------------------------------------------------------------------------------------------------------
Telecommunications 165,000 British 2,750,301 -- 2,750,301
Telecommunications
PLC
50,000 Cable & Wireless PLC 616,462 -- 616,462
130,000 Vodafone Group PLC 2,474,975 -- 2,474,975
----------- ----------- -----------
5,841,738 -- 5,841,738
--------------------------------------------------------------------------------------------------------------
Transportation -- Airlines 227,000 British Airways PLC 337,149 1,291,208 1,628,357
--------------------------------------------------------------------------------------------------------------
Utilities -- Electrical & 290,058 BG PLC 714,495 879,698 1,594,193
Gas
50,000 National Power PLC 389,292 -- 389,292
50,000 Scottish Power PLC 430,723 -- 430,723
----------- ----------- -----------
1,534,510 879,698 2,414,208
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 42,393,259 9,387,934 51,781,193
UNITED KINGDOM
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 131,254,689 32,850,860 164,105,549
EUROPE
- -----------------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
- -----------------------------------------------------------------------------------------------------------------------------------
Argentina Oil & Gas Producers 25000 YPF Sociedad Anonima -- 1,053,125 1,053,125
(ADR)(a)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN -- 1,053,125 1,053,125
ARGENTINA
- -----------------------------------------------------------------------------------------------------------------------------------
Brazil Equity Basket 55,000 MSCI Brazil OPALS(c) 2,072,950 -- 2,072,950
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 2,072,950 -- 2,072,950
BRAZIL
- -----------------------------------------------------------------------------------------------------------------------------------
Chile Financial Investment Fund 24,750 +Genesis Chile Fund 730,125 -- 730,125
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 730,125 -- 730,125
CHILE
- -----------------------------------------------------------------------------------------------------------------------------------
Mexico Foreign Bonds 1,923,000 Mexican Par Bond 19 -- 19
(Rights)(h)
USD United Mexican 1,037,500 -- 1,037,500
1,250,000 States, 'C', 6.201%
due 12/31/2019(i)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 1,037,519 -- 1,037,519
MEXICO
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 3,840,594 1,053,125 4,893,719
LATIN AMERICA
- -----------------------------------------------------------------------------------------------------------------------------------
MIDDLE EAST
- -----------------------------------------------------------------------------------------------------------------------------------
Israel Industrial Conglomerates 8,109 Koor Industries 174,850 -- 174,850
Limited (ADR)(a)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 174,850 -- 174,850
MIDDLE EAST
- -----------------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
- -----------------------------------------------------------------------------------------------------------------------------------
Canada Aerospace & Military 27,760 Bombardier Inc. 'B' 432,305 -- 432,305
Technology
--------------------------------------------------------------------------------------------------------------
Banking 3,360 Bank of Montreal 128,985 -- 128,985
7,210 Royal Bank of Canada 330,959 -- 330,959
5,140 The Toronto-Dominion 271,943 -- 271,943
Bank
----------- ----------- -----------
731,887 -- 731,887
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 12,090 Seagram Company 633,070 -- 633,070
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 17,980 +Rogers 371,705 -- 371,705
Communications,
Inc. 'B'
--------------------------------------------------------------------------------------------------------------
Business & Public Services 34,890 Laidlaw Inc. 246,757 -- 246,757
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 6,470 +Newbridge Networks 178,854 -- 178,854
Corporation
--------------------------------------------------------------------------------------------------------------
Energy Sources 8,590 Alberta Energy 248,266 -- 248,266
Company Ltd.
22,520 +Renaissance Energy 286,382 -- 286,382
Ltd.
9,120 Suncor Energy, Inc. 344,520 -- 344,520
----------- ----------- -----------
879,168 -- 879,168
--------------------------------------------------------------------------------------------------------------
Forest Products & Paper 21,410 Abitibi-Consolidated 219,851 -- 219,851
Inc.
--------------------------------------------------------------------------------------------------------------
Gold Mines 18,210 Placer Dome Inc. 203,090 -- 203,090
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE> 76
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Merchandising 6,510 Canadian Tire Corp. 194,348 -- 194,348
'A'
--------------------------------------------------------------------------------------------------------------
Metals -- Nonferrous 14,730 Inco Limited 210,357 -- 210,357
--------------------------------------------------------------------------------------------------------------
Telecommunications 8,160 BCE Inc. 376,509 -- 376,509
15,450 Nortel Networks 1,161,508 -- 1,161,508
Corporation
7,190 Teleglobe Inc. 218,071 -- 218,071
----------- ----------- -----------
1,379,579 -- 1,379,579
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 6,057,480 -- 6,057,480
NORTH AMERICA
- -----------------------------------------------------------------------------------------------------------------------------------
PACIFIC BASIN/ASIA
- -----------------------------------------------------------------------------------------------------------------------------------
Australia Banking 41,200 National Australia 668,759 -- 668,759
Bank Limited
45,000 Westpac Banking 308,815 -- 308,815
Corporation Limited
----------- ----------- -----------
977,574 -- 977,574
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 44,000 Foster's Brewing 124,926 -- 124,926
Group Limited
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 93,800 The News Corporation 776,868 -- 776,868
Limited
31,500 The News Corporation 240,941 -- 240,941
Limited (Preferred)
19,500 Publishing & 122,836 -- 122,836
Broadcasting
Limited
----------- ----------- -----------
1,140,645 -- 1,140,645
--------------------------------------------------------------------------------------------------------------
Building Materials & 81,000 Pioneer 188,645 -- 188,645
Components International
Limited
--------------------------------------------------------------------------------------------------------------
Business & Public Services 6,000 Brambles Industries 160,423 -- 160,423
Limited
--------------------------------------------------------------------------------------------------------------
Chemicals 31,500 Orica Limited 174,544 -- 174,544
--------------------------------------------------------------------------------------------------------------
Energy Sources 51,000 Broken Hill 524,752 -- 524,752
Proprietary Company
Limited
23,600 Woodside Petroleum 147,444 -- 147,444
Limited
----------- ----------- -----------
672,196 -- 672,196
--------------------------------------------------------------------------------------------------------------
Gold Mines 80,000 +Newcrest Mining 149,158 -- 149,158
93,000 Normandy Mining 67,533 -- 67,533
Limited
----------- ----------- -----------
216,691 -- 216,691
--------------------------------------------------------------------------------------------------------------
Insurance 23,500 +AMP Limited 256,433 -- 256,433
42,800 National Mutual 70,839 -- 70,839
Holdings Limited
33,800 QBE Insurance Group 132,672 -- 132,672
Limited
----------- ----------- -----------
459,944 -- 459,944
--------------------------------------------------------------------------------------------------------------
Merchandising 18,800 Coles Myer Limited 98,552 -- 98,552
35,000 Woolworths Limited 117,004 -- 117,004
----------- ----------- -----------
215,556 -- 215,556
--------------------------------------------------------------------------------------------------------------
Metals -- Nonferrous 200,000 M.I.M. Holdings 108,597 -- 108,597
Limited
67,500 WMC Limited 250,820 -- 250,820
----------- ----------- -----------
359,417 -- 359,417
--------------------------------------------------------------------------------------------------------------
Real Estate 24,700 Lend Lease 313,609 -- 313,609
Corporation Limited
18,700 Westfield Holdings 110,714 -- 110,714
Limited
----------- ----------- -----------
424,323 -- 424,323
--------------------------------------------------------------------------------------------------------------
Telecommunications 33,000 +AAPT Limited 119,601 -- 119,601
168,600 +Telstra Corporation 573,241 262,818 836,059
Limited
----------- ----------- -----------
692,842 262,818 955,660
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 5,807,726 262,818 6,070,544
AUSTRALIA
- -----------------------------------------------------------------------------------------------------------------------------------
Hong Kong Multi-Industry 65000 Hutchison Whampoa -- 540,689 540,689
Limited
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN -- 540,689 540,689
HONG KONG
- -----------------------------------------------------------------------------------------------------------------------------------
Japan Appliances & Household 24,600 Sony Corporation 950,588 1,364,706 2,315,294
Durables
--------------------------------------------------------------------------------------------------------------
Automobiles 115,000 Fuji Heavy 752,693 -- 752,693
Industries, Ltd.
39,000 Toyota Motor 1,066,280 -- 1,066,280
Corporation
----------- ----------- -----------
1,818,973 -- 1,818,973
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE> 77
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Banking 144,000 The Asahi Bank, Ltd. 685,998 -- 685,998
40,000 The Bank of 536,868 536,868
Tokyo-Mitsubishi,
Ltd.
----------- ----------- -----------
685,998 536,868 1,222,866
--------------------------------------------------------------------------------------------------------------
Beverages & Tobacco 74 Japan Tobacco, Inc. 741,839 -- 741,839
--------------------------------------------------------------------------------------------------------------
Broadcasting & Publishing 16,000 Nippon Broadcasting 689,312 -- 689,312
System,
Incorporated
1,350 Nippon Television 469,760 -- 469,760
Network Corp.
----------- ----------- -----------
1,159,072 -- 1,159,072
--------------------------------------------------------------------------------------------------------------
Building Materials & 116,000 Sekisui Chemical 718,873 -- 718,873
Components Co., Ltd.
--------------------------------------------------------------------------------------------------------------
Business & Public Services 39,000 Ricoh Co., Ltd. 432,974 -- 432,974
--------------------------------------------------------------------------------------------------------------
Chemicals 94,000 Kaneka Corporation 822,403 -- 822,403
39,000 Shin-Etsu Chemical 745,650 466,031 1,211,681
Co., Ltd.
144,000 Toray Industries, 700,315 -- 700,315
Inc.
----------- ----------- -----------
2,268,368 466,031 2,734,399
--------------------------------------------------------------------------------------------------------------
Construction & Housing 161,000 Nishimatsu 888,368 -- 888,368
Construction Co.,
Ltd.
--------------------------------------------------------------------------------------------------------------
Convertible Bonds USD1,070,000 MBL International 1,182,350 -- 1,182,350
Finance (Bermuda),
3% due 11/30/2002
--------------------------------------------------------------------------------------------------------------
Data Processing and 179,000 Fujitsu Limited 1,322,121 1,673,571 2,995,692
Reproduction
--------------------------------------------------------------------------------------------------------------
Electrical & Electronics 118,000 Hitachi Ltd. 869,113 -- 869,113
29,000 Square Co., Ltd. 915,410 -- 915,410
----------- ----------- -----------
1,784,523 -- 1,784,523
--------------------------------------------------------------------------------------------------------------
Electronic Components & 5,000 Keyence Corporation 724,938 -- 724,938
Instrumentation 15,000 Murata Manufacturing 828,915 -- 828,915
Co., Ltd.
38 +NTT Mobile 2,081,027 -- 2,081,027
Communications
Network, Inc.(d)
7,000 Rohm Company Ltd. 918,061 -- 918,061
----------- ----------- -----------
4,552,941 -- 4,552,941
--------------------------------------------------------------------------------------------------------------
Financial Investment Company 13,000 Jafco Co., Ltd. 523,447 -- 523,447
--------------------------------------------------------------------------------------------------------------
Diversified Financials 123,000 Daiwa Securities 650,157 -- 650,157
Group Inc.
120,000,000 +Sanwa International 1,028,998 -- 1,028,998
Finance Ltd.
(Convertible
Preferred)
130 Shohkoh Fund & Co., 72,809 -- 72,809
Ltd.
12,700 Takefuji Corporation 1,120,588 -- 1,120,588
----------- ----------- -----------
2,872,552 -- 2,872,552
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 48,000 Fujisawa 755,195 -- 755,195
Pharmacturical Co.,
Ltd.
29,000 Sankyo Company, Ltd. 683,554 -- 683,554
9,000 Taisho 288,567 -- 288,567
Pharmaceutical
Company, Ltd.
19,000 Takeda Chemical 845,319 -- 845,319
Industries, Ltd.
----------- ----------- -----------
2,572,635 -- 2,572,635
--------------------------------------------------------------------------------------------------------------
Industrial Components 68,000 Bridgestone Corp. 735,377 1,050,539 1,785,916
131,000 NSK Limited 628,409 -- 628,409
----------- ----------- -----------
1,363,786 1,050,539 2,414,325
--------------------------------------------------------------------------------------------------------------
Insurance 136,000 Mitsui Marine and 685,070 -- 685,070
Fire Insurance
Company, Ltd.
--------------------------------------------------------------------------------------------------------------
Machinery & Engineering 118,000 Komatsu Ltd. 701,939 -- 701,939
4,400 THK Co., Ltd. 81,657 -- 81,657
----------- ----------- -----------
783,596 -- 783,596
--------------------------------------------------------------------------------------------------------------
Merchandising 2,000 Art Vivant Co., Ltd. 51,367 -- 51,367
31,000 Ito-Yokado Co., Ltd. 716,819 1,134,963 1,851,782
46,000 Uny Co., Ltd. 691,715 -- 691,715
----------- ----------- -----------
1,459,901 1,134,963 2,594,864
--------------------------------------------------------------------------------------------------------------
Metals -- Steel 324,000 Nippon Steel 681,823 -- 681,823
Corporation
--------------------------------------------------------------------------------------------------------------
Multi-Industry 54,000 Ibiden Co., Ltd. 876,885 -- 876,885
--------------------------------------------------------------------------------------------------------------
Non Index 660,099 Nikkei 225 280,009 -- 280,009
(Warrants)(f)
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 78
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
INTERNATIONAL CONSULTS INTERNATIONAL
SHARES HELD/ EQUITY INTERNATIONAL EQUITY
INDUSTRY FACE AMOUNT INVESTMENTS FUND++ PORTFOLIO++ FUND++
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate 85,000 Mitsui Fudosan Co., 710,563 -- 710,563
Ltd.
--------------------------------------------------------------------------------------------------------------
Telecommunications 140 Nippon Telegraph & 830,986 537,697 1,368,683
Telephone
Corporation (NTT)
--------------------------------------------------------------------------------------------------------------
Transportation -- Road 134 East Japan Railway 777,133 -- 777,133
Company
& Rail 116,000 Nippon Express Co., 663,132 -- 663,132
Ltd.
----------- ----------- -----------
1,440,265 -- 1,440,265
--------------------------------------------------------------------------------------------------------------
Wholesale & International 81,000 Mitsui & Co., Ltd. 518,749 -- 518,749
Trade 6,400 Softbank Corporation 737,034 -- 737,034
----------- ----------- -----------
1,255,783 -- 1,255,783
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 34,844,289 6,764,375 41,608,664
JAPAN
- -----------------------------------------------------------------------------------------------------------------------------------
New Zealand Broadcasting & Publishing 127,270 +Sky Network 200,220 -- 200,220
Television Limited
--------------------------------------------------------------------------------------------------------------
Energy Sources 90,270 Fletcher Challenge 216,883 -- 216,883
Energy
--------------------------------------------------------------------------------------------------------------
Forest Products & Paper 321,410 Fletcher Challenge 273,459 -- 273,459
Paper
--------------------------------------------------------------------------------------------------------------
Telecommunications 81,970 Telecom Corporation 353,529 -- 353,529
of New Zealand
Limited
--------------------------------------------------------------------------------------------------------------
Total Investments in 1,044,091 -- 1,044,091
New Zealand
- -----------------------------------------------------------------------------------------------------------------------------------
Philippines Equity Basket 15,000 MSCI Philippines 716,400 -- 716,400
OPALS 'B'(c)(d)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 716,400 -- 716,400
PHILIPPINES
- -----------------------------------------------------------------------------------------------------------------------------------
Singapore Equity Basket 64,000 MSCI Singapore OPALS 2,956,160 -- 2,956,160
'B'(c)
--------------------------------------------------------------------------------------------------------------
Telecommunications 151,000 Singapore 254,804 -- 254,804
Telecommunications,
Ltd.
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 3,210,964 -- 3,210,964
SINGAPORE
- -----------------------------------------------------------------------------------------------------------------------------------
South Korea Appliances & Household 568 +Samsung Electronics 20,959 -- 20,959
Durables (GDR)(b)(d)
--------------------------------------------------------------------------------------------------------------
Telecommunications 946 SK Telecom Co. Ltd. 13,474 -- 13,474
(ADR)(a)(d)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 34,433 -- 34,433
SOUTH KOREA
- -----------------------------------------------------------------------------------------------------------------------------------
Thailand Equity Basket 11,000 MSCI Thailand 1,084,820 -- 1,084,820
OPALS(c)
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 1,084,820 -- 1,084,820
THAILAND
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 46,742,723 7,567,882 54,310,605
PACIFIC BASIN/ ASIA
- -----------------------------------------------------------------------------------------------------------------------------------
SOUTH EAST ASIA
- -----------------------------------------------------------------------------------------------------------------------------------
India Beverages & Tobacco 200 ITC Ltd. 4,735 -- 4,735
--------------------------------------------------------------------------------------------------------------
Chemicals 308 Reliance Industries 1,114 -- 1,114
Ltd.
--------------------------------------------------------------------------------------------------------------
Health & Personal Care 200 +Reckitt & Coleman 2,132 -- 2,132
of India Ltd.
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 7,981 -- 7,981
SOUTH EAST ASIA
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
SHORT-TERM SECURITIES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper* USD 910,000 General Motors -- 909,625 909,625
Acceptance Corp.,
4.94% due 6/01/1999
--------------------------------------------------------------------------------------------------------------
US Government & Agency USD 10,150,000 Federal Home Loan 10,146,042 -- 10,146,042
Obligations* Banks, 4.68% due
6/01/1999
1,500,000 US Treasury Bills, 1,490,625 -- 1,490,625
4.22% due
7/22/1999(g)
--------------------------------------------------------------------------------------------------------------
Total Investments in 11,636,667 909,625 12,546,292
Short-Term
Securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE> 79
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NOMINAL
VALUE PRO FORMA
COVERED BY INTERNATIONAL CONSULTS INTERNATIONAL
OPTIONS EQUITY INTERNATIONAL EQUITY
OPTIONS PURCHASED PURCHASED INVESTMENTS FUND++ PORTFOLIO++ FUND++
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Call Options Purchased 47,000 OCBC, expiring March 298,779 -- 298,779
2000 at USD 0.01
40,000 DBS, expiring March 321,280 -- 321,280
2000 at USD 0.01
50,000 UOB, expiring March 286,050 -- 286,050
2000 at USD 0.01
50,000 SIA, expiring March 355,400 -- 355,400
2000 at USD 0.01
-------------------------------------------------------------------------------------------------------------
Currency Put Options 12,000,000 Japanese Yen, 1,200 -- 1,200
Purchased expiring October
1999 at Y150
-------------------------------------------------------------------------------------------------------------
Put Options Purchased 1,935 CAC, expiring June 50,552 -- 50,552
1999 at USD 37.73
-------------------------------------------------------------------------------------------------------------
Total Options 1,313,261 -- 1,313,261
Purchased
-------------------------------------------------------------------------------------------------------------
Total Investments 202,241,772 42,381,492 244,623,264
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NOMINAL
VALUE
COVERED BY
OPTIONS
OPTIONS WRITTEN WRITTEN
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Currency Call Options 12,000,000 Japanese Yen, (21,600) -- (21,600)
Written expiring October
1999 at Y96.45
-------------------------------------------------------------------------------------------------------------
Total Options (21,600) -- (21,600)
Written
- ----------------------------------------------------------------------------------------------------------------------------------
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) (1,126,346)#
----------- ----------- -----------
Net Assets 205,758,540 42,135,173 248,535,112#
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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
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>
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VALUE
NUMBER OF CONTRACTS ISSUE EXCHANGE EXPIRATION DATE (NOTES 1A & 1C)
----------------------------------------------------------------------------------------
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>
F-9
<PAGE> 80
COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
*** 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.
(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) 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.
(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 investment.
++ Value as discussed in Combined Notes to Financial Statements.
# 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-10
<PAGE> 81
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
FOR MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED)
The following unaudited pro forma Combined Statement of Assets and
Liabilities 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
Merrill Lynch International Equity Fund included in its Annual Report to
Shareholders, which accompanies this Statement of Additional Information and
from Merrill Lynch Consults International Portfolio's audited financial
statements and related notes included in its Annual Report to Shareholders,
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 (Note 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 1g)................ -- -- $ 2,208,601(1) 2,208,601
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 10,274,910
------------ ----------- ----------- ------------
NET ASSETS:
Net Assets........................................... $205,758,540 $42,135,173 $(2,358,601) $245,535,112
============ =========== =========== ============
</TABLE>
F-11
<PAGE> 82
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
FOR MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
AS OF MAY 31, 1999 (UNAUDITED) (CONTINUED)
<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 Shares of beneficial interest, $0.10 par
value, unlimited number of shares authorized....... $ 213,300 -- -- $ 213,300
Class B Shares of beneficial interest, $0.10 par
value, unlimited number of shares authorized....... 1,578,379 -- -- 1,578,379
Class C Shares of beneficial interest, $0.10 par
value, unlimited number of shares authorized....... 70,049 $ 367,093 $ 74,555 511,697
Class D Shares of beneficial interest, $0.10 par
value, unlimited number of shares authorized....... 382,734 -- 382,734
Paid-in capital in excess of par..................... 259,340,650 32,497,282 (194,780) 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 $(2,237,926) $ 46,225,188
============ =========== =========== ============
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-12
<PAGE> 83
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
FOR THE YEAR ENDED MAY 31, 1999
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Operations has been
derived from the Statements of Operations of Merrill Lynch International Equity
Fund and Merrill Lynch 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 Merrill Lynch
International Equity Fund included in its Annual Report to Shareholders for the
year ended May 31, 1999, which accompanies this Statement of Additional
Information and from Merrill Lynch Consults International Portfolio's audited
financial statements and related notes included in its Annual Report to
Shareholders.
<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)(1) 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) 7,555,538
------------ ------------ --------- ------------
Investment income (loss) -- net................. 1,782,248 (520,761) 357,819 1,619,306
------------ ------------ --------- ------------
</TABLE>
F-13
<PAGE> 84
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH INTERNATIONAL EQUITY FUND AND
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
FOR THE YEAR ENDED MAY 31, 1999
(UNAUDITED) (CONTINUED)
<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 $(28,408,038)
============ ============ ========= ============
- ---------------------------------------------------------------------------------------------------------------
** Net foreign withholding tax on dividends...... $ 558,607 $ 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-14
<PAGE> 85
MERRILL LYNCH INTERNATIONAL EQUITY FUND
AND MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
COMBINED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch International Equity Fund ("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 U.S. 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
F-15
<PAGE> 86
the contract. Such receipts or payments are known as variation margin and
are recorded by 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-16
<PAGE> 87
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 of MLAM.
International Equity Fund also has entered into a Distribution Agreement and
Distribution Plans with Merrill Lynch Funds Distributor ("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-17
<PAGE> 88
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,
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<PAGE> 89
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.
12 -- Private Letter Ruling from the Internal Revenue Service.(i)
13 -- Not applicable.
</TABLE>
C-2
<PAGE> 90
<TABLE>
<S> <C> <C>
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.(k)
(b) -- Annual Report to Shareholders of the Registrant for the year ended May 31, 1999.(k)
(c) -- Prospectus dated February 27, 1999 and Statement of Additional Information dated February 27, 1999 of
Merrill Lynch Consults International Portfolio.(k)
(d) -- Form of Proxy.
(e) -- Annual Report to Shareholders of Merrill Lynch Consults International Portfolio for the year ended
October 31, 1998.
(f) -- Semi-Annual Report to Shareholders of Merrill Lynch Consults International Portfolio for the six months
ended April 30, 1999.
</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 the Registrant's Registration Statement
on Form N-14 filed on October 29, 1999 and incorporated herein by
reference.
(k) Filed on October 29, 1999, as an Exhibit to the Registrant's Registration
Statement on Form N-14 under the Securities Act of 1933, as amended (File
No. 333-90007).
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
C-3
<PAGE> 91
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-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> 92
SIGNATURES
As required by the Securities Act of 1933, this Pre-Effective Amendment No.
1 to the Registration Statement has been signed on behalf of the Registrant, in
the Township of Plainsboro and State of New Jersey, on the 13th day of December,
1999.
MERRILL LYNCH INTERNATIONAL EQUITY FUND
(Registrant)
By /s/ ROBERT HARRIS
------------------------------------------
(Robert Harris, Secretary)
As required by the Securities Act of 1933, this Pre-Effective Amendment No.
1 to the 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>
TERRY K. GLENN* President and Trustee
- ------------------------------------------------ (Principal Executive Officer)
(Terry K. Glenn)
DONALD C. BURKE* Vice President and Treasurer
- ------------------------------------------------ (Principal Financial and
(Donald C. Burke) Accounting Officer)
DONALD CECIL* Trustee
- ------------------------------------------------
(Donald Cecil)
EDWARD H. MEYER* Trustee
- ------------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Trustee
- ------------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Trustee
- ------------------------------------------------
(Richard R. West)
ARTHUR ZEIKEL* Trustee
- ------------------------------------------------
(Arthur Zeikel)
EDWARD D. ZINBARG* Trustee
- ------------------------------------------------
(Edward D. Zinbarg)
*By: /s/ ROBERT HARRIS December 13, 1999
------------------------------------------
(Robert Harris, Attorney-in-Fact)
</TABLE>
C-5
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant.
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(d) -- Form of Proxy.
(e) -- Annual Report to Shareholders of Merrill Lynch Consults
International Portfolio for the year ended October 31, 1998.
(f) -- Semi-Annual Report to Shareholders of Merrill Lynch Consults
International Portfolio for the six months ended April 30,
1999.
</TABLE>
C-6
<PAGE> 1
EXHIBIT 11
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
December 13, 1999
Merrill Lynch International Equity Fund
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch International Equity Fund (the
"Fund") in connection with the proposed acquisition by the Fund of
substantially all of the assets and the assumption by the Fund of substantially
all of the liabilities of Merrill Lynch Consults International Portfolio
("Consults"), in exchange for an equal aggregate value of newly-issued Class C
shares of beneficial interest (the "Shares") of the Fund (the "Reorganization").
This opinion is furnished in connection with the Fund's Registration Statement
on Form N-14 under the Securities Act of 1933, as amended (File No. 333-90007)
(the "Registration Statement"), relating to the Shares, par value $0.10 per
share, to be issued to Consults in the Reorganization and subsequently
distributed by Consults to its shareholders as provided for in the Agreement
and Plan of Reorganization, dated as of October 27, 1999, between the Fund and
Consults.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale
of the Shares. In addition, we have examined and are familiar with the
Declaration of Trust of the Fund, as amended, the By-Laws of the Fund, as
amended, and such other documents as we have deemed relevant to the matters
referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and
Consults as set forth in the proxy statement and prospectus constituting a part
of the Registration Statement (the "Proxy Statement and Prospectus"), the
Shares, upon issuance in the manner referred to in the Registration Statement,
for consideration not less than the par value thereof, will be legally issued,
fully paid
<PAGE> 2
and non-assessable shares of beneficial interest of the Fund (except for certain
possible liability of shareholders described in the Proxy Statement and
Prospectus under "Comparison of the Funds--Additional Information--Capital
Stock").
In rendering the foregoing opinion, we have relied without independent
investigation or verification, as to all matters involving the laws of the
Commonwealth of Massachusetts upon the opinion of Bingham Dana LLP.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting parts thereof.
Very truly yours,
/s/ BROWN & WOOD LLP
2
<PAGE> 1
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch International Equity Fund:
We consent to the incorporation by reference in this Pre-Effective Amendment No.
1 to Registration Statement No. 333-90007 on Form N-14 of our report dated July
16, 1999 of Merrill Lynch International Equity Fund in the Statement of
Additional Information, 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
December 10, 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. 333-90007) 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
December 6, 1999
<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 the proposal as marked, or if not marked, to vote "FOR" the
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
<PAGE> 1
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 1998
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
Worldwide Investments as of October 31, 1998
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Banking............................................................... 8.1%
Oil & Related......................................................... 6.8
Foods................................................................. 6.7
Electronics........................................................... 5.9
Insurance............................................................. 5.4
Pharmaceuticals....................................................... 4.4
Telecommunications.................................................... 4.2
Natural Gas Utilities................................................. 4.1
Beverage.............................................................. 3.9
Household Appliances.................................................. 3.7
Nestle S.A. (Registered).............................................. 4.4
Novartis AG (Registered).............................................. 4.4
Diageo PLC............................................................ 3.9
Credit Suisse Group (Registered)...................................... 3.8
Electrolux AB (Series B).............................................. 3.7
Boots Company PLC..................................................... 3.7
Telecom Italia S.p.A.................................................. 3.1
Repsol, S.A........................................................... 3.1
BG PLC................................................................ 3.0
CGU PLC............................................................... 2.9
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Alan J. Albert, Senior Vice President
Donald C. Burke, Vice President
Christophe Velay, Vice President
Gerald M. Richard, Treasurer
Lorraine Mandel, 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
<PAGE> 2
Merrill Lynch Consults International Portfolio, October 31, 1998
DEAR SHAREHOLDER
Fiscal Year in Review
Our goal of enhancing performance through tactical asset allocation proved
extremely difficult to achieve during the past year. For the 12 months ended
October 31, 1998, Merrill Lynch Consults International Portfolio had a total
return of -2.79% compared to +9.65% for the unmanaged benchmark Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East (EAFE) Index.
Detrimental to performance was the Fund's geographic representation. Our
decisions to invest in Latin America during the year, underweighting Europe
during the first two quarters of the fiscal year, and underweighting non-Japan
Asia during the fourth quarter all hurt the Fund's performance. Our security
selection benefited performance, and many of our top holdings were among the
best-performing stocks in their respective markets.
For the first half of the fiscal year, the Portfolio had a total return of
+13.43%, modestly underperforming the EAFE Index, which was up 15.44% over the
same period. This period was characterized by a strong recovery from the October
1997 declines. The second fiscal quarter saw the strongest markets of the year,
and was the best quarter for the Portfolio, which had a +12.59% total return to
outperform the benchmark by 2.00%. Our decisions to underweight Asia and Japan
in favor of Europe proved correct, while Latin America performed in line with
the Portfolio's benchmark. In terms of security selection, our concentration in
financial, telecommunications and pharmaceutical stocks also benefited the
Portfolio since these were some of the best-performing sectors.
The fiscal quarter ended July 31, 1998 witnessed the Portfolio give back the
lead it gained during the April quarter. The Portfolio lost 1.44%, trailing the
Index by 272 basis points (2.72%). As in the first fiscal quarter, asset
allocation was the reason. In spite of halving our positions in Japan, Asia and
Latin America, our allocations in these regions negatively impacted the
Portfolio's performance.
At the beginning of the critical fourth fiscal quarter, we had markedly reduced
the Portfolio's allocations to Asia and Latin America. Combined, these regions
accounted for 14.3% of the Portfolio's net assets as of August 1, 1998, whereas
the EAFE Index had no exposure to Latin America and 25.1% in Asia, including
Japan. Although our decision to underweight non-European markets proved
appropriate, the Portfolio lost 13.04% of its value between July 31, 1998 and
October 31, 1998 as compared to only 6.2% for the EAFE Index. The reason was the
considerable and unexpected price declines in Latin America, which amounted to a
negative total return of 22.43% in the MSCI Latin America Index, as compared to
a 1.44% loss in the MSCI Emerging Markets Asia Index. Our underweighted position
in Asia (ex-Japan) had a negative impact on performance relative to the EAFE
Index, since these markets ended the quarter on a positive note.
Throughout the year, we entered into various forward agreements to hedge
approximately 50% of the Portfolio's Japanese yen exposure. This served to
protect Portfolio performance during the depreciation of the Japanese currency
during the first three fiscal quarters, but we underestimated the yen's
resiliency when the yen rapidly appreciated in September. The net effect of
currency hedges during the year was not significant in relation to total return.
<PAGE> 3
Investment Outlook
During the month of October, global equities recovered approximately half of the
losses incurred since the summer. The rebound was induced by interest rate cuts
by the US Federal Reserve Board and some European central banks, Brazil's fiscal
austerity program, better-than-expected third quarter earnings releases in the
United States, and the approval of funding for the International Monetary Fund.
While the United States, Europe and emerging markets have seen significant
gains, Japan once more was lagging as investors remained skeptical of a
recovery. Japan's new banking bill does not provide any serious requirements for
the banks to restructure their loan portfolios when applying for public funds.
Additionally, the half-year earnings announcements turned out to be far below
the reduced expectations.
In the intermediate term, we are relatively more optimistic for Western equity
markets than we are in Asia. As the Japanese government struggles to break with
the traditional system and implement restructuring policies, the economic
situation may deteriorate further before it improves. Nevertheless, the
Portfolio maintains a commitment to this major market, albeit a substantially
reduced one. We will watch Japan closely since it is likely that the market will
finish its bottoming process in the not too distant future, from which it may
take off for a long-term bull phase. Considering the imminent risks, we are
focusing our investments in Japan on companies with strong and transparent
balance sheets and with the ability to compete globally. These are factors that
should increase the companies' long-term viability, while reducing risks in the
short term.
We do not see any fundamental improvement behind the strong rally in the Asian
emerging markets. Rather, the recent rise in share prices has been driven
primarily by external factors such as a temporarily stronger yen, lower interest
rates, and in no small part, government intervention in the Hong Kong stock
market. Therefore, we are skeptical about the longevity of the recovery in
financial markets in Asia (ex-Japan), and continue to hold an underweight
position there.
In Europe, we will continue to focus on companies that have visible earnings
growth, whether from a sustainable increase in revenues or from the benefits of
restructuring and consolidation. We continue to favor companies in the
pharmaceutical, telecommunications and consumer services industries. The
Portfolio has investments that are likely to benefit from the major demographic
and economic trends in Europe including aging of the population, increased
savings, greater focus on enhancing corporate shareholder value, cross-border
industry consolidation and selective increase in consumption. With the start of
European Monetary Union scheduled for January 1999, our investment strategy in
Europe will increasingly be based on sector, rather than country, analysis.
The risks to the emerging markets have not disappeared. Many of the factors
responsible for the market declines of August and September have not been
resolved. Predominant among these is the excess global capacity, which primarily
hurts the economies that rely on exports of undifferentiated, low-value-added
products. This situation has been made worse by the visible reduction in
investment and commercial lending to developing countries. Nevertheless, there
are positives. For example, valuations are extremely attractive. Many firms with
solid fundamentals have seen their prices fall drastically during the general
sell-off, presenting attractive buying opportunities. Second, governments in
Latin America have shown a strong commitment to adopting fiscal and monetary
measures to maintain price stability and financial order. This is in sharp
contrast to the Asian situation. This is a difficult stance, especially because
it is painful in the short term, but we believe it will pay off. The excellent
demographic and political trends in Latin America, combined with prudent
governments, will help the region overcome its present difficulties. We expect
to continue to invest in Latin America, focusing on companies that we believe
offer good value and diversified sources of revenues.
<PAGE> 4
In Conclusion
We appreciate your continued interest in Merrill Lynch Consults International
Portfolio, and we look forward to reviewing our strategy with you again in our
next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Christophe Velay
Christophe Velay
Vice President and Portfolio Manager
December 7, 1998
<PAGE> 5
Merrill Lynch Consults International Portfolio, October 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Consults International Portfolio during its fiscal year ended October 31,
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Record Payable Domestic Ordinary Foreign Source Total Ordinary Foreign Taxes Long-Term
Date Date Income Income Income Paid or Withheld Capital Gains
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/11/97 12/19/97 $.112497 $.240904 $.353401 $.045518 $.401125*
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Of this distribution, 45.79% is subject to the 28% tax rate and 54.21% is
subject to the 20% tax rate.
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.
<PAGE> 6
PERFORMANCE DATA
None of the past results shown should 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.
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the ML Consults
International Portfolio compared to growth of an investment in the Morgan
Stanley Capital International EAFE Index. Beginning and ending values are:
9/14/92** 10/98
ML Consults International Portfolio*+ ............... $10,000 $14,250
Morgan Stanley Capital International EAFE Index++ ... $10,000 $18,105
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of Operations.
+ ML Consults International Portfolio invests in a diversified international
portfolio of equity securities, other than US securities.
++ This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East. The starting date for the Index
in the line graph is from September 30, 1992.
Average Annual Total Return
Period Covered % Return
================================================================================
Year Ended 9/30/98 -18.04%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 + 2.91
- --------------------------------------------------------------------------------
Inception (9/14/92) through 9/30/98 + 4.80
- --------------------------------------------------------------------------------
Recent Performance Results*
12 Month 3 Month Since Inception
Total Return Total Return Total Return
================================================================================
ML Consults International Portfolio -2.79% -13.04% +42.50%
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in 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
commenced operations on 9/14/92.
<PAGE> 7
Merrill Lynch Consults International Portfolio, October 31, 1998
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
LATIN Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Argentina Banking 38,662 Banco de Galicia y Buenos Aires S.A. (ADR)* $ 607,996 $ 652,421 1.1%
--------------------------------------------------------------------------------------------------------------------
Oil & Related 25,000 YPF S.A. (ADR)* 640,679 723,438 1.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Argentina 1,248,675 1,375,859 2.3
====================================================================================================================================
Brazil Mining US$ 44,000 Companhia Vale do Rio Doce S.A., 0.00%
due 12/31/2049(a) 0 0 0.0
--------------------------------------------------------------------------------------------------------------------
Telecommunications 9,000 +Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)* 1,008,563 683,438 1.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in Brazil 1,008,563 683,438 1.1
====================================================================================================================================
Total Investments in Latin America 2,257,238 2,059,297 3.4
====================================================================================================================================
PACIFIC
BASIN
====================================================================================================================================
Japan Electrical Equipment 140,000 Hitachi, Ltd. 1,260,692 712,863 1.2
--------------------------------------------------------------------------------------------------------------------
Electronics 100,000 Fujitsu Limited 1,326,973 1,064,743 1.8
14,500 Sony Corporation 1,174,991 921,346 1.5
----------- ----------- ------
2,501,964 1,986,089 3.3
--------------------------------------------------------------------------------------------------------------------
Merchandising 19,000 Ito-Yokado Co., Ltd. 1,004,019 1,109,394 1.8
--------------------------------------------------------------------------------------------------------------------
Tire & Rubber 40,000 Bridgestone Corporation 905,159 880,989 1.4
--------------------------------------------------------------------------------------------------------------------
Total Investments in the Pacific Basin 5,671,834 4,689,335 7.7
====================================================================================================================================
WESTERN
EUROPE
====================================================================================================================================
France Consumer--Goods 8,000 LVMH (Louis Vuitton Moet Hennessy) 1,727,390 1,483,081 2.4
--------------------------------------------------------------------------------------------------------------------
Foods 5,300 Groupe Danone 879,482 1,401,314 2.3
--------------------------------------------------------------------------------------------------------------------
Health/Personal Care 8,000 Sanofi S.A. 690,834 1,252,700 2.1
--------------------------------------------------------------------------------------------------------------------
Insurance 13,400 AXA-UAP 951,487 1,514,615 2.5
--------------------------------------------------------------------------------------------------------------------
Machinery & Equipment 60,000 +Alstom 2,044,888 1,494,600 2.5
--------------------------------------------------------------------------------------------------------------------
Oil & Related 13,000 Elf Aquitaine S.A. 973,037 1,504,500 2.5
--------------------------------------------------------------------------------------------------------------------
Total Investments in France 7,267,118 8,650,810 14.3
====================================================================================================================================
Germany Apparel 14,000 Adidas--Salomon AG 2,430,705 1,641,088 2.7
--------------------------------------------------------------------------------------------------------------------
Auto & Truck 18,000 Daimler-Chrysler AG 1,795,336 1,397,583 2.3
--------------------------------------------------------------------------------------------------------------------
Banking 22,000 Deutsche Bank AG 1,629,930 1,369,184 2.3
--------------------------------------------------------------------------------------------------------------------
Chemicals 40,000 BASF AG 1,132,319 1,696,677 2.8
--------------------------------------------------------------------------------------------------------------------
Utilities 31,000 VEBA AG 2,063,699 1,732,628 2.9
--------------------------------------------------------------------------------------------------------------------
Total Investments in Germany 9,051,989 7,837,160 13.0
====================================================================================================================================
Italy Banking 100,000 Unicredito Italiano S.p.A. 140,795 537,503 0.9
--------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 140,000 Italgas S.p.A. 476,677 641,766 1.1
--------------------------------------------------------------------------------------------------------------------
Telecommunications 260,000 Telecom Italia S.p.A. 1,652,716 1,881,872 3.1
--------------------------------------------------------------------------------------------------------------------
Tires & Rubber 460,000 Pirelli S.p.A. 1,019,656 1,320,547 2.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Italy 3,289,844 4,381,688 7.3
====================================================================================================================================
Netherlands Electronics 30,000 Koninklijke (Royal) Philips Electronics N.V. 1,540,158 1,596,958 2.6
--------------------------------------------------------------------------------------------------------------------
Publishing 30,000 VNU NV 1,026,754 1,037,862 1.7
--------------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 2,566,912 2,634,820 4.3
====================================================================================================================================
Portugal Electric Utilities 53,120 EDP-Electricidade de Portugal, S.A. 982,087 1,337,000 2.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Portugal 982,087 1,337,000 2.2
====================================================================================================================================
Spain Oil & Related 37,500 Repsol, S.A. 1,156,793 1,880,186 3.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in Spain 1,156,793 1,880,186 3.1
====================================================================================================================================
Sweden Household Appliances 150,000 Electrolux AB (Series B) 1,365,221 2,255,105 3.7
--------------------------------------------------------------------------------------------------------------------
Total Investments in Sweden 1,365,221 2,255,105 3.7
====================================================================================================================================
Switzerland Banking 15,000 Credit Suisse Group (Registered) 1,554,232 2,311,150 3.8
--------------------------------------------------------------------------------------------------------------------
Foods 1,250 Nestle S.A. (Registered) 1,396,560 2,663,510 4.4
--------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 1,456 Novartis AG (Registered) 778,218 2,628,470 4.4
--------------------------------------------------------------------------------------------------------------------
Total Investments in Switzerland 3,729,010 7,603,130 12.6
====================================================================================================================================
United Kingdom Automobile Parts 400,000 LucasVarity PLC 1,331,705 1,366,310 2.3
--------------------------------------------------------------------------------------------------------------------
Beverage 216,000 Diageo PLC 2,540,684 2,332,774 3.9
--------------------------------------------------------------------------------------------------------------------
Entertainment 150,000 EMI Group PLC 1,360,813 889,734 1.5
--------------------------------------------------------------------------------------------------------------------
Financial Services 75,000 +Allied Zurich AG 1,025,269 896,641 1.5
--------------------------------------------------------------------------------------------------------------------
Insurance 110,000 CGU PLC 1,374,814 1,743,302 2.9
--------------------------------------------------------------------------------------------------------------------
Machinery 400,000 Siebe PLC (Ordinary) 805,619 1,640,912 2.7
--------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 280,058 BG PLC 928,384 1,835,858 3.0
--------------------------------------------------------------------------------------------------------------------
Retail 150,000 Boots Company PLC 1,317,274 2,252,905 3.7
--------------------------------------------------------------------------------------------------------------------
Tobacco 75,000 +British American Tobacco PLC 707,878 677,504 1.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 11,392,440 13,635,940 22.6
====================================================================================================================================
Total Investments in Western Europe 40,801,414 50,215,839 83.1
====================================================================================================================================
Total Investments $48,730,486 56,964,471 94.2
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts** (633,216) (1.0)
Other Assets Less Liabilities 4,110,542 6.8
----------- ------
Net Assets $60,441,797 100.0%
=========== ======
====================================================================================================================================
</TABLE>
+ Non-income producing security.
(a) Received through a bonus issue from Companhia Vale do Rio Doce S.A.
As of October 31, 1998, the bonds have not commenced trading and the
coupon rate has not been determined.
* American Depositary Receipts (ADR).
** Forward foreign exchange contracts sold as of October 31, 1998 were
as follows:
--------------------------------------------------------------------
Unrealized
Foreign Expiration Depreciation
Currency Sold Date (Note 1c)
--------------------------------------------------------------------
(Yen)421,860,000 November 1998 $(633,216)
--------------------------------------------------------------------
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$3,000,000) $(633,216)
=========
--------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE> 8
Merrill Lynch Consults International Portfolio, October 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of October 31, 1998
===========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$48,730,486) (Note 1a) ................. $ 56,964,471
Cash ........................................................................... 147,250
Foreign cash (Note 1b) ......................................................... 458
Receivables:
Securities sold .............................................................. $ 4,058,709
Dividends .................................................................... 295,093
Beneficial interest sold ..................................................... 235,340 4,589,142
------------
Prepaid registration fees and other assets (Note 1f) ........................... 16,026
------------
Total assets ................................................................... 61,717,347
------------
===========================================================================================================================
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1c) ........ 633,216
Payables:
Beneficial interest redeemed ................................................. 362,575
Distributor (Note 2) ......................................................... 51,027
Investment adviser (Note 2) .................................................. 38,271
Commissions .................................................................. 14,542
Administration fee (Note 2) .................................................. 12,757 479,172
------------
Accrued expenses ............................................................... 163,162
------------
Total liabilities .............................................................. 1,275,550
------------
===========================================================================================================================
Net Assets: Net assets ..................................................................... $ 60,441,797
============
===========================================================================================================================
Net Assets Common shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized .............................................................. $ 536,074
Paid-in capital in excess of par ............................................... 51,822,282
Undistributed investment income--net (Note 1g) ................................. 1,557,351
Accumulated realized capital losses on investments and foreign currency
transactions--net .............................................................. (1,091,910)
Unrealized appreciation on investments and foreign currency transactions--net .. 7,618,000
------------
Net assets--Equivalent to $11.27 per share based on 5,360,740 shares of
beneficial interest outstanding ................................................ $ 60,441,797
============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1998
===========================================================================================================================
<S> <C> <C>
Investment Dividends (net of $226,702 foreign withholding tax) ......................... $ 2,692,982
Income Interest and discount earned ................................................ 124,847
(Notes 1d & 1e): ------------
Total income ................................................................ 2,817,829
------------
===========================================================================================================================
Expenses: Account maintenance and distribution fees (Note 2) .......................... $ 911,697
Investment advisory fees (Note 2) ........................................... 683,792
Administration fees (Note 2) ................................................ 227,924
Stamp tax fee ............................................................... 156,078
Accounting services (Note 2) ................................................ 150,624
Custodian fees .............................................................. 85,971
Professional fees ........................................................... 83,082
Printing and shareholder reports ............................................ 60,708
Transfer agent fees (Note 2) ................................................ 34,506
Registration fees (Note 1f) ................................................. 29,106
Trustees' fees .............................................................. 22,761
Pricing fees ................................................................ 6,598
Other ....................................................................... 13,180
------------
Total expenses .............................................................. 2,466,027
------------
Investment income--net ...................................................... 351,802
------------
===========================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net .......................................................... (1,091,909)
(Loss) On Foreign currency transactions--net ........................................ 2,488,873 1,396,964
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions-- Investments--net .......................................................... (1,153,114)
Net (Notes 1b, Foreign currency transactions--net ........................................ (1,448,987) (2,602,101)
1c, 1e & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign currency
transactions ................................................................ (1,205,137)
------------
Net Decrease in Net Assets Resulting from Operations ........................ $ (853,335)
============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 10
Merrill Lynch Consults International Portfolio, October 31, 1998
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended October 31,
-----------------------------
Increase (Decrease) in Net Assets: 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ....................................................... $ 351,802 $ 1,201,465
Realized gain on investments and foreign currency transactions--net .......... 1,396,964 4,831,529
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net ................................................... (2,602,101) 9,042,849
------------ ------------
Net increase (decrease) in net assets resulting from operations .............. (853,335) 15,075,843
------------ ------------
==================================================================================================================================
Dividends & Investment income--net ....................................................... (1,584,173) --
Distributions to In excess of investment income--net .......................................... (931,508) (5,862,557)
Shareholders Realized gain on investments--net ............................................ (3,930,011) (4,613,274)
(Note 1g): ------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders ................................................................. (6,445,692) (10,475,831)
------------ ------------
==================================================================================================================================
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions ..... (40,209,743) (71,570,166)
Transactions ------------ ------------
(Note 4):
==================================================================================================================================
Net Assets: Total decrease in net assets ................................................. (47,508,770) (66,970,154)
Beginning of year ............................................................ 107,950,567 174,920,721
------------ ------------
End of year* ................................................................. $ 60,441,797 $107,950,567
============ ============
==================================================================================================================================
*Undistributed investment income--net (Note 1h) ............................... $ 1,557,351 $ 1,232,371
============ ============
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended October 31,
--------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995+ 1994+
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........................ $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
Operating ------- -------- -------- -------- --------
Performance: 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 Based on net asset value per share ........................ (2.79%) 9.26% 5.93% (1.68%) 9.74%
Return: ======= ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses .................................................. 2.70% 2.44% 2.37% 2.35% 2.27%
Net Assets: ======= ======== ======== ======== ========
Investment income (loss)--net ............................. .39% .84% (.42%) (.41%) (.56%)
======= ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of year (in thousands) .................... $60,442 $107,951 $174,921 $197,077 $272,487
Data: ======= ======== ======== ======== ========
Portfolio turnover ........................................ 48.78% 28.62% 38.16% 17.31% 24.64%
======= ======== ======== ======== ========
==================================================================================================================================
</TABLE>
+ Based on average shares outstanding.
See Notes to Financial Statements.
<PAGE> 11
Merrill Lynch Consults International Portfolio, October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Consults International Portfolio (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities, including depositary
receipts, 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. Realized and unrealized gains/losses on 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.
o 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. Premium or discount is amortized over the life
of the contract.
o Foreign currency options and futures--The Fund may 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.
o Financial futures contracts--The 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, 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.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current 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.
<PAGE> 12
(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) Prepaid registration fees--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 date. Distributions in excess of net investment
income are due primarily to differing tax treatments for foreign currency
transactions.
(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 $2,488,859 have been reclassified between accumulated
net realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
(Suisse) Investment Management S.A. (the "Investment Adviser"). The Investment
Adviser is a subsidiary of Merrill Lynch Bank (Suisse) S.A. which is, in turn,
an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Fund Asset
Management, L.P. ("FAM") and Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") have been retained as sub-advisers (the "Sub-Advisers") to the Fund.
Pursuant to sub-advisory agreements, the Sub-Advisers will provide investment
advisory services with respect to the management of the Fund's cash position.
As compensation for its services to the Fund, the Investment Adviser receives
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The Fund will not pay any incremental fee to the Sub-Advisers for
their services.
The Fund has an Administrative Agreement with Princeton Administrators, L.P.
(the "Administrator"), an indirect subsidiary of ML & Co. 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. 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.
<PAGE> 13
Merrill Lynch Consults International Portfolio, October 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940 pursuant to which 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., receives 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, Pierce, Fenner & Smith Inc.
("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance
activities and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance activities to the Fund's shareholders. The ongoing distribution fee
compensates the Distributor and MLPF&S 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.
As authorized by the Plan, the Distributor has entered into an agreement with
MLPF&S, an affiliate of the Investment Adviser, which provides for the
compensation of MLPF&S for providing account maintenance and
distribution-related services to the Fund. For the year ended October 31, 1998,
MLFD earned $911,697 under the Plan, all of which was paid to MLPF&S pursuant to
the agreement.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
acts as the Fund's transfer agent.
In addition, MLPF&S received $30,933 in commissions on the execution of
portfolio security transactions for the Fund for the year ended October 31,
1998.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, the Investment Adviser (including their affiliated companies), FDS, PFD,
and/or ML & Co.
<PAGE> 14
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1998 were $42,009,001 and $85,872,129, respectively.
Net realized gains (losses) for the year ended October 31, 1998 and net
unrealized gains (losses) as of October 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $(1,092,181) $ 8,233,985
Short-term investments ................... 272 --
Foreign currency transactions ............ (57,709) 17,231
Forward foreign exchange
contracts ................................ 2,546,582 (633,216)
----------- -----------
Total .................................... $ 1,396,964 $ 7,618,000
=========== ===========
- --------------------------------------------------------------------------------
As of October 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $8,233,985, of which $13,058,758 related to appreciated
securities and $4,824,773 related to depreciated securities. The aggregate cost
of investments at October 31, 1998 for Federal income tax purposes was
$48,730,486.
4. Beneficial Interest Transactions:
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 856,874 $ 10,569,673
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 537,886 6,056,591
---------- ------------
Total issued ............................. 1,394,760 16,626,264
Shares redeemed .......................... (4,761,563) (56,836,007)
---------- ------------
Net decrease ............................. (3,366,803) $(40,209,743)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,189,803 $ 15,058,939
Shares issued to shareholders in
reinvestment of dividends
and distributions ........................ 829,254 9,652,518
---------- ------------
Total issued ............................. 2,019,057 24,711,457
Shares redeemed .......................... (7,759,006) (96,281,623)
---------- ------------
Net decrease ............................. (5,739,949) $(71,570,166)
========== ============
- --------------------------------------------------------------------------------
5. Commitments:
At October 31, 1998, the Fund entered into forward exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to sell various foreign currencies with an approximate value of
$4,054,000.
6. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carry forward of
approximately $1,092,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees,
Merrill Lynch Consults International Portfolio
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Consults International Portfolio, including the schedule of investments,
as of October 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended and financial highlights for each of the years indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and 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 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 and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the custodian.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Consults International Portfolio at October 31, 1998, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and financial highlights for each
of the indicated years, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
December 3, 1998
<PAGE> 16
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 Consults
International Portfolio
Box 9011
Princeton, NJ
08543-9011 #16566-10/98
<PAGE> 1
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
April 30, 1999
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
Worldwide Investments as of April 30, 1999
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Oil & Related ......................................................... 11.7%
Electronics ........................................................... 9.6
Banking ............................................................... 7.2
Insurance ............................................................. 6.9
Foods ................................................................. 6.6
Pharmaceuticals ....................................................... 5.2
Telecommunications .................................................... 4.9
Tires & Rubber ........................................................ 3.9
Retail ................................................................ 3.8
Beverage .............................................................. 3.8
Percent of
Ten Largest Equity Holdings Net Assets
Credit Suisse Group (Registered Shares) ............................... 4.3%
Telecom Italia SpA .................................................... 4.3
Axa ................................................................... 3.8
Diageo PLC ............................................................ 3.8
Fujitsu Limited ....................................................... 3.8
LVMH (Louis Vuitton Moet Hennessy) .................................... 3.5
Total SA 'B' .......................................................... 3.5
Nestle SA (Registered Shares) ......................................... 3.5
BP Amoco PLC .......................................................... 3.4
Novartis AG (Registered Shares) ....................................... 3.2
<PAGE> 2
Merrill Lynch Consults International Portfolio, April 30, 1999
DEAR SHAREHOLDER
For the six month-period ended April 30, 1999, Merrill Lynch Consults
International Portfolio had a total return of +7.63% compared to +15.28% for the
unmanaged benchmark Morgan Stanley Capital International Europe, Australia and
Far East Index. Although a number of factors contributed to the Fund's relative
underperformance, the primary factor was our strategy of holding investments in
Latin America through January as these markets continued to deteriorate, while
underweighting in emerging Asia as the region recovered sharply from the
financial crisis of last fall. For example, the unmanaged Hang Seng Index in
Hong Kong has gained 33.21% since October 31, 1998, whereas European stocks as
measured by the Dow Jones Stoxx 50 Index returned +15.41% over the same period.
To a lesser extent, our relative underweight in Japan over the last two months
of recovery in that market was also detrimental to the Fund's relative
performance, with the Nikkei Index rising to 14.31% in US dollar terms since the
beginning of the year.
Security selection contributed to improving relative performance, as
demonstrated by the returns produced by some of our top holdings in Europe and
Japan during the six-month period. These included: Telecom Italia SpA, +63.7%;
Credit Swiss Group, +45.3%; Diageo PLC, +11.24%; LVMH (Louis Vuitton Moet
Hennessy), +61.6%; Sony Corporation, +50.7%; and Fujitsu Limited, +64.9%.
Hedging of the Japanese yen exposure proved mainly neutral to performance during
the six-month period.
Investment Environment
The past six months saw a dramatic change in investor perceptions and in
economic outlook throughout the world. Following the global financial crisis
experienced during August, September and October, US and European markets
rebounded sharply on monetary easing and on economic growth in the United
States, which was much stronger than expected. Stock prices were also supported
by the prevalence of a low inflation environment as economies recovered and the
unprecedented pace of corporate mergers and acquisitions.
Latin America continued to suffer through January on the devaluation of the
real, and although both markets and currencies have recovered sharply in the
last two months, the region's economic condition is far from healthy. Many
countries are experiencing or fast approaching recession and continued financial
disturbances. On the other hand, the Asian recovery surprised the investment
community. Investors have been anticipating an improvement in the Asian economy
which, although showing positive signs, has yet to prove its sustainability. The
problems of excess industrial capacity and weak financial systems are still
latent. We have consciously maintained a limited exposure to these more volatile
sectors of the world equity markets, recognizing that while a sharp rise can
produce underperformance, a repeat of 1998's decline is conceivable in this
still unstable region.
In Japan we believe we may be finally seeing the long-awaited turnaround, and
investors are anticipating future improvements. Part of the rise in the Nikkei
Index can be explained by purchases of Japanese securities by domestic financial
companies for the March 31 fiscal year-end.
Portfolio Strategy
Although a correction is possible, we gradually increased our weight in Japan
and used weakness to add to established positions. Our strategy is to select
companies that are either competitive on a global scale or that have started
restructuring to focus on improving return on equity. We partially hedge the
currency exposure in Japan, to reduce this element of volatility from the
Portfolio.
We continued to overweight Europe where we found solid companies, competitive on
a regional or global scale, at reasonable valuations and with attractive
risk/return characteristics. Throughout the six-month period ended April 30,
1999, we followed a stock selection strategy in Europe based on participating in
three major trends shaping the economic and corporate fields, with country
allocation a secondary consideration. First, companies have been undergoing
industrial combinations and reorganizations to compete in a global environment
and in a more open Europe. For example, Electrolux AB is in the middle of
restructuring programs to increase operational efficiency; Endesa SA is reducing
its workforce, acquiring regional affiliates to reduce costs, restructuring the
balance sheet and repurchasing shares; and Koninklijke (Royal) Philips
Electronics NV is half way through a four-year plan to reduce manufacturing
sites and divest non-core businesses. Second, demographic changes that increase
demand for financial and healthcare services are on the rise. In the financial
sector, we own Axa in France, Credit Suisse Group in Switzerland, and Allied
Zurich PLC and Prudential Corporation PLC in the United Kingdom. Our favorite
beneficiaries of the demand for health care are Novartis AG, Sanofi SA and Glaxo
Well come PLC. All have diversified pharma ceutical portfolios and superior
research. Boots Company PLC, a pharmaceutical retailer, is also likely to
benefit from this trend, in our opinion. Finally, select countries are still
experiencing strength in consumption. We favored France, where
Pinault-Printemps-Redoute SA is the retailing leader and LVMH (Louis Vuitton
Moet Hennessy) experiences continued demand for its luxury goods in Europe and
globally. Both companies have high-quality, aggressive manage-ments focused on
shareholders.
<PAGE> 3
In Conclusion
We appreciate your continued interest in Merrill Lynch Consults International
Portfolio, and we look forward to reviewing our strategy with you again in our
next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Christophe Velay
Christophe Velay
Vice President and Portfolio Manager
June 10, 1999
================================================================================
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Merrill Lynch Consults International Portfolio's Board of
Trustees. We are pleased to announce that Terry K. Glenn has been elected
President and Trustee of the Fund. Mr. Glenn has held the position of Executive
Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Trustees in wishing him
well in his retirement from Merrill Lynch and are pleased that he will continue
as a member of the Fund's Board of Trustees.
================================================================================
<PAGE> 4
Merrill Lynch Consults International Portfolio, April 30, 1999
PERFORMANCE DATA
None of the past results shown should 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.
<TABLE>
<CAPTION>
Average Annual Total Return
Period Covered % Return
=================================================================================================
<S> <C>
Year Ended 3/31/99 -9.26%
- -------------------------------------------------------------------------------------------------
Five Years Ended 3/31/99 +3.59
- -------------------------------------------------------------------------------------------------
Inception (9/14/92) through 3/31/99 +6.31
- -------------------------------------------------------------------------------------------------
Recent Performance Results*
12 Month 3 Month Since Inception
Total Return Total Return Total Return
=================================================================================================
ML Consults International Portfolio -7.76% +3.56% +53.38%
- -------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in 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
commenced operations on 9/14/92.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Percent
LATIN Shares Held/ Value of Net
AMERICA Industries Face Amount Investments Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Argentina Oil & Related 25,000 YPF Sociedad Anonima (ADR)* $ 640,679 $ 1,050,000 2.3%
--------------------------------------------------------------------------------------------------------------------
Total Investments in Argentina 640,679 1,050,000 2.3
====================================================================================================================================
Brazil Mining US$ 44,000 Companhia Vale do Rio Doce SA, 0% due
12/31/2049 (a) 0 0 0.0
--------------------------------------------------------------------------------------------------------------------
Total Investments in Brazil 0 0 0.0
====================================================================================================================================
Total Investments in Latin America 640,679 1,050,000 2.3
====================================================================================================================================
PACIFIC
BASIN
====================================================================================================================================
Australia Telecommunications 53,000 +Telstra Corporation Limited 290,994 287,879 0.6
--------------------------------------------------------------------------------------------------------------------
Total Investments in Australia 290,994 287,879 0.6
====================================================================================================================================
Japan Electrical Equipment 140,000 Hitachi Ltd. 1,260,692 1,023,732 2.2
--------------------------------------------------------------------------------------------------------------------
Electronics 100,000 Fujitsu Limited 1,326,973 1,714,885 3.8
14,500 Sony Corporation 1,174,991 1,355,765 3.0
----------- ----------- ---
2,501,964 3,070,650 6.8
--------------------------------------------------------------------------------------------------------------------
Merchandising 19,000 Ito-Yokado Co., Ltd. 1,004,019 1,167,883 2.6
--------------------------------------------------------------------------------------------------------------------
Tires & Rubber 40,000 Bridgestone Corp. 905,159 1,073,375 2.3
--------------------------------------------------------------------------------------------------------------------
Total Investments in Japan 5,671,834 6,335,640 13.9
====================================================================================================================================
Total Investments in the Pacific Basin 5,962,828 6,623,519 14.5
====================================================================================================================================
WESTERN
EUROPE
====================================================================================================================================
France Consumer--Goods 6,000 LVMH (Louis Vuitton Moet Hennessy) 1,295,543 1,611,732 3.5
--------------------------------------------------------------------------------------------------------------------
Foods 5,300 Danone 879,482 1,419,209 3.1
--------------------------------------------------------------------------------------------------------------------
Health/Personal Care 8,000 Sanofi SA 690,834 1,255,686 2.7
--------------------------------------------------------------------------------------------------------------------
Insurance 13,400 Axa 951,487 1,733,109 3.8
--------------------------------------------------------------------------------------------------------------------
Oil & Related 11,500 Total SA 'B' 1,177,202 1,577,439 3.5
--------------------------------------------------------------------------------------------------------------------
Retail 4,000 Pinault-Printemps-Redoute SA 679,990 664,675 1.5
--------------------------------------------------------------------------------------------------------------------
Total Investments in France 5,674,538 8,261,850 18.1
====================================================================================================================================
</TABLE>
<PAGE> 5
Merrill Lynch Consults International Portfolio, April 30, 1999
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
WESTERN Percent
EUROPE Shares Held/ Value of Net
(concluded) Industries Face Amount Investments Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Germany Banking 20,200 HypoVereinsbank $ 1,568,650 $ 1,319,126 2.9%
--------------------------------------------------------------------------------------------------------------------
Total Investments in Germany 1,568,650 1,319,126 2.9
====================================================================================================================================
Italy Natural Gas Utilities 140,000 Italgas SpA 476,677 623,821 1.4
--------------------------------------------------------------------------------------------------------------------
Telecommunications 186,000 Telecom Italia SpA 1,430,439 1,982,404 4.3
--------------------------------------------------------------------------------------------------------------------
Tires & Rubber 240,000 Pirelli SpA 525,494 734,106 1.6
--------------------------------------------------------------------------------------------------------------------
Total Investments in Italy 2,432,610 3,340,331 7.3
====================================================================================================================================
Netherlands Broadcast & Publishing 28,000 Wolters Kluwer NV 'A' 1,372,740 1,220,970 2.7
--------------------------------------------------------------------------------------------------------------------
Chemicals 28,400 Akzo Nobel NV 1,170,897 1,285,003 2.8
--------------------------------------------------------------------------------------------------------------------
Electronics 15,000 Koninklijke (Royal) Philips Electronics NV 931,927 1,293,894 2.8
--------------------------------------------------------------------------------------------------------------------
Publishing 30,000 VNU NV 1,026,754 1,216,102 2.7
--------------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 4,502,318 5,015,969 11.0
====================================================================================================================================
Spain Oil & Related 69,000 +Repsol, SA 703,900 1,124,656 2.5
--------------------------------------------------------------------------------------------------------------------
Utilities--Electric 40,000 Endesa, SA 1,085,251 890,749 1.9
--------------------------------------------------------------------------------------------------------------------
Total Investments in Spain 1,789,151 2,015,405 4.4
====================================================================================================================================
Sweden Household Appliances 70,000 Electrolux AB 'B' 658,054 1,422,375 3.1
--------------------------------------------------------------------------------------------------------------------
Telecommunications & 37,000 Telefonaktiebolaget LM Ericsson 'B' 962,800 973,858 2.2
Equipment
--------------------------------------------------------------------------------------------------------------------
Total Investments in Sweden 1,620,854 2,396,233 5.3
====================================================================================================================================
Switzerland Banking 10,000 Credit Suisse Group (Registered Shares) 1,006,065 1,987,255 4.3
--------------------------------------------------------------------------------------------------------------------
Foods 850 Nestle SA (Registered Shares) 949,661 1,576,370 3.5
--------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 1,000 Novartis AG (Registered Shares) 534,490 1,466,956 3.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Switzerland 2,490,216 5,030,581 11.0
====================================================================================================================================
United Kingdom Airlines 180,000 British Airways PLC 1,160,375 1,427,265 3.1
--------------------------------------------------------------------------------------------------------------------
Beverage 148,500 Diageo PLC 1,746,720 1,715,435 3.8
--------------------------------------------------------------------------------------------------------------------
Financial Services 75,000 Allied Zurich PLC 1,025,269 1,025,167 2.2
--------------------------------------------------------------------------------------------------------------------
Insurance 100,000 Prudential Corporation PLC 1,416,009 1,427,265 3.1
--------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 160,058 BG PLC 530,588 898,706 2.0
--------------------------------------------------------------------------------------------------------------------
Oil & Related 82,000 BP Amoco PLC 1,237,089 1,556,516 3.4
--------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 31,000 Glaxo Wellcome PLC 983,256 917,346 2.0
--------------------------------------------------------------------------------------------------------------------
Retail 80,000 Boots Company PLC 702,070 1,059,380 2.3
--------------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 8,801,376 10,027,080 21.9
====================================================================================================================================
Total Investments in Western Europe 28,879,713 37,406,575 81.9
====================================================================================================================================
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
SHORT-TERM
SECURITIES Issue
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial Paper** $850,000 Ford Motor Credit Company, 4.95%
due 5/03/1999 849,766 849,766 1.8
====================================================================================================================================
Total Investments in Short-Term Securities 849,766 849,766 1.8
====================================================================================================================================
Total Investments $36,332,986 45,929,860 100.5
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (39,757) (0.1)
Liabilities in Excess of Other Assets (194,704) (0.4)
------------ -----
Net Assets $ 45,695,399 100.0%
============ =====
====================================================================================================================================
</TABLE>
+ Non-income producing security.
(a) Received through a bonus issue from Companhia Vale do Rio Doce SA.
As of April 30, 1999, the bonds have not commenced trading and the
coupon rate has not been determined.
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
*** Forward foreign exchange contracts sold as of April 30, 1999 were as
follows:
-------------------------------------------------------------------------
Unrealized
Foreign Expiration Depreciation
Currency Sold Date (Note 1c)
-------------------------------------------------------------------------
(Yen) 360,810,000 June 1999 $(39,757)
-------------------------------------------------------------------------
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$3,000,000) $(39,757)
========
-------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE> 7
Merrill Lynch Consults International Portfolio, April 30, 1999
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of April 30, 1999
=================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$36,332,986) (Note 1a) ......... $ 45,929,860
Cash ................................................................... 409
Foreign cash (Note 1b) ................................................. 365
Receivables:
Dividends ........................................................... $ 268,397
Beneficial interest sold ............................................ 25,000 293,397
-----------
Prepaid registration fees and other assets (Note 1f) ................... 15,935
------------
Total assets ........................................................... 46,239,966
------------
=================================================================================================================================
Liabilities: Unrealized depreciation on forward foreign exchange
contracts (Note 1c) .................................................. 39,757
Payables:
Beneficial interest redeemed ........................................ 280,040
Distributor (Note 2) ................................................ 38,045
Investment adviser (Note 2) ......................................... 28,534
Administration fee (Note 2) ......................................... 9,511 356,130
-----------
Accrued expenses ....................................................... 148,680
------------
Total liabilities ...................................................... 544,567
------------
=================================================================================================================================
Net Assets: Net assets ............................................................. $ 45,695,399
============
=================================================================================================================================
Net Assets Common shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized ................................ $ 383,013
Paid-in capital in excess of par ....................................... 34,361,551
Undistributed investment income--net ................................... 181,407
Undistributed realized capital gains on investments
and foreign currency transactions--net ............................... 1,216,969
Unrealized appreciation on investments and foreign
currency transactions--net ........................................... 9,552,459
------------
Net assets--Equivalent to $11.93 per share based
on 3,830,131 shares of beneficial interest outstanding ............... $ 45,695,399
============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended April 30, 1999
=================================================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $34,914 foreign withholding tax) ..................... $ 271,497
Income Interest and discount earned ........................................... 41,068
(Notes 1d & 1e): ------------
Total income ........................................................... 312,565
------------
=================================================================================================================================
Expenses: Account maintenance and distribution fees (Note 2) ..................... $ 265,699
Investment advisory fees (Note 2) ...................................... 199,274
Stamp tax fee .......................................................... 70,289
Administration fees (Note 2) ........................................... 66,425
Professional fees ...................................................... 39,023
Custodian fees ......................................................... 34,339
Printing and shareholder reports ....................................... 22,957
Registration fees (Note 1f) ............................................ 15,251
Transfer agent fees (Note 2) ........................................... 14,717
Trustees' fees ......................................................... 14,507
Accounting services (Note 2) ........................................... 11,004
Pricing fees ........................................................... 2,825
Other .................................................................. 3,024
-----------
Total expenses ......................................................... 759,334
------------
Investment loss--net ................................................... (446,769)
------------
=================================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Investments--net .................................................... 2,785,282
Gain (Loss) Foreign currency transactions--net .................................. (476,403) 2,308,879
On Investments -----------
& Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net .................................................... 1,362,889
Transactions--Net Foreign currency transactions--net .................................. 571,570 1,934,459
(Notes 1b, 1c, ----------- ------------
1e & 3): Net realized and unrealized gain on investments and
foreign currency transactions ....................................... 4,243,338
------------
Net Increase in Net Assets Resulting from Operations ................... $ 3,796,569
============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
Merrill Lynch Consults International Portfolio, April 30, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: April 30, 1999 Oct. 31, 1998
============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income (loss)--net .................................... $ (446,769) $ 351,802
Realized gain on investments and foreign currency
transactions--net .............................................. 2,308,879 1,396,964
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net ............. 1,934,459 (2,602,101)
------------ -------------
Net increase (decrease) in net assets resulting from operations... 3,796,569 (853,335)
------------ -------------
============================================================================================================================
Dividends & Investment income--net ........................................... (929,175) (1,584,173)
Distributions to In excess of investment income--net .............................. -- (931,508)
Shareholders Realized gain on investments--net ................................ -- (3,930,011)
(Note 1g): ------------ -------------
Net decrease in net assets resulting from dividends
and distributions to shareholders .............................. (929,175) (6,445,692)
------------ -------------
============================================================================================================================
Beneficial Interest Net decrease in net assets derived from beneficial
Transactions interest transactions .......................................... (17,613,792) (40,209,743)
(Note 4): ------------ -------------
============================================================================================================================
Net Assets: Total decrease in net assets ..................................... (14,746,398) (47,508,770)
Beginning of period .............................................. 60,441,797 107,950,567
------------ -------------
End of period* ................................................... $ 45,695,399 $ 60,441,797
============ =============
============================================================================================================================
*Undistributed investment income--net ............................. $ 181,407 $ 1,557,351
============ =============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios For the
have been derived from information provided Six Months
in the financial statements. Ended For the Year Ended October 31,
April 30, ------------------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995+
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........ $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83
Operating ------- ------- -------- -------- --------
Performance: Investment income (loss)--net ............ (.10) .05 .10 (.05) (.05)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ........................ .95 (.40) .97 .76 (.18)
------- ------- -------- -------- --------
Total from investment operations ............ .85 (.35) 1.07 .71 (.23)
------- ------- -------- -------- --------
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)
------- ------- -------- -------- --------
Total dividends and distributions ........... (.19) (.75) (.79) (.90) (.32)
------- ------- -------- -------- --------
Net asset value, end of period .............. $ 11.93 $ 11.27 $ 12.37 $ 12.09 $ 12.28
======= ======= ======== ======== ========
=================================================================================================================================
Total Investment Based on net asset value per share .......... 7.63%++ (2.79%) 9.26% 5.93% (1.68%)
Return: ======= ======= ======== ======== ========
=================================================================================================================================
Ratios to Average Expenses .................................... 2.86%* 2.70% 2.44% 2.37% 2.35%
Net Assets: ======= ======= ======== ======== ========
Investment income (loss)--net ............... (1.68%)* .39% .84% (.42%) (.41%)
======= ======= ======== ======== ========
=================================================================================================================================
Supplemental Net assets, end of period (in thousands) .... $45,695 $60,442 $107,951 $174,921 $197,077
Data: ======= ======= ======== ======== ========
Portfolio turnover .......................... 29.93% 48.78% 28.62% 38.16% 17.31%
======= ======= ======== ======== ========
=================================================================================================================================
</TABLE>
* Annualized.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
<PAGE> 10
Merrill Lynch Consults International Portfolio, April 30, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Consults International Portfolio (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. 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. All such adjustments
are of a normal recurring nature. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities, including depositary
receipts, 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. Realized and unrealized gains/losses on 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.
o 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. Premium or discount is amortized over the life
of the contract.
o Foreign currency options and futures--The Fund may 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.
o Financial futures contracts--The 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, 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.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current 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.
<PAGE> 11
(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 sub stantially 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) Prepaid registration fees--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 date. Distributions in excess of net investment
income are due primarily to differing tax treatments for foreign currency
transactions.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
(Suisse) Investment Management S.A. (the "Investment Adviser"). The Investment
Adviser is a subsidiary of Merrill Lynch Bank (Suisse) S.A. which is, in turn,
an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Fund Asset
Management, L.P. ("FAM") and Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") have been retained as sub-advisers (the "Sub-Advisers") to the Fund.
Pursuant to sub-advisory agreements, the Sub-Advisers will provide investment
advisory services with respect to the management of the Fund's cash position.
As compensation for its services to the Fund, the Investment Adviser receives
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The Fund will not pay any incremental fee to the Sub-Advisers for
their services.
The Fund has an Administrative Agreement with Princeton Administrators, L.P.
(the "Administrator"), an indirect subsidiary of ML & Co. 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
<PAGE> 12
Merrill Lynch Consults International Portfolio, April 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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. 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.
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940 pursuant to which Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc., receives 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
subagreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance activities and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for providing
account maintenance activities to the Fund's shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S 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.
As authorized by the Plan, the Distributor has entered into an agreement with
MLPF&S, an affiliate of the Investment Adviser, which provides for the
compensation of MLPF&S for providing account maintenance and
distribution-related services to the Fund. For the six months ended April 30,
1999, MLFD earned $265,699 under the Plan, all of which was paid to MLPF&S
pursuant to the agreement.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
acts as the Fund's transfer agent.
In addition, MLPF&S received $9,279 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended April 30, 1999.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, the Investment Adviser (including their affiliated companies), FDS, PFD,
and/or ML & Co.
<PAGE> 13
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the six months ended April 30, 1999 were $15,400,419 and
$31,432,968, respectively.
Net realized gains (losses) for the six months ended April 30, 1999 and net
unrealized gains (losses) as of April 30, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $ 2,785,282 $ 9,596,874
Foreign currency transactions ............ 31,205 (4,658)
Forward foreign exchange
contracts ................................ (507,608) (39,757)
----------- -----------
Total .................................... $ 2,308,879 $ 9,552,459
=========== ===========
- -------------------------------------------------------------------------------
As of April 30, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $9,596,874, of which $10,545,355 related to appreciated
securities and $948,481 related to depreciated securities. The aggregate cost of
investments at April 30, 1999 for Federal income tax purposes was $36,332,986.
4. Beneficial Interest Transactions:
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
For the Six Months Ended Dollar
April 30, 1999 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 134,494 $ 1,503,543
Shares issued to shareholders
in reinvestments of dividends
and distributions ........................ 76,975 865,198
---------- ------------
Total issued ............................. 211,469 2,368,741
Shares redeemed .......................... (1,742,078) (19,982,533)
---------- ------------
Net decrease ............................. (1,530,609) $(17,613,792)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 856,874 $ 10,569,673
Shares issued to shareholders
in reinvestments of dividends
and distributions ........................ 537,886 6,056,591
---------- ------------
Total issued ............................. 1,394,760 16,626,264
Shares redeemed .......................... (4,761,563) (56,836,007)
---------- ------------
Net decrease ............................. (3,366,803) $(40,209,743)
========== ============
- --------------------------------------------------------------------------------
5. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $1,092,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
<PAGE> 14
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Arthur Zeikel, Trustee
Alan J. Albert, Senior Vice President
Christophe Velay, Vice President
Donald C. Burke, Vice President and Treasurer
Robert Harris, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer of Merrill Lynch Consults International Portfolio
has recently retired. His colleagues at Merrill Lynch Asset Management, L.P.
join the Fund's Board of Trustees in wishing Mr. Richard well in his retirement.
- --------------------------------------------------------------------------------
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
<PAGE> 15
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 Consults
International Portfolio
Box 9011
Princeton, NJ
08543-9011 #16566--4/99
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