<PAGE>
Rule 497(b)
Registration No. 33-49354
PROSPECTUS
FEBRUARY 28, 1996
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Consults International Portfolio, a Massachusetts business
trust (the 'Fund'), is a diversified, open-end management investment company
seeking the highest total investment return consistent with prudent risk through
investment in a diversified international portfolio of equity securities,
other than United States equity securities. Total investment return is the
aggregate of income and capital value changes. Distribution of shares of the
Fund is limited to current clients of the Merrill Lynch Consults(Registered)
Service and of the Merrill Lynch Strategic Portfolio Advisor(Service Mark)
Service. The Fund is designed for Merrill Lynch Consults(Registered) Service and
Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service clients who seek
to internationally diversify a portion of their investment portfolio. For more
information on the Fund's investment objective and policies, please see
'Investment Objective and Policies' on page 5.
The Fund offers shares (the 'shares') which may be purchased at a price
equal to the next determined net asset value per share. Shares of the Fund are
not subject to any sales charge, but are subject to an ongoing account
maintenance fee at an annual rate of 0.25% of average daily net assets and an
ongoing distribution fee at an annual rate of 0.75% of average daily net assets.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), which has entered into a dealer agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated ('Merrill Lynch'). Shareholders may redeem their
shares at any time at the next determined net asset value. The minimum initial
purchase is $5,000, and the minimum subsequent purchase is $1,000. Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Such fee is presently waived for clients of the
Merrill Lynch Consults(Registered) Service and of the Merrill Lynch Strategic
Portfolio Advisor(Service Mark) Service. Redemptions directly through the
Fund's transfer agent are not subject to processing fees. See 'Purchase of
Shares' and 'Redemption of Shares.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 28, 1996 (the 'Statement of Additional
Information'), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A.--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
The following table illustrates expenses and fees that you would incur as a
shareholder of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases............................................................... None
Sales Load Imposed on Dividend Reinvestments.................................................. None
Redemption Fees............................................................................... None
Exchange Fees................................................................................. Not Applicable
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) FOR THE YEAR ENDED
OCTOBER 31, 1995:
Investment Adviser Fees....................................................................... 0.75%
Administrative Fees(a)........................................................................ 0.25%
12b-1 Fees(b)
Account Maintenance Fees................................................................... 0.25%
Distribution Fees.......................................................................... 0.75%
OTHER EXPENSES:
Custodian Fees................................................................................ 0.10%
Shareholder Servicing Costs(c)................................................................ 0.03%
Other(d)...................................................................................... 0.22%
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Total Other Expenses.......................................................................... 0.35%
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TOTAL FUND OPERATING EXPENSES................................................................... 2.35%
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--------------
</TABLE>
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(a) See 'Management of the Fund--Administrator'--page 14.
(b) See 'Purchase of Shares--Distribution Plan'--page 15.
(c) See 'Management of the Fund--Transfer Agency Services'--page 14.
(d) Each client of the Merrill Lynch Consults(Registered) Service and of the
Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service is charged
an annual fee of up to 3% (charged on a quarterly basis) of the value of
such client's portfolio. However, no such fee is imposed on the portion of
the client's assets maintained in the Fund. An investment made directly in
the Fund will not be subject to the 3% charge at any time while the assets
remain in the Fund.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
----------------------------------------
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, whether or not the investor redeems his investment at the
end of the period, assuming (1) an operating expense ratio of 2.35%
and (2) a 5% annual return throughout the periods: $ 24 $73 $ 125 $269
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN,
AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE. Shareholders who own their shares for an
extended period of time may pay more in account maintenance and distribution
fees than the economic equivalent of the maximum front-end sales charge
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Such fee is
presently waived for clients of the Merrill Lynch Consults(Registered) Service
and of the Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service.
Redemptions directly through the Transfer Agent are not subject to the
processing fee. See 'Purchase of Shares' and 'Redemption of Shares.'
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the audits of the financial statements of the Fund by Ernst &
Young LLP, independent auditors. Financial statements for the year ended October
31, 1995 and the independent auditors' report thereon, are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or writing the Fund at the
telephone number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPT. 14,
FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
-------------------------------- OCT. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994++ 1993++ 1992++
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 12.83 $ 11.74 $ 9.60 $ 10.00
-------- -------- -------- --------------
Investment loss--net.................................. (.05) (.12) (.08) (.02)
Realized and unrealized gain (loss) on
investments--net................................... (.18) 1.26 2.22 (.38)
-------- -------- -------- --------------
Total from investment operations........................ (.23) 1.14 2.14 (.40)
-------- -------- -------- --------------
Less distributions from realized gain on
investments--net...................................... (.32) (.05) -- --
-------- -------- -------- --------------
Net asset value, end of period.......................... $ 12.28 $ 12.83 $ 11.74 $ 9.60
-------- -------- -------- --------------
-------- -------- -------- --------------
TOTAL INVESTMENT RETURN:
Based on net asset value per share...................... (1.68%) 9.74% 22.29% (4.00%)#
-------- -------- -------- --------------
-------- -------- -------- --------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement and excluding account
maintenance and distribution fees..................... 1.35% 1.27% 1.76% 2.50%*
-------- -------- -------- --------------
-------- -------- -------- --------------
Expenses, net of reimbursement.......................... 2.35% 2.27% 2.76% 3.50%*
-------- -------- -------- --------------
-------- -------- -------- --------------
Expenses................................................ 2.35% 2.27% 2.76% 4.45%*
-------- -------- -------- --------------
-------- -------- -------- --------------
Investment loss--net.................................... (.41%) (.56%) (.86%) (2.77%)*
-------- -------- -------- --------------
-------- -------- -------- --------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $197,077 $272,487 $175,756 $ 16,636
-------- -------- -------- --------------
-------- -------- -------- --------------
Portfolio turnover...................................... 17.31% 24.64% 32.54% 0.00%
-------- -------- -------- --------------
-------- -------- -------- --------------
</TABLE>
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* Annualized.
+ Commencement of Operations.
++ Based on average number of shares outstanding during the period.
# Aggregate total investment return.
See Notes to Financial Statements.
3
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS
Distribution of shares of the Fund is limited to clients of the Merrill
Lynch Consults(Registered) Service and of the Merrill Lynch Strategic Portfolio
Advisor(Service Mark) Service, customized full service approaches to investment
management. Pursuant to the Merrill Lynch Consults(Registered) Service Merrill
Lynch offers to assist clients in selecting and retaining, from a roster of
managers, one or more professional portfolio managers generally emphasizing
investment in United States securities. Merrill Lynch Strategic Portfolio
Advisor(Service Mark) Service is a service designed by Merrill Lynch to provide
business and individual clients with a comprehensive package of consulting,
investment and account services. Each client of Merrill Lynch
Consults(Registered) Service and Merrill Lynch Strategic Portfolio
Advisor(Service Mark) Service is charged an annual fee based upon the value of
such client's portfolio. The portion of a client's assets that is maintained in
the Fund is not subject to such a fee; however, investors in the Fund incur
various charges related to the Fund as described in this Prospectus. The Fund is
intended to complement the Merrill Lynch Consults(Registered) Service and the
Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service, by permitting
clients of the services to invest, by investing in shares of the Fund, in a
diversified international portfolio of equity securities, other than U.S.
equity securities. The Fund's investment objective is based on the
investment philosophy that an internationally diversified portfolio may offer
the possibility of a higher expected return than a portfolio comprised of
securities from one securities market. Historically, the securities markets of
many countries generally have moved relatively independently of one another due
to different economic, financial, political and social factors. When markets
which are moving in different directions are combined into a single portfolio,
there is an offsetting effect which may reduce total portfolio volatility (i.e.,
risk) without reducing the total portfolio's expected rate of return over time.
However, there can be no assurance that, over any time period, non-United States
markets will provide higher investment returns, considering relative currency
fluctuations, than investment in United States markets or that an
internationally diversified portfolio will provide greater returns than a
non-diversified portfolio which invests in only certain securities markets.
Investments on an international basis involve certain risks not typically
involved in domestic investments, including fluctuations in foreign exchange
rates, future political and economic developments, and the possible imposition
of exchange controls or other foreign or U.S. governmental laws or restrictions
applicable to such investments. Securities prices in different countries are
subject to different economic, financial, political and social factors. Since
the Fund will invest heavily in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
will affect the value of securities in the portfolio and the unrealized
appreciation or depreciation of investments so far as United States investors
are concerned. Currencies of certain foreign countries may be volatile and
therefore may affect the value of securities denominated in such currencies.
Changes in foreign currency exchange rates relative to the United States dollar
will affect the United States dollar value of the Fund's assets denominated in
that currency and the Fund's return on such assets. The rate of exchange between
the dollar and other currencies is determined by forces of supply and demand in
the foreign exchange markets. These forces are, in turn, affected by the
international balance of payments, the level of interest and inflation rates and
other economic and financial conditions, government intervention, speculation
and other factors. Moreover, individual foreign economies may differ favorably
or unfavorably from the United States economy in such respects as growth of
gross domestic product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position. Also, it is anticipated that
most of the securities held by the Fund will not be registered with the
Securities and Exchange Commission nor will the issuers thereof be subject to
the reporting requirements of such agency.
4
<PAGE>
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investments in those countries.
There may be less publicly available information about a foreign company than
about a United States company, and foreign companies and companies in smaller,
emerging capital markets in particular, may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of United States companies. As a result, traditional investment measurements,
such as price/earnings ratios, as used in the United States, may not be
applicable to certain smaller, emerging foreign capital markets. In addition,
certain foreign investments may be subject to foreign withholding taxes. These
risks often are heightened for investments in smaller, emerging capital markets.
See 'Additional Information--Taxes.'
Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions. Delays
in settlement could result in periods when assets of the Fund are temporarily
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems or the risk of
intermediary counter party failures could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems either could result in losses to the Fund due to subsequent
declines in value of the portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible liability to a
purchaser. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the United States. There is
generally less governmental supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the United States. For example,
there may be no comparable provisions under certain foreign laws to insider
trading and similar investor protection securities laws that apply with respect
to securities transactions consummated in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial costs, are higher.
Transactions effected on behalf of the Fund by Merrill Lynch (Suisse) Investment
Management S.A. (the 'Investment Adviser') may be subject to Swiss transactional
taxes. Certain foreign investments may be subject to foreign withholding taxes.
Shareholders of the Fund do not have an exchange privilege with any other
investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek the highest total
investment return consistent with prudent risk through investment in a
diversified international portfolio of equity securities, other than United
States equity securities. Total investment return is the aggregate of
income and capital value changes. The investment objective of the Fund described
in this paragraph is a fundamental policy which may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities. There can be no assurance that the Fund will achieve its investment
objective.
In pursuing the Fund's investment objective, its management will utilize a
fully-managed investment policy which permits the Fund to take a flexible
approach and vary its policies as to geographic and industry
5
<PAGE>
diversification based upon its evaluation of international economic and market
trends. This evaluation could include such factors as the condition and growth
potential of various economies and securities markets, currency and taxation
considerations, and other pertinent financial, social, national, and political
considerations.
Under normal circumstances, the Fund will invest in issuers domiciled in at
least three countries. It is expected that more than 50% of the Fund's assets
will be invested in equity securities of companies located in Western Europe and
the Far East, although the Fund may also invest in capital markets throughout
the world. For purposes of the Fund's objective, equity securities includes
securities convertible into equity securities and securities the values of which
are indexed to the market values of equity securities or indices of equity
securities. A United States closed-end investment company will be considered to
be a non-United States investment if it, in turn, primarily invests in
non-United States securities. The Fund may invest in foreign securities in the
form of depository receipts, including American Depository Receipts (ADRs) and
European Depository Receipts (EDRs), or other securities convertible into
securities of foreign issuers. The Fund reserves the right, as a temporary
defensive measure and to provide for redemptions, to hold cash or cash
equivalents (in United States dollars or foreign currencies) and short-term
securities, including money market securities. Transactions effected by the Fund
may be subject to Swiss federal transactional taxes of 0.15%. The Investment
Adviser believes that such transactional taxes will not materially affect the
performance of the Fund.
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended (the 'Securities Act'), but can be offered
and sold to 'qualified institutional buyers,' such as the Fund, under Rule 144A
under that Act ('Rule 144A securities'). The Fund's Board of Trustees has
determined to treat as liquid investments any foreign Rule 144A securities that
can be freely traded in a meaningful foreign securities market, if the facts and
circumstances support such determination. The Board has delegated to the
Investment Adviser the daily functionings of determining and monitoring the
liquidity of foreign Rule 144A securities, but retains oversight and is
ultimately responsible for such determinations.
As part of the Merrill Lynch Consults(Registered) Service, Merrill Lynch
may provide information to its clients regarding the possible change in risk
posture of a client's domestic Merrill Lynch Consults(Registered) Service
account due to an investment in the Fund. Risk classes are assigned to each
domestic Merrill Lynch Consults(Registered) Service investment manager based
upon an approximation of its 10 year standard deviation (which is used as a
measure of volatility) as calculated by Merrill Lynch Consults(Registered)
Service according to information provided by the manager. A risk class is
assigned to the Fund based upon an approximation of the 10 year standard
deviation of the Morgan Stanley Europe, Asia, Far East Index ('EAFE Index'), a
market weighted unmanaged index, as a general proxy for non-domestic equity
investments. Any change in risk will be estimated only as it relates to the
client's domestic Merrill Lynch Consults(Registered) Service account and the
Fund shares held for that account, and not for assets held in other domestic
Merrill Lynch Consults(Registered) Service accounts or outside of the Merrill
Lynch Consults(Registered) Service. The Fund, which commenced operations in
1992, does not allocate its assets proportionately to the weighting of the EAFE
Index and may invest in countries which are not included in the EAFE Index. As a
consequence, the Fund's performance may not correlate completely to the EAFE
Index. Projections of risk posture based on a measurement of past performance of
an investment manager or of an index may not accurately predict future risk
posture or performance.
6
<PAGE>
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against movements in the equity markets, interest rates and exchange rates
between currencies. These strategies include the use of options on portfolio
securities, stock index options, stock index futures, financial futures,
currency futures, options on such futures and forward foreign exchange
transactions and securities the values of which are indexed to the market values
of equity securities, indices of equity securities, currencies or currency
units. The Fund may enter into such transactions only in connection with its
hedging strategies. While the Fund's net asset value will continue to fluctuate
and no assurance can be given that the Fund's hedging transactions will be
effective, the Investment Adviser believes that the ability of the Fund to
engage in these hedging transactions may enhance the Fund's ability to reduce
the volatility of the net asset value of Fund shares. Furthermore, the Fund will
only engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets, interest
rates or currency exchange rates occur. Reference is made to the Statement of
Additional Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in 'Risk Factors in Options, Futures and Currency
Transactions'), the Investment Adviser believes that, because the Fund will
engage in these transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. Because of the nature of options and futures transactions, there
are certain risks involved. These risks are described below under 'Risk Factors
in Options, Futures and Currency Transactions.'
Set forth below is a description of the hedging instruments the Fund may
utilize with respect to investment and currency risks.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
Purchasing Put Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures and related options on such futures. The Fund may
7
<PAGE>
purchase or write put and call options on stock indices to hedge against the
risks of market-wide stock price movements in the securities in which the Fund
invests. Options on indices are similar to options on securities except that on
exercise or assignment, the parties to the contract pay or receive an amount of
cash equal to the difference between the closing value of the index and the
exercise price of the option times a specified multiple. The Fund may invest in
stock index options based on a broad market index, e.g., the Nikkei Index, or on
a narrow index representing an industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ('futures contracts') as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a particular commodity, which may be a security, for a set price on a
future date. Unlike most other futures contracts, a stock index futures contract
does not require actual delivery of a commodity, in this case securities, but
results in cash settlement based upon the difference in value of the stock index
between the time the contract was entered into and the time of its settlement.
The Fund may effect transactions in stock index futures contracts in connection
with equity securities in which it invests. Transactions by the Fund in stock
index futures and financial futures are subject to limitations as described
below under 'Restrictions on the Use of Futures Transactions.'
The Fund is authorized to sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Fund's portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it will be able to purchase futures in order to gain rapid market exposure that
may in part or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of futures
contracts will be terminated by offsetting sales. The Fund does not consider
purchases of futures contracts to be a speculative practice under these
circumstances. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase such securities upon termination of the
long futures position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a put option on a
future, but under unusual circumstances (e.g., if the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund is also authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock indices rather than
selling the underlying futures contract in anticipation of a decrease in the
market value of its securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on United States and foreign exchanges and in options in the over-the-counter
markets ('OTC options'). In general, exchange traded contracts are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) with standardized strike prices and expiration
dates. OTC options transactions are two-party contracts with price and terms
negotiated by the buyer and seller. See 'Restrictions on OTC Options' below for
information as to restrictions on the use of OTC options.
The Fund is authorized to 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
8
<PAGE>
variations in foreign exchange rates. Such transactions could be effected with
respect to hedges on non-United States dollar denominated securities owned by
the Fund, sold by the Fund but not yet delivered, or committed or anticipated to
be purchased by the Fund. As an illustration, the Fund may use such techniques
to hedge the stated value in United States dollars of an investment in a yen
denominated security. In such circumstances, for example, the Fund can purchase
a foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the yen relative to the dollar will tend to
be offset by an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified amount of yen for
dollars at a specified price by a future date (a technique called a 'straddle').
By selling such call option in this illustration, the Fund gives up the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar. The Investment Adviser believes that 'straddles' of the type
which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the rights to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency.
Forward Foreign Exchange Transactions. The Fund has authority to deal in
forward foreign exchange between currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rate between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
(up to one year) and price set at the time of the contract. The Fund's dealings
in forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund will not attempt to hedge all of its foreign portfolio
positions.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ('CFTC'), the futures trading activities
described herein will not result in the Fund being deemed to be a 'commodity
pool,' as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may (i) purchase and sell futures
contracts and options thereon for bona fide hedging purposes, as defined under
CFTC regulations, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) the Fund may enter into
non-hedging transactions, provided that the Fund not enter into such
transactions for yield enhancement or risk management purposes if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums would exceed 5% of the market
value of its liquidating value, after taking into account unrealized profits and
unrealized losses on any such transactions.
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When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with financial
institutions or entities which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceed 15% (10% to the extent
required by certain state laws) of the net assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary United States Government securities dealer recognized by the Federal
Reserve Bank of New York and the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is 'in-the-money'
(i.e., current market value of the underlying security minus the option's strike
price). The repurchase price with primary dealers is typically a formula price
which is generally based on a multiple of the premium received for the option,
plus the amount by which the option is 'in-the-money.' This policy as to OTC
options is not a fundamental policy of the Fund and may be amended by the Board
of Trustees of the Fund without the approval of the Fund's shareholders.
However, the Fund will not change or modify this policy prior to change or
modification by the Securities and Exchange Commission staff of its position.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject of
the hedge. If the price of the options or futures moves more or less than the
price of hedged securities or currencies, the Fund will experience a gain or
loss which will not be completely offset by movements in the price of the
subject of the hedge. The successful use of options and futures also depends on
the Investment Adviser's ability to predict correctly price movements in the
market involved in a particular options or futures transaction. To compensate
for imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts if the
volatility of the price of the hedged securities is historically less than that
of the stock index options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the stock index
option or futures contract approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of over-the-counter
transactions, the Investment Adviser believes the Fund can receive on each
business day a bid or offer. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it
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may not be possible to close an options or futures position. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to hedge effectively its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a futures commission merchant with whom the Fund has an open position in an
option, a futures contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). 'Trading limits' are imposed on the maximum number
of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
Because the Fund will engage in the options and futures transactions
described above solely in connection with its hedging activities, the Investment
Adviser does not believe that such options and futures transactions necessarily
will have any significant effect on the Fund's portfolio turnover.
OTHER INVESTMENT PRACTICES
Portfolio Transactions. In executing portfolio transactions, the
Investment Adviser seeks to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available. The Fund has no obligation to deal with any
broker or group of brokers in the execution of transactions in portfolio
securities. Under the Investment Company Act of 1940, as amended (the
'Investment Company Act'), persons affiliated with the Fund and persons who are
affiliated with such affiliated persons, including Merrill Lynch, are prohibited
from dealing with the Fund as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Securities and Exchange Commission. Such persons may serve as the Fund's broker
in transactions conducted on an exchange and in over-the-counter transactions
conducted on an agency basis and may receive brokerage commissions from the
Fund. In addition, consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Fund may consider sales of shares
of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Brokerage commissions and
other transaction costs on foreign stock exchange transactions are generally
higher than in the United States, although the Fund will endeavor to achieve the
best net results in effecting its portfolio transactions.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Under a repurchase agreement, the bank or primary dealer
or an affiliate thereof agrees, upon entering into the contract, to repurchase
the security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period
although it may be affected by currency fluctuations. If the bank or dealer were
to default on its obligation under a repurchase agreement, the Fund may
experience delay or difficulty in exercising its rights to realize upon the
security and might incur a loss if the value of the security has declined. The
Fund might also incur disposition costs in liquidating the security. The Fund
may not invest more than 15% (or 10% to the extent
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<PAGE>
required by state law) of its net assets in repurchase agreements maturing in
more than seven days, together with all other illiquid securities. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements.
Illiquid Securities. The Fund may not invest in securities which cannot be
readily resold because of legal or contractual restrictions or which are
otherwise not readily marketable, including repurchase agreements and purchase
and sale contracts maturing in more than seven days, if at the time of
acquisition more than 15% of its net assets (or 10% to the extent required by
state law) would be invested in such securities. Securities which the Fund has
the right to put to the issuer or a standby bank or broker and receive the
principal amount of redemption price thereof less transaction costs, on no more
than seven days' notice or when the Fund has the right to convert such
securities into a readily marketable security in which it could otherwise invest
upon not less than seven days' notice, are not subject to this restriction. The
Fund may purchase, without regard to the foregoing limitation, securities which
are not registered under the Securities Act of 1933, as amended (the 'Securities
Act'), but can be offered and sold to 'qualified institutional buyers' as
defined under Rule 144A under the Securities Act ('Rule 144A Securities'),
provided that the Fund's Board of Trustees determines that such securities are
liquid.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. During the period of
this loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent the value of the collateral
falls below the market value of the borrowed securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not:
--Invest in the securities of any one issuer if, immediately after and
as a result of such investment the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the Fund's total assets, taken at
market value, except that such restriction shall not apply to securities
issued or guaranteed by the United States Government or any of its agencies
or instrumentalities.
--Invest in the securities of any single issuer if, immediately after
and as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer.
--Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
Nothing in the foregoing investment restrictions shall be deemed to
prohibit the Fund from purchasing the securities of any issuer pursuant to the
exercise of subscription rights distributed to the Fund by the issuer, except
that no such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or fail
to meet the diversification requirements of the Internal Revenue Code of 1986,
as amended.
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<PAGE>
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Trustees of the Fund consist of six individuals, five of whom are not
'interested persons' of the Fund as defined in the Investment Company Act. The
Trustees are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
The Trustees are:
ARTHUR ZEIKEL*--President of Merrill Lynch Asset Management, L.P., ('MLAM')
and its affiliate, Fund Asset Management, L.P. ('FAM'); President and
Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch; Executive Vice President of Merrill Lynch & Co., Inc.
('ML & Co.'); Director of Merrill Lynch Funds Distributor, Inc.
JAMES H. BODURTHA--Chairman and CEO, China Enterprise Management
Corporation.
HERBERT I. LONDON--John M. Olin Professor of Humanities, Gallatin Division
of New York University.
ROBERT R. MARTIN--Director, WTC Industries, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
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* Interested person, as defined by the Investment Company Act, of the Fund.
INVESTMENT ADVISER
The Fund's investment adviser is Merrill Lynch (Suisse) Investment
Management S.A. The Investment Adviser, located at 18 Rue De Contamines, 1211
Geneva 3, Switzerland, is a subsidiary of Merrill Lynch Bank (Suisse), S.A.
which is, in turn, an indirect subsidiary of ML & Co., a financial services
holding company. Affiliates of the Investment Adviser serve as investment
adviser or investment manager to over 130 registered investment companies with
an aggregate of over $196.4 billion in assets as of January 31, 1996. 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. For the fiscal year ended October 31, 1995, the fee paid by the
Fund to the Investment Adviser was $1,644,757 (based upon average net assets of
approximately $219.3 million and the effective rate was 0.75%). At January 31,
1996, the net assets of the Fund aggregated approximately $207.9 million. At
this asset level, the annual management fee would aggregate approximately $1.6
million at an effective annual rate of 0.75%.
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 separate
sub-advisory agreements with the Investment Adviser (the 'Sub-Advisory
Agreements'), the Sub-Advisers provide investment advisory services with respect
to the management of the Fund's cash position. The Fund does not pay any
incremental fee for this service. For the fiscal year ended October 31, 1995,
the Investment Adviser did not pay any fees to MLAM U.K. and FAM for investment
advisory services provided to the Fund. FAM is located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and MLAM U.K. is located at Ropemaker Place,
25 Ropemaker Street, London, England. FAM is a wholly-owned subsidiary of ML &
Co. ML & Co. and Princeton Services, Inc. are 'controlling
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<PAGE>
persons' of FAM as defined under the Investment Company Act because of their
power to exercise a controlling influence over its management policies. MLAM
U.K. is an indirect subsidiary of ML & Co.
Christine Pinto is primarily responsible for the day-to-day management of
the Fund's portfolio and has served in that capacity since 1996. She has served
as a Portfolio Manager and Deputy Manager of Merrill Lynch Bank (Suisse) S.A.
since 1993. From 1981 to 1983 she was a Senior Equity Marketing Specialist in
the Consumer Markets Group. From 1983 to 1993, she was Senior Investment
Strategist and First Vice President of the Global Research and Economics Group.
The Fund pays certain expenses incurred in its operations, including, among
other things, the investment advisory fees, legal and audit fees, unaffiliated
trustees' fees and expenses, registration fees, custodian and transfer agency
fees, accounting and pricing costs, and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. For the fiscal year ended October 31, 1995, the ratio of total
expenses, excluding account maintenance and distribution fees, to average net
assets was 1.35% for the shares.
ADMINISTRATOR
Princeton Administrators, LP (the 'Administrator'), an indirect subsidiary
of ML & Co., acts as the Fund's administrator under the terms of the
administration agreement between the Administrator and the Fund (the
'Administration Agreement'). The Administrator performs or arranges for the
performance of certain administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including maintaining the books and records of the Fund, preparing
reports and other documents required by United States federal, state and other
applicable laws and regulations to maintain the registration of the Fund and its
shares and providing the Fund with administrative office facilities. For the
services rendered to the Fund and the facilities furnished, the Fund pays the
Administrator a monthly fee equal to 0.25% of the Fund's average daily net
assets. Also, accounting services are provided to the Fund by the Administrator,
and the Fund reimburses the Administrator for its costs in connection with such
services on a semi-annual basis. For the fiscal year ended October 31, 1995, the
total fee paid by the Fund to the Administrator was $548,251.
The principal address of the Administrator is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the 'Transfer Agent'), which
is an indirect subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the 'Transfer Agency Agreement'). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
a fee of $11.00 per shareholder account and is entitled to reimbursement for
out-of-pocket expenses incurred by it under the Transfer Agency Agreement. For
the fiscal year ended October 31, 1995, the total fee paid by the Fund to the
Transfer Agent was $65,263. At January 31, 1996, the Fund had 4,069 shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate $44,759, plus miscellaneous and out-of-pocket expenses.
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<PAGE>
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Investment Adviser
(together, the 'Codes'). The Codes significantly restrict the personal investing
activities of all employees of the Investment Adviser and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Shares of the Fund are offered continuously for sale to clients of the
Merrill Lynch Consults(Registered) Service by Merrill Lynch Funds Distributor,
Inc., an indirect subsidiary of ML & Co. (the 'Distributor') and Merrill Lynch.
The minimum initial purchase is $5,000, and the minimum subsequent purchase is
$1,000. Shares of the Fund are offered to clients of Merrill Lynch Strategic
Portfolio Advisor(Service Mark) Service on the same terms as offered to clients
of Merrill Lynch Consults(Registered) Service. Merrill Lynch Strategic Portfolio
Advisor(Service Mark) Service is a service designed by Merrill Lynch to provide
business and individual clients with a comprehensive package of consulting,
investment and account services.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share. As to purchase orders received by
securities dealers, the applicable offering price will be based on the net asset
value determined as of 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), on the day the orders are
placed with the Distributor, provided the orders are received by the Distributor
prior to 12:00 P.M., New York time, on that day. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase order by the Distributor. If the
purchase orders are not received by the Distributor prior to 12:00 P.M., New
York time, such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares to the
general public at any time in response to conditions in the securities markets
or otherwise and may thereafter resume such offering from time to time. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
sale of shares to such customers. Such fee is presently waived for clients of
the Merrill Lynch Consults(Registered) Service and of the Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service.
DISTRIBUTION PLAN
Pursuant to a distribution plan adopted by the Fund pursuant to Rule 12b-1
under the Investment Company Act (the 'Distribution Plan'), the Fund pays the
Distributor ongoing distribution and account maintenance fees, which are accrued
daily and paid monthly, at the annual rates of 0.75% and 0.25%, respectively, of
the average daily net assets of the Fund. Pursuant to a sub-agreement with the
Distributor, Merrill Lynch also provides account maintenance activities and
distribution services to the Fund. The ongoing account maintenance fee
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<PAGE>
compensates the Distributor and Merrill Lynch for providing account
maintenance activities to the Fund's shareholders. The ongoing distribution
fee compensates the Distributor and Merrill Lynch for providing shareholder
and distribution services and bearing distribution related expenses of the
Fund, including payments to financial consultants for selling shares of the
Fund. For the fiscal year ended October 31, 1995, the Fund paid the
Distributor $2,193,008 pursuant to the Distribution Plan, of which $1,644,757
was paid to Merrill Lynch for providing distribution-related services and
$548,251 was paid to Merrill Lynch for providing account maintenance services
to the Fund. At January 31, 1996, the net assets of the Fund subject to the
Distribution Plan aggregated approximately $207.9 million. At this asset
level, the annual fee payable pursuant to the Distribution Plan would
aggregate approximately $2.1 million.
The payments under the Distribution Plan are based upon a percentage of
average daily net assets regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the continuance
of the Distribution Plan. This information is presented annually as of December
31 of each year on a 'fully allocated accrual' basis and quarterly on a 'direct
expense and revenue/cash' basis. On the fully allocated accrual basis, revenues
consist of the distribution fees and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the distribution fees and the expenses
consist of financial consultant compensation. As of December 31, 1994, the last
date at which such fully allocated accrual data is available, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch since
the Fund commenced operations on September 14, 1992 exceeded revenues for such
period by approximately $340,000 (0.14% of net assets at that date). As of
October 31, 1995, direct cash revenues for the period since commencement of
operations exceeded direct cash expenses by approximately $3,298,822 (1.67% of
net assets at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch and there is no assurance that the
Board of Trustees of the Fund will approve the continuance of the Distribution
Plan from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plan. In their review of the Distribution Plan,
the Trustees will not be asked to take into consideration expenses incurred in
connection with the distribution of shares of other funds for which the
Distributor acts as distributor.
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee but not the account
maintenance fee. As applicable to the Fund, the maximum sales charge rule limits
the aggregate distribution fee payments payable by the Fund to (1) 6 1/4% of the
eligible gross sales of shares of the Fund (defined to exclude shares issued
pursuant to dividend reinvestments) plus (2) interest on the unpaid balance at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from payment of the distribution fee). To the extent
payments would exceed the maximum permitted by the NASD, the Fund will not make
further payments of the distribution fee; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances, the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
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<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption. There will be no charge for redemption if the
redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive upon redemption all dividends reinvested
through the date of redemption. The value of shares at the time of redemption
may be more or less than the shareholder's cost, depending on the market value
of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. The notice in
either event requires the signatures of all persons in whose names the shares
are registered, signed exactly as their names appear on the Transfer Agent's
register or on the certificate, as the case may be. The signatures on the notice
must be guaranteed by an 'eligible guarantor institution' as such is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. 'Eligible guarantor institution(s)' include
certain banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents, such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares, which will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and such request is received by the Fund
from such dealer not later than 30 minutes after the close of business on the
New York Stock Exchange (generally, 4:00 P.M., New York time), on the same day.
Dealers have the responsibility to submit such repurchase requests to the Fund
not later than 30 minutes after the close of business on the New York Stock
Exchange in order to obtain that day's closing price.
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<PAGE>
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund. Securities firms which do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares to such customers. Such fee is
presently waived for clients of the Merrill Lynch Consults(Registered) Service
and of Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service.
Redemptions directly through the Fund's Transfer Agent are not subject to a
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. A shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of such
services, copies of the various plans described below and instructions as to how
to participate in the various services or plans, or to change options with
respect thereto, can be obtained from the Fund, the Distributor or Merrill
Lynch.
Investment Account. Distribution of shares of the Fund (other than
reinvestment of dividends and capital gains distributions of the Fund) is
limited to current clients of the Merrill Lynch Consults(Registered) Service and
of Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service. If a client
terminates the Merrill Lynch Consults(Registered) Service or the Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service, the client's shares may be
retained in the client's Merrill Lynch brokerage account, subject to the consent
of Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name will be
opened, automatically, without charge at the Transfer Agent. Shareholders
interested in transferring their shares from Merrill Lynch to another brokerage
firm may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that the shareholder be issued certificates
for his shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are automatically reinvested in full
and fractional shares of the Fund at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by telephone (1-800-MER-FUND) or by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch, or the Transfer Agent, if the shareholder's account is maintained
with the Transfer Agent, elect to have subsequent dividends, or both dividends
and capital gains distributions, paid in cash rather than reinvested, in which
event payment will be mailed on or about the payment date.
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Merrill Lynch Asset Information and Measurement(Registered) Service.
Clients of the Merrill Lynch Consults(Registered) Service and the Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service are currently provided,
without incremental charge, the Merrill Lynch Asset Information and
Measurement(Registered) Service ('AIM(Registered)'). AIM(Registered) currently
provides, through quarterly reports, the ability to monitor and evaluate
performance of a Merrill Lynch Consults(Registered) Service or Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service account, including any shares
of the Fund held in the account, and analyzes the risk taken to achieve the
return. Shares of the Fund must be held in the account for a full quarterly
period to be subject to such evaluation.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses.
The Fund may also quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
the effect of such total return on a hypothetical $1,000 investment in the Fund
at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, the Morgan
Stanley Europe, Australia, Far East Index or performance data published by
Lipper Analytical Services, Inc., Money Magazine, U.S. News & World Report,
Business Week, Morningstar Publications, Inc., CDA Investment Technology, Inc.,
Ibbotson Associates, Forbes Magazine and Fortune Magazine or other industry
publications. From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance rating in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
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<PAGE>
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized long- or short-term capital gains, if any, will be distributed
to the Fund's shareholders at least annually. Dividends will be reduced by
account maintenance, distribution and transfer agency fees payable by
shareholders of the Fund. See 'Additional Information--Determination of Net
Asset Value.' Dividends and distributions may be reinvested automatically in
shares of the Fund at net asset value. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed below whether they are
reinvested in shares of the Fund or received in cash. See 'Shareholder
Services--Automatic Reinvestment of Dividends and Capital Gains Distributions'
for information as to how to elect either dividend reinvestment or cash
payments.
Certain gains or losses attributable to foreign currency gains or losses
from certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Fund would not be able to make any
ordinary dividend distributions, and (b) distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's tax basis in
his Fund shares for Federal income tax purposes. See 'Additional
Information--Taxes.'
TAXES
The Fund has qualified and intends to continue to qualify for the special
tax treatment afforded regulated investment companies ('RICs') under the
Internal Revenue Code of 1986, as amended (the 'Code'). If it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to shareholders. The Fund intends to distribute substantially all of
such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains are
taxable to a shareholder as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
Dividends and distributions are taxable to shareholders even though they
are reinvested in additional shares of the Fund. Not later than 60 days after
the close of its taxable year, the Fund will provide its shareholders with a
written notice designating the amounts of any dividends or capital gains
distributions. If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record in such a
month, then such dividend or distribution will be treated for tax purposes as
being paid by the RIC and received by its shareholders on December 31 of the
year in which the dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Non-resident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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Investment income received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Certain
shareholders may be able to claim United States foreign tax credits with respect
to such taxes, subject to certain provisions and limitations contained in the
Code. If more than 50% in value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate share
of such taxes in their United States income tax returns as gross income, treat
such proportionate share as taxes paid by them, and deduct such proportionate
share in computing their taxable incomes or, alternatively, subject to certain
limitations, use them as foreign tax credits against their United States income
taxes. No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. Foreign tax credits cannot be
claimed by certain retirement accounts. A shareholder that is a non-resident
alien individual or a foreign corporation may be subject to United States
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
United States tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The Fund may invest in equity securities of investment companies (or
similar investment entities) organized under foreign law or of ownership
interests in special accounts, trusts or partnerships. If the Fund purchases
shares of an investment company (or similar investment entity) organized under
foreign law, the Fund will be treated as owning shares in a passive foreign
investment company ('PFIC') for United States Federal income tax purposes. The
Fund may be subject to United States Federal income tax, and an additional tax
in the nature of interest, on a portion of distributions from such company and
on gain from the disposition of such shares (collectively referred to as 'excess
distributions'), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from forward contracts,
from futures contracts that are not 'regulated futures contracts,' and from
unlisted options will be treated as ordinary income or loss under Code Section
988. In certain circumstances, the Fund may elect capital gain or loss treatment
for such transactions. In general, however, Code Section 988 gains or losses
will increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing each shareholder's basis in his Fund
shares.
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The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers as to whether any
portion of the dividends they receive from the Fund is exempt from state income
tax and as to any other specific questions as to Federal, foreign, state or
local taxes. Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily 15 minutes after the
close of business on the New York Stock Exchange (generally 4:00 P.M., New York
time) on each day during which the New York Stock Exchange is open for trading.
The net asset value is computed by dividing the market value of the securities
held by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
fees payable to the Investment Adviser and the Administrator and the account
maintenance fee and distribution fee payable to the Distributor, are accrued
daily.
Portfolio securities, which are traded on the stock exchanges, are valued
at the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. Securities which are traded both in the OTC market and on a stock
exchange will be valued according to the broadest and most representative
market. Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the over-
the-counter market, the last asked price. Options purchased are valued at the
last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Securities
and assets for which market quotations are not readily available are valued at
fair market value as determined in good faith by or under the direction of the
Board of Trustees of the Fund.
ORGANIZATION OF THE FUND
The Fund is an unincorporated business trust organized on June 26, 1992
under the laws of Massachusetts. It is a diversified, open-end management
investment company comprised of separate classes. The Trustees are authorized to
issue an unlimited number of full and fractional shares of beneficial interest
of $.10 par value of different classes. Shareholder approval is not required for
the authorization of additional classes of shares of the Fund. The Fund has
received an order from the Securities and Exchange Commission permitting the
issuance and sale of multiple classes of shares.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Trustees and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Trustees; (ii) approval of an investment
22
<PAGE>
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Voting rights for Trustees
are not cumulative. Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Each share is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities. Shareholders may cause a meeting of shareholders to be held for the
purpose of voting on the removal of Trustees at the request of 10% of the
outstanding shares of the Fund. A Trustee may be removed at a special meeting of
shareholders by a vote of a majority of the votes entitled to be cast for the
election of Trustees.
The Declaration of Trust of the Fund contemplates that the Fund may be
terminated, solely upon a vote of the Board of Trustees of the Fund, and without
a vote of shareholders, within five years after it commences operations if the
Fund does not have net assets in excess of $100 million. Shareholders should be
aware that their investment in the Fund may be liquidated in such event. Among
other consequences, this could result in a taxable event for shareholders.
The Declaration of Trust establishing the Fund dated June 26, 1992 and
amended July 31, 1992, a copy of which, together with all amendments thereto
(the 'Declaration'), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name 'Merrill Lynch Consults
International Portfolio' refers to the Trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of the Fund shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of said Fund but the 'Trust Property'
only shall be liable.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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<PAGE>
ADVISER
Merrill Lynch (Suisse) Investment Management S.A.
18 Rue De Contamines
1211 Geneva 3, Switzerland
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
ADMINISTRATOR
Princeton Administrators, LP
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
202 Carnegie Center
Princeton, New Jersey 08543-5321
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER, THE ADMINISTRATOR OR
THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table...................................... 2
Financial Highlights........................... 3
Risks and Special Considerations............... 4
Investment Objective and Policies.............. 5
Management of the Fund......................... 13
Board of Trustees............................ 13
Investment Adviser........................... 13
Administrator................................ 14
Transfer Agency Services..................... 14
Code of Ethics............................... 15
Purchase of Shares............................. 15
Distribution Plan............................ 15
Redemption of Shares........................... 17
Shareholder Services........................... 18
Performance Data............................... 19
Additional Information......................... 20
Dividends and Distributions.................. 20
Taxes........................................ 20
Determination of Net Asset Value............. 22
Organization of the Fund..................... 22
Shareholder Reports.......................... 23
Shareholder Inquiries........................ 23
</TABLE>
Code # 16458-0296
Prospectus
[LOGO]
- ------------------------------------------------------
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
INVESTMENT ADVISER:
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A.
February 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Consults International Portfolio, a Massachusetts business
trust (the 'Fund'), is a diversified, open-end management investment company,
seeking the highest total investment return consistent with prudent risk through
investment in a diversified international portfolio of equity securities,
other than United States securities. Total investment return is the
aggregate of income and capital value changes. Distribution of shares of the
Fund is limited to current clients of the Merrill Lynch Consults(Registered)
Service and of the Merrill Lynch Strategic Portfolio Advisor(Service Mark)
Service. The Fund is designed for Merrill Lynch Consults(Registered) Service and
Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service clients who seek
to internationally diversify a portion of their investment portfolio.
The Fund offers shares which may be purchased at a price equal to the next
determined net asset value per share. Shares of the Fund are not subject to any
sales charge, but are subject to an ongoing account maintenance fee at an annual
rate of 0.25% of average daily net assets and an ongoing distribution fee at an
annual rate of 0.75% of average daily net assets.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
February 28, 1996 (the 'Prospectus'), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A.--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is February 28, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek the highest total
investment return consistent with prudent risk through investment in a
diversified international portfolio of equity securities, other than United
States securities. Reference is made to 'Investment Objective and Policies'
in the Prospectus for a discussion of the investment objective and policies
of the Fund.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility
may be reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch (Suisse) Investment Management S.A. (the
'Investment Adviser') will effect portfolio transactions without regard to
holding period, if, in its judgment, such transactions are advisable in light of
a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. As a result of
the investment policies described in the Prospectus, including changes in asset
allocation under certain market conditions, the Fund's portfolio turnover may be
higher than that of other investment companies. Accordingly, while the Fund
anticipates that its annual turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. The
Fund is subject to the Federal income tax requirement that less than 30% of the
Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.
The Fund may invest in the securities of foreign issuers in the form of
depository receipts, including American Depository Receipts (ADRs) and European
Depository Receipts (EDRs), Global Depository Receipts (GDRs), or other
securities convertible into securities of foreign issuers. Depository receipts
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by an American
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are designed
for use in the United States securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradeable both in the
U.S. and Europe and are designed for use throughout the world.
2
<PAGE>
HEDGING TECHNIQUES
Reference is made to the discussion under the caption 'Investment Objective
and Policies--Hedging Techniques' in the Prospectus for information with respect
to various portfolio strategies involving options and futures. The Fund may seek
to hedge its portfolio against movements in the equity markets and exchange
rates between currencies through the use of options and futures transactions and
forward foreign exchange transactions. The Fund has authority to write (i.e.,
sell) covered call options on its portfolio securities, purchase put options on
securities and engage in transactions in stock index options, stock index
futures and financial futures, and related options on such futures. The Fund may
also deal in forward foreign exchange transactions and foreign currency options
and futures, including related options on such futures, and securities the
values of which are indexed to market values of equity securities, indices of
equity securities, currencies or currency units. The Fund is authorized to enter
into such options and futures transactions either on exchanges or in the
over-the-counter ('OTC') markets. Each of such portfolio strategies is described
in the Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), the Investment Adviser
believes that, because the Fund will engage in these transactions only for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of option and futures transactions. While the Fund's use of hedging strategies
is intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. The following is further information
relating to portfolio strategies involving options and futures the Fund may
utilize.
Hedging Investment Risks. The Fund may write (i.e., sell) covered call
options on the equity securities in which it may invest and may enter into
closing purchase transactions with respect to certain of such options. Covered
call options serve as a partial hedge against the decline in price of the
underlying security. A covered call option is an option where the Fund, in
return for a premium, gives another party a right to buy specified securities
owned by the Fund at a specified future date and price set at the time of the
contract. By writing covered call options, the Fund gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. The writer of a covered call option has
no control over when he may be required to sell his securities since he may be
assigned an exercise notice at any time prior to the termination of his
obligation as a writer. If an option expires unexercised, the writer realizes a
gain in the amount of the premium. Such a gain, of course, may be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security.
The Fund may also purchase put options to hedge against a decline in the
market value of its equity holdings. By buying a put the Fund has a right to
sell the underlying security at the exercise price, thus limiting the Fund's
risk of loss through a decline in the market value of the security until the put
option expires. The amount of any appreciation in the value of the underlying
security will be offset partially by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option
may be sold in a closing sale transaction, and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction cost. A closing sale transaction
3
<PAGE>
cancels out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option it
has purchased.
The Fund also may engage in transactions in stock index options and
futures. A futures contract is an agreement between two parties to buy and sell
a security or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual delivery
of the underlying instrument or cash settlement but are settled through
liquidation, i.e., by entering into an offsetting transaction. Futures contracts
have been designed by boards of trade which have been designated 'contracts
markets' by the Commodity Futures Trading Commission ('CFTC').
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as 'initial margin' and
represents a 'good faith' deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called 'variation margin,' are required to be made on a daily basis as
the price of the futures contracts fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
'mark to the market.' At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Securities and Exchange Commission
exempting it from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, as amended (the 'Investment Company Act'), in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a 'senior security' other than a borrowing from a bank.
The staff of the Securities and Exchange Commission has in the past indicated
that a futures contract may be a 'senior security' under the Investment Company
Act.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the currency which is
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the currency, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the currency
which is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such options or
futures. However, there can be no assurance that a liquid
4
<PAGE>
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an option
or futures position. The Fund will acquire only over-the-counter options for
which management believes the Fund can receive on each business day a bid or
offer. In the case of a futures position or an option on a futures position
written by the Fund, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the currency underlying futures contracts it holds. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying currency (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). 'Trading limits' are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
Hedging Foreign Currency Risks. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate then prevailing for purchasing or selling currency in the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than 1/10 of 1% due to the
costs of converting from one currency to another. However, the Fund has
authority to deal in forward foreign exchange between currencies of various
countries and the dollar as a hedge against possible variations in the foreign
exchange rate between these currencies. This is accomplished through contractual
agreements to purchase or to sell a specified currency at a specified future
date and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid equity or debt
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
If the value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will not attempt to hedge all of its portfolio positions and
will enter into such transactions
5
<PAGE>
only to the extent, if any, deemed appropriate by the Investment Adviser of the
Fund. The Fund will not enter into a forward contract with a term of more than
one year.
As discussed in the Prospectus, the Fund may also purchase or sell listed
or OTC foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
The United States government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments by United
States investors such as the Fund. If such restrictions should be reinstituted,
it might become necessary for the Fund to invest all or substantially all of its
assets in United States securities. In such event, the Fund would review its
investment objective and investment policies to determine whether changes are
appropriate.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end
6
<PAGE>
investment companies where no underwriter or dealer's commission or profit,
other than customary broker's commission, is involved and only if
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company is owned by the Fund, (ii) 5% of the Fund's total
assets, taken at market value, would be invested in any one such company,
or (iii) 10% of the Fund's total assets, taken at market value, would be
invested in such securities. Investments by the Fund in wholly-owned
investment entities created under the laws of certain countries will not be
deemed an investment in other investment companies.
3. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
4. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
5. Make short sales of securities or maintain a short position in
securities. This restriction does not apply to hedging transactions or
positions.
6. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts or
other securities shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities as set forth in (7)
below.
7. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans may be made only in
accordance with the guidelines set forth below.
8. Issue senior securities, borrow money or pledge its assets in
excess of 20% of its total assets taken at market value (including the
amount borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only 'leveraged' investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions. For the purpose of this restriction, collateral
arrangements with respect to the writing of options, and, if applicable,
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.
9. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which are otherwise not readily
marketable, including repurchase agreements and purchase and sale contracts
maturing in more than seven days, if at the time of acquisition more than
15% of its net assets
7
<PAGE>
would be invested in such securities. Securities which the Fund has the
right to put to the issuer or a stand-by bank or broker and receive the
principal amount of redemption price thereof less transaction costs, on no
more than seven days' notice or when the Fund has the right to convert such
securities into a readily marketable security in which it could otherwise
invest upon not less than seven days' notice, are not subject to this
restriction. The Fund may purchase, without regard to the foregoing
limitation, securities which are not registered under the Securities Act of
1933, as amended (the 'Securities Act'), but can be offered and sold to
'qualified institutional buyers,' as defined under Rule 144A under the
Securities Act ('Rule 144A securities'), provided that the Fund's Board of
Trustees determines that such securities are liquid.
10. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter in selling portfolio securities.
11. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, except that the Fund may invest in
securities issued by companies that engage in oil, gas or other mineral
exploration or development activities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Trustees, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York or American Stock Exchange. For purposes of this restriction,
warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except that
the Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest or such currencies and the
United States dollar and purchase and sell stock index and currency options
and warrants, stock index futures, financial futures and currency futures
contracts and related options on such futures.
(iii) Invest in securities of corporate issuers having a record,
together with predecessors, of less than three years of continuous
operation, if more than 5% of its total assets, taken at market value,
would be invested in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus or in this Statement of Additional Information, as amended from
time to time.
(v) Purchase puts, calls, straddles, spreads and any combination
thereof if its net position in such securities would exceed 5% of the
Fund's total assets.
Notwithstanding the provisions of investment restriction (9) above, the
securities laws of certain states in which the Fund's shares are registered for
sale currently limit investment in the types of securities described in such
restriction (excluding 144A securities) to 10% of the Fund's net assets. The
Fund will comply with this 10% restriction for so long as it remains applicable.
8
<PAGE>
Subject to investment restriction (7) above, the Fund may from time to time
lend securities from its portfolio to brokers, dealers and financial
institutions such as banks and trust companies and receive collateral in cash or
securities issued or guaranteed by the United States government which will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. Such cash will be invested in short-term securities,
which will increase the current income of the Fund. Such loans will not be for
more than 30 days and will be terminable at any time. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans. With respect to
the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
The Board of Trustees has established the policy that the Fund will not
knowingly purchase or retain the securities of any issuer if those individual
officers and Trustees of the Fund, the Investment Adviser, or the Distributor
for the Fund each owning beneficially more than one-half of 1% of the securities
of such issuer own in the aggregate more than 5% of the securities of such
issuer.
Because of the affiliation of the Investment Adviser with the Fund, the
Fund is prohibited from engaging in certain transactions involving the firm or
its affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See 'Portfolio
Transactions and Brokerage.' Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Investment Adviser
or its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act, in which such firm
or any of its affiliates participate as an underwriter or dealer.
The investment restrictions set forth in the Prospectus contain an
exception that permits the Fund to purchase securities pursuant to the exercise
of subscription rights, subject to the condition that such purchase will not
result in the Fund ceasing to be a diversified investment company. Far Eastern
and European corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such rights would
result in the Fund's interest in the issuing company being diluted. The market
for such rights is not well developed and, accordingly, the Fund may not always
realize full value on the sale of rights. Therefore, the exception applies in
cases where the limits set forth in the investment restrictions in the
Prospectus would otherwise be exceeded by exercising rights or have already been
exceeded as a result of fluctuations in the market value of the Fund's portfolio
securities with the result that the Fund would otherwise be forced either to
sell securities at a time when it might not otherwise have done so or to forego
exercising the rights.
9
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Trustee is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (63)--President and Trustee (1)(2)--President of Merrill
Lynch Asset Management, L.P., doing business as Merrill Lynch Asset Management
('MLAM') (which term as used herein includes its corporate predecessors), since
1977; President of Fund Asset Management, L.P. ('FAM') (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ('Princeton Services') since 1993; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill
Lynch') since 1990 and Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. ('ML & Co.') since 1990;
Director of Merrill Lynch Funds Distributor, Inc. ('MLFD' or the 'Distributor').
JAMES H. BODURTHA (51)--Trustee (2)--124 Long Pond Road, Plymouth,
Massachusetts 02360. Chairman and Chief Executive Officer, China Enterprise
Management Corporation since 1993; Chairman, Berkshire Corporation since 1980;
Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (56)--Trustee (2)--New York University--Gallatin
Division, 113-115 University Place, New York, New York 10003. John M. Olin
Professor of Humanities, New York University since 1993 and Professor thereof
since 1973; Dean, Gallatin Division of New York University from 1978 to 1993 and
Director from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses.
ROBERT R. MARTIN (68)--Trustee (2)--513 Grand Hill, St. Paul, Minnesota
55102. Director, WTC Industries, Inc., since 1994; Chairman and Chief Executive
Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President,
Dain Bosworth from 1974 to 1989; Director, Carnegie Capital Management from 1977
to 1985 and Chairman thereof in 1979; Director, Securities Industry Association
from 1981 to 1982 and Public Securities Association from 1979 to 1980; Trustee,
Northland College since 1992.
JOSEPH L. MAY (66)--Trustee (2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983; Vice
President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Company from 1972 to 1989.
ANDRE F. PEROLD (43)--Trustee (2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School and Associate Professor
from 1983 to 1989; Trustee, The Common Fund, since 1989; Director, Quantec
Limited since 1991 and Teknekron Software Systems since 1994.
TERRY K. GLENN (55)--Executive Vice President (1)(2)--Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD since 1986 and Director thereof
since 1991.
DONALD C. BURKE (35)--Vice President (1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1981 to
1990.
10
<PAGE>
CHRISTINE L. PINTO (36)--Vice President (1)--Portfolio Manager and Deputy
Manager of Merrill Lynch Bank (Suisse) S.A. since 1993; Senior Investment
Strategist and First Vice President of the Global Research and Economics Group
from 1983 to 1993.
GERALD M. RICHARD (46)--Treasurer (1)(2)--Senior Vice President and
Treasurer of FAM and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
since 1981; employee of MLFD since 1978.
MARK B. GOLDFUS (49)--Secretary (1)(2)--Vice President of MLAM since 1985.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which MLAM or FAM acts as Investment Adviser.
As of January 31, 1996, the officers and Trustees of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
The Fund pays each Trustee not affiliated with the Investment Adviser a fee
of $2,500 per year plus $250 per meeting attended, together with such Trustee's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the
non-affiliated Trustees, $500 per year plus $125 for each meeting attended. For
the fiscal year ended October 31, 1995, fees and expenses paid to the
unaffiliated Trustees aggregated $24,418.
COMPENSATION OF TRUSTEES
The following table sets forth, for the fiscal year ended October 31, 1995,
compensation paid by the Fund to the non-interested Trustees, and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies advised by FAM and its affiliate, MLAM ('FAM/MLAM Advised
Funds') to the non-interested Trustees.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
TRUSTEE FROM FUND FUND EXPENSES TRUSTEES(1)
- --------------------------------------------------------- ------------ -------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha 1,625 None 157,500*
Herbert I. London 4,500 None 157,500
Robert R. Martin 4,500 None 157,500
Joseph L. May 4,500 None 157,500
Andre F. Perold 4,500 None 157,500
</TABLE>
- ------------------
<TABLE>
<S> <C>
(1) In addition to the Fund, the Trustees serve on the boards of other FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (46 funds and portfolios); Mr. London (46 funds and portfolios); Mr. Martin (46 funds and portfolios);
Mr. May (46 funds and portfolios); and Mr. Perold (46 funds and portfolios).
* $157,500 represents the amount Mr. Bodurtha would have received if he had been a Trustee for the entire
calendar year ended December 31, 1995. Mr. Bodurtha was elected to the Fund's Board of Trustees effective June
23, 1995.
</TABLE>
11
<PAGE>
INVESTMENT ADVISER
Reference is made to 'Management of the Fund--Investment Adviser' in the
Prospectus for certain information concerning the management and advisory
arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Investment Adviser or an affiliate for the Fund or
other funds for which it may act as investment adviser or for its advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliates
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the Investment
Adviser (the 'Investment Advisory Agreement'). As discussed in the Prospectus,
the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.75% of average daily net assets of the
Fund. For the fiscal years ended October 31, 1993, 1994 and 1995, the total
management fees paid by the Fund to the Investment Adviser were $384,718,
$1,770,022 and $1,644,757, respectively. At January 31, 1996, the net assets of
the Fund aggregated approximately $207.9 million. At this asset level, the
annual management fee would aggregate approximately $1.6 million at an effective
annual rate of 0.75%.
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 separate
sub-advisory agreements with the Investment Adviser (each, a 'Sub-Advisory
Agreement' and collectively, the 'Sub-Advisory Agreements'), the Sub-Advisers
provide investment advisory services to the Fund with respect to the management
of the Fund's cash position. For the fiscal year ended October 31, 1995, the
Investment Adviser did not pay any fees to MLAM U.K. and FAM for investment
advisory services provided to the Fund. FAM is located at 800 Scudders Mill
Road, Plainsboro, N.J. 08536. MLAM U.K. is located at Ropemaker Place, 25
Ropemaker Street, London, England. FAM is a wholly-owned subsidiary of ML & Co.,
a financial services holding company. ML & Co. and Princeton Services, Inc. are
'controlling persons' of FAM as defined under the Investment Company Act because
of their power to exercise a controlling influence over its management policies.
MLAM U.K. is an indirect subsidiary of ML & Co.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, account maintenance and distribution fees, brokerage fees and
commissions and extraordinary charges such as litigation costs) from exceeding
2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the
next $70 million of average daily net assets and 1.5% of the remaining average
daily net assets. The Investment Adviser's obligation to reimburse the Fund is
limited to the amount of the investment advisory fee. To date, such
reimbursement has not been required. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
12
<PAGE>
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Trustees of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in the operation
of the Fund, including, among other things, taxes, expenses for legal and
auditing services, costs of printing proxies, share certificates, shareholder
reports and prospectuses and statements of additional information (except to the
extent paid by the Fund's underwriters), charges of the custodian, any
sub-custodian and transfer agent, fees of Princeton Administrators, L.P. (the
'Administrator'), expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal, state or
foreign laws, fees and expenses of unaffiliated Trustees, accounting and pricing
costs (including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Fund. As required by the Fund's
distribution agreement, its underwriters will pay certain of the promotional
expenses of the Fund incurred in connection with the offering of shares of the
Fund. See 'Purchase of Shares.'
Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement and each Sub-Advisory Agreement will remain in
effect for two years from the date of its adoption. Thereafter each such
agreement will remain in effect from year to year if approved annually (a) by
the Board of Trustees of the Fund or by a majority of the outstanding shares of
the Fund and (b) by a majority of the Trustees who are not parties to such
contract or interested persons (as defined in the Investment Company Act) of any
such party. The Investment Advisory Agreement is not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of a majority of the outstanding voting securities
of the Fund. Each Sub-Advisory Agreement also provides that it will terminate in
the event of its assignment or upon the termination of the Investment Advisory
Agreement, and further provides that such agreement may be terminated on 60
days' written notice by the Investment Adviser, the respective Sub-Adviser or by
vote of the majority of the outstanding voting securities of the Fund.
PURCHASE OF SHARES
Reference is made to 'Purchase of Shares' in the Prospectus for certain
information as to the purchase of shares of the Fund (the 'shares').
The Fund has entered into a distribution agreement with Merrill Lynch Funds
Distributor, Inc. (the 'Distributor') in connection with the continuous offering
of shares of the Fund (the 'Distribution Agreement'). The Distribution Agreement
obligates the Distributor to pay certain expenses in connection with the
offering of the shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreement is subject to the same renewal
requirements and termination provisions as the Investment Advisory Agreement
described under 'Management of the Fund--Advisory and Management Arrangements.'
13
<PAGE>
DISTRIBUTION PLAN
Reference is made to 'Purchase of Shares--Distribution Plan' in the
Prospectus for certain information with respect to the distribution plan of the
Fund (the 'Distribution Plan').
The payment of the distribution fee and account maintenance fee is subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, the Distribution Plan provides that the Distributor shall provide and
the Trustees shall review quarterly reports of the disbursement of the account
maintenance fees and distribution fees paid to the Distributor. In their
consideration of the Distribution Plan, the Trustees must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and its shareholders. The Distribution Plan further provides
that, so long as the Distribution Plan remains in effect, the selection and
nomination of Trustees who are not 'interested persons' of the Fund, as defined
in the Investment Company Act (the 'Independent Trustees'), shall be committed
to the discretion of the Independent Trustees then in office. In approving the
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is a reasonable likelihood that the Distribution Plan will
benefit the Fund and its shareholders. The Distribution Plan can be terminated
at any time, without penalty, by the vote of a majority of the Independent
Trustees or by the vote of the holders of a majority of the outstanding voting
securities of the Fund. The Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without shareholder approval, and
all material amendments are required to be approved by the vote of Trustees,
including a majority of the Independent Trustees who have no direct or indirect
financial interest in the Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
the Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of the Distribution Plan or such report,
the first two years in an easily accessible place. For the fiscal year ended
October 31, 1995, the Fund paid the Distributor $2,193,008 pursuant to the
Distribution Plan, of which $548,251 was paid to Merrill Lynch for providing
account maintenance services and $1,644,757 was paid to Merrill Lynch for
providing distribution-related services to the Fund.
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee but not the account
maintenance fee. As applicable to the Fund, the maximum sales charge rule limits
the aggregate distribution fee payments payable by the Fund to (1) 6 1/4% of the
eligible gross sales of shares of the Fund (defined to exclude shares issued
pursuant to dividend reinvestments) plus (2) interest on the unpaid balance at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from payment of the distribution fee). To the extent
payments would exceed the maximum permitted by the NASD, the Fund will not make
further payments of the distribution fee; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances, the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1995 with respect to the shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period September 14, 1992 (commencement
of operations of the Fund) to October 31, 1995.
14
<PAGE>
DATA CALCULATED AS OF OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule
As Adopted....................... $313,042 $19,565 $ 3,097 $22,662 $3,816 $18,847 $1,478
Under Distributor's
Voluntary
Waiver........................... $313,042 $19,565 $ 1,565 $21,130 $3,816 $17,315 $1,478
</TABLE>
- ---------------
(1) Purchase price of all eligible shares sold since September 14, 1992
(commencement of operations of the Fund) other than shares acquired through
dividend reinvestment.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in the Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments is amortizing the unpaid balance. No assurance can be given
that payments of the distribution fee will reach either the voluntary
maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or such Exchange is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Securities and Exchange Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
Portfolio Turnover. The Fund has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the Investment Adviser, investment
considerations warrant such action. As a result, portfolio turnover rate may
vary greatly from year to year or during periods within a year. Also, the use of
covered call options at times when the underlying securities are appreciating in
value may result in higher portfolio turnover than would otherwise be the case.
The Fund pays brokerage commissions in connection with writing call options and
effecting closing purchase transactions, as well as in connection with purchases
and sales of portfolio securities. A high rate of portfolio turnover would
result in correspondingly greater brokerage commission expenses. Portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases and sales of
Government securities and of all other securities, including options, whose
maturity or expiration dates at the time of acquisition were one year or less)
by the monthly average value of the securities in the Fund during
15
<PAGE>
the fiscal year. For the fiscal years ended October 31, 1995, 1994 and 1993, the
rates of portfolio turnover were 17.31%, 24.64% and 32.54%, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of the brokerage. In executing such
transactions, the Investment Adviser seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. The Fund has no obligation to deal with
any broker or group of brokers in execution of transactions in portfolio
securities. Subject to obtaining the best price and execution, brokers who
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. Information so received will be in addition
to and not in lieu of the services required to be performed by the Investment
Adviser under the Investment Advisory Agreement, and the expenses of the
Investment Adviser will not necessarily be reduced as a result of the receipt of
such supplemental information. It is possible that certain of the supplementary
investment research so received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other accounts or investment companies. In addition, consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
policies established by the Board of Trustees of the Fund, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of depository
receipts, including ADRs or EDRs, or securities convertible into foreign equity
securities. Depository receipts may be listed on stock exchanges or traded in
over-the-counter markets in the United States or Europe or other countries, as
the case may be. ADRs, like other securities traded in the United States, will
be subject to negotiated commission rates.
The Fund may invest in securities traded in the over-the-counter markets
and intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Securities and Exchange Commission. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
16
<PAGE>
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. See 'Investment Objective
and Policies--Investment Restrictions.'
The Board of Trustees will consider the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. The Board
will reconsider this matter from time to time.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of any
national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection with
such transactions. For the fiscal year ended October 31, 1995, the Fund paid
total brokerage of $471,006, of which $72,382, or approximately 15.5%, was paid
to Merrill Lynch for effecting transactions involving 15.1% of the aggregate
amount of transactions in which the Fund paid brokerage commissions. For the
fiscal year ended October 31, 1994, the Fund paid total brokerage of $687,783,
of which $41,123, or approximately 6.0%, was paid to Merrill Lynch for effecting
transactions involving 5.5% of the aggregate amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended October 31, 1993, the
Fund paid total brokerage of $790,205, of which $154,632 or approximately 20.0%
was paid to Merrill Lynch for effecting transactions involving 18.9% of the
aggregate amount of transactions in which the Fund paid brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time) on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund
also will determine its net asset value on any day in which there is sufficient
trading in its portfolio securities that the net asset value might be affected
materially, but only if on any such day the Fund is required to sell or redeem
shares. The net asset value is computed by dividing the value of the securities
held by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
fees payable to the Investment Adviser and to the Administrator and the account
maintenance fee and distribution fee payable to the Distributor, are accrued
daily.
Portfolio securities, including depository receipts, which are traded on
the stock exchanges, are valued at the last sale price (regular way) on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Securities traded in the
over-the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. Securities which are
traded both in the OTC market and on a stock exchange will be valued according
to the broadest and most representative market. Options written are valued at
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price. Options
purchased
17
<PAGE>
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last bid price.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Trustees of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
Generally, trading in foreign securities, United States government
securities and money market instruments is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. Occasionally,
events affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New York
Stock Exchange which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by or under the direction of the Board of Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Distribution of shares of the Fund (other than reinvestment of dividends
and capital gains distributions of the Fund) is limited to current clients of
the Merrill Lynch Consults(Registered) Service and of the Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service. Shareholders will receive
statements of dividends and capital gains distributions.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from Merrill Lynch Financial Data Services, Inc. (the
'Transfer Agent').
If a client terminates the Merrill Lynch Consults(Registered) Service or
the Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service, the
client's shares may be retained in the client's Merrill Lynch brokerage account,
subject to the consent of Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened, automatically, without charge, at the
Transfer Agent. Shareholders interested in transferring their shares from
Merrill Lynch may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the shareholder
in this manner, the shareholder must request that he be issued certificates for
his shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, as of the close of
business on the ex-dividend
18
<PAGE>
date of the dividend or distribution. Shareholders may elect in writing or by
telephone (1-800-MER-FUND) to receive either their dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed on or
about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing that
they no longer wish to have their dividends and/or distributions reinvested in
shares of the Fund or vice versa and, commencing ten days after receipt by the
Transfer Agent of such notice, those instructions will be effected.
MERRILL LYNCH ASSET INFORMATION AND MEASUREMENT(REGISTERED) SERVICE
Clients of the Merrill Lynch Consults(Registered) Service and of the
Merrill Lynch Strategic Portfolio Advisor(Service Mark) Service are currently
provided, without incremental charge, the Merrill Lynch Asset Information and
Measurement(Registered) Service ('AIM(Registered)'). AIM(Registered) currently
provides, through quarterly reports, the ability to monitor and evaluate
performance of their Merrill Lynch Consults(Registered) Service or Merrill Lynch
Strategic Portfolio Advisor(Service Mark) Service account, including shares of
the Fund held in the account, and analyzes the risk taken to achieve the return.
Shares of the Fund must be held in the account for a full quarterly period to be
subject to such evaluation.
TAXES
The Fund has qualified and intends to remain qualified for the special tax
treatment afforded regulated investment companies ('RICs') under the Internal
Revenue Code of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but
not its shareholders) will not be subject to Federal income tax on the part of
its net ordinary income and net realized capital gains which it distributes to
shareholders. The Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains are
taxable to a shareholder as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. A capital gains distribution with
respect to shares held for six months or less, however, will cause any loss on a
subsequent sale or exchange of such shares to be treated as long-term capital
loss to the extent of such long-term capital gains distribution.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
dividends or capital gains distributions. It is not expected that any portion of
the dividends paid by the Fund will be eligible for the corporate dividends
received deduction. If the Fund pays a dividend that was declared in the
previous October, November or December to shareholders of record in such a
month, then such dividend or distribution will be treated for tax purposes as
being paid by the RIC and received by its shareholders on December 31 of the
year in which the dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens generally will be subject to a 30% United States withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Non-resident shareholders are urged to
consult their own tax advisers concerning the applicability of the United States
withholding tax.
Investment income received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
19
<PAGE>
Certain shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% in value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible to file an election with the Internal Revenue Service pursuant
to which shareholders of the Fund will be required to include their
proportionate share of such taxes in their United States income tax returns as
gross income, treat such proportionate share as taxes paid by them and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain restrictions, use them as foreign tax credits against their
United States income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. Foreign tax
credits cannot be claimed by certain retirement accounts. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to United
States withholding tax on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or deduction
against such United States tax for the foreign taxes treated as having been paid
by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
When you sell shares in the Fund, you may realize a gain or loss. A loss
realized on a sale of shares of the Fund will be disallowed if other Fund shares
are acquired (whether through the automatic reinvestment of dividends or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
The Fund may invest in equity securities of investment companies (or
similar investment entities) organized under foreign law or of ownership
interests in special accounts, trusts or partnerships. If the Fund purchases
shares of an investment company (or similar investment entity) organized under
foreign law, the Fund will be treated as owning shares in a passive foreign
investment company ('PFIC') for United States Federal income tax purposes. The
Fund may be subject to United States Federal income tax, and an additional tax
in the nature of interest, on a portion of distributions from such company and
on gain from the disposition of such shares (collectively referred to as 'excess
distributions'), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, an amount equal to at
least 98% of its ordinary income, determined on a calendar year basis, and 98%
of its capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. While the Fund intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be liable
for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
20
<PAGE>
TAX TREATMENT OF FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Unless the Fund is eligible to make and makes a special
election, such options, futures or forward foreign exchange contracts that are
'Section 1256 contracts' will be 'marked to market' for Federal income tax
purposes at the end of each taxable year, i.e., each option, futures or forward
foreign exchange contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from transactions in
options, futures or forward foreign exchange contracts will be 60% long-term and
40% short-term capital gain or loss.
Code Section 1092, which applies to certain 'straddles,' may affect the
taxation of the Fund's transactions in options, futures or forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in forward foreign exchange contracts. Similarly, Code Section 1091, which deals
with 'wash sales,' may cause the Fund to postpone recognition of certain losses
for tax purposes.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an option, futures or forward foreign exchange contract.
SPECIAL RULES FOR OPTIONS, FUTURES AND FOREIGN CURRENCY TRANSACTIONS
In general, gains from 'foreign currencies' and from forward foreign
exchange contracts relating to investments in stock, securities or foreign
currencies will be qualifying income for purposes of determining whether the
Fund qualifies as a RIC. It is currently unclear, however, who will be treated
as the issuer of a foreign currency instrument or how forward foreign exchange
contracts will be valued for purposes of the RIC diversification requirements
applicable to the Fund. The Fund may request a private letter ruling from the
Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from forward contracts
will be treated as ordinary income or loss under Code Section 988. In certain
circumstances, the Fund may elect capital gain or loss treatment for such
transactions. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income. Additionally, if
Code Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in his Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
21
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth is total return information for shares of the Fund for the period
indicated.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
One Year Ended October 31, 1995....................................... (1.68)% $ 983.20
Inception (September 14, 1992) to October 31, 1995.................... 7.85% $ 1,266.60
<CAPTION>
FOR YEAR ENDED OCTOBER 31, ANNUAL TOTAL RETURN
- ----------------------------------------------------------------------
<S> <C> <C>
1995.................................................................. (1.68)% $ 983.20
1994.................................................................. 9.74% $ 1,097.40
1993.................................................................. 22.29% $ 1,222.90
Inception (September 14, 1992) to October 31, 1992.................... (4.00)% $ 960.00
AGGREGATE TOTAL RETURN
Inception (September 14, 1992) to October 31, 1995.................... 26.66% $ 1,266.60
</TABLE>
22
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund is an unincorporated business trust organized on June 26, 1992
under the laws of Massachusetts. It is a diversified, open-end management
investment company comprised of separate classes. The Trustees are authorized to
issue an unlimited number of full and fractional shares of beneficial interest
of $.10 par value of different classes. Shareholder approval is not required for
the authorization of additional classes of shares of the Trust. The Trust has
received an order from the Commission permitting the issuance and sale of two
classes of shares.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Trustees and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Trustees; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Trustees are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive or conversion
rights. Redemption rights are discussed elsewhere herein and in the Prospectus.
Each share is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Share certificates
are issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case. Shareholders may cause a meeting
of shareholders to be held for the purpose of voting on the removal of Trustees
at the request of 10% of the outstanding shares of the Fund. A Trustee may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Trustees.
The Declaration of Trust of the Fund contemplates that the Fund may be
terminated, solely upon a vote of the Board of Trustees of the Fund, and without
a vote of shareholders, within five years after it commences operations if the
Fund does not have net assets in excess of $100 million. Shareholders should be
aware that their investment in the Fund may be liquidated in such event. Among
other consequences, this could result in a taxable event for shareholders.
The Declaration of Trust establishing the Fund, dated June 26, 1992 and
amended on July 31, 1992, a copy of which, together with all amendments thereto
(the 'Declaration'), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name 'Merrill Lynch Consults
International Portfolio' refers to the Trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of the Fund shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of said Fund but the 'Trust Property'
only shall be liable.
23
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for shares of the Fund, based on the value of the Fund's
net assets as of October 31, 1995, is calculated as follows:
<TABLE>
<S> <C>
Net Assets.................................................................... $197,077,135
------------
------------
Number of Shares Outstanding.................................................. 16,050,472
------------
------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................................ $ 12.28
Sales Charge.................................................................. none
------------
Offering Price................................................................ $ 12.28
------------
------------
</TABLE>
INDEPENDENT AUDITORS
Ernst & Young LLP, 202 Carnegie Center, Princeton, New Jersey 08543-5321,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, acts as the Custodian of the Fund's assets. Under its contract with the
Fund, the Custodian is authorized to establish separate accounts in foreign
currencies and to cause foreign securities owned by the Fund to be held in its
offices outside the United States and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32232-5289, acts as the Fund's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
'Management of the Fund--Transfer Agency Services' in the Prospectus.
ADMINISTRATOR
Princeton Administrators, LP, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, acts as the Fund's administrator. See 'Management of the
Fund--Administrator' in the Prospectus.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
24
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on February 1, 1996.
------------------------
25
<PAGE>
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, 1995, 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 periods 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. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, 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, 1995, 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 periods, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Princeton, New Jersey
December 1, 1995
26
Merrill Lynch Consults International Portfolio, October 31, 1995
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
LATIN Shares Value Percent of
AMERICA Industries Held Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C>
Argentina Banking 124,027 Banco de Galicia y Buenos Aires
S.A. (ADR)* $ 2,750,621 $ 2,356,513 1.2%
Oil & Related 127,000 YPF S.A. (ADR)* 2,978,847 2,174,875 1.1
Total Investments in Argentine
Stocks 5,729,468 4,531,388 2.3
Chile Glass Packaging 50,000 Cristalerias de Chile S.A. (ADR)* 1,024,719 1,212,500 0.6
Total Investments in Chilean Stocks 1,024,719 1,212,500 0.6
Mexico Beverage 29,200 Panamerican Beverages Inc. 844,752 799,350 0.4
Building & 175,000 Empresas ICA Sociedad Controladora,
Construction S.A. de C.V. (ADR)* 2,646,374 1,662,500 0.8
Telecommunications 55,000 Telefonos de Mexico, S.A. de C.V.
(ADR)* 2,896,991 1,512,500 0.8
Total Investments in Mexican
Stocks 6,388,117 3,974,350 2.0
Total Investments in Latin
America 13,142,304 9,718,238 4.9
NORTH
AMERICA
Canada Metals 132,700 Noranda, Inc. 2,176,720 2,658,451 1.4
Total Investments in North America 2,176,720 2,658,451 1.4
PACIFIC
BASIN
Australia Metals 277,200 Broken Hill Proprietary, Ltd. 2,767,090 3,752,648 1.9
Publishing 560,000 News Corporation, Ltd. (Ordinary) 2,410,336 2,822,662 1.4
Total Investments in Australian
Stocks 5,177,426 6,575,310 3.3
Hong Kong Multi-Industry 500,000 Hutchison Whampoa, Ltd. 2,336,145 2,755,142 1.4
560,000 Swire Pacific Ltd. (Class A) 4,361,458 4,201,268 2.1
Total Investments in Hong Kong
Stocks 6,697,603 6,956,410 3.5
Indonesia Telecommuni- 52,000 P.T. Indonesian Satellite (ADR)* 1,942,400 1,722,500 0.9
cations
Total Investments in Indonesian
Stocks 1,942,400 1,722,500 0.9
Japan Apparel 270,000 Tokyo Style Co., Ltd. 4,641,901 4,102,941 2.1
500,000 Toray Industries, Inc. 3,864,992 3,132,353 1.6
------------ ------------ ------
8,506,893 7,235,294 3.7
Automobile & 502,000 Yamaha Motors Co., Ltd. 4,309,498 3,937,255 2.0
Equipment
Building & 40,000 Daiwa House Industry Co., Ltd. 583,662 600,000 0.3
Construction 245,000 Okumura Corp. 2,020,587 2,147,353 1.1
------------ ------------ ------
</TABLE>
27
<TABLE>
<S> <S> <C> <S> <C> <C>
2,604,249 2,747,353 1.4
Chemicals 410,000 Mitsui Petrochemical Industries,
Ltd. 2,463,356 3,259,902 1.7
310,000 Sekisui Chemical Co., Ltd. 2,983,828 4,042,157 2.0
------------ ------------ ------
5,447,184 7,302,059 3.7
Electric 111,100 Kansai Electric Power Co., Inc. 3,037,494 2,614,118 1.3
Utilities
Electrical 435,000 Hitachi, Ltd. 3,600,724 4,477,941 2.3
Equipment
Electronic 500,000 Hitachi Cable, Ltd. 3,871,452 3,593,137 1.8
Components
Electronics 257,000 Matsushita Electric Industrial
Co., Ltd. 3,522,654 3,653,431 1.9
Financial 213,000 Nomura Securities Co., Ltd. 4,746,603 3,905,000 2.0
Services
Food Processing 200,000 Nippon Meat Packers, Inc. 2,679,349 2,725,490 1.4
Household 310,000 Kao Corp. 3,553,422 3,768,627 1.9
Products
Insurance 572,000 Nippon Fire & Marine Insurance
Co., Ltd. 4,139,949 3,084,314 1.6
International 440,000 Sumitomo Corp. 3,919,593 4,011,765 2.0
Trade
Machinery 520,000 Mitsubishi Heavy Industries, Ltd. 3,349,314 4,022,353 2.0
Merchandising 71,000 Ito-Yokado Co., Ltd. 3,371,372 3,891,078 2.0
Metals 1,400,000 ++Sumitomo Metal Industries, Ltd. 4,064,328 3,801,961 1.9
Office Equipment 226,000 Canon, Inc. 3,202,973 3,877,451 2.0
Pharmaceuticals 145,000 Yamanouchi Pharmaceutical Co.,
Ltd. 2,961,571 3,241,176 1.6
Printing 200,000 Dai Nippon Printing, Ltd. 3,371,268 3,196,078 1.6
Transportation 430,000 Kamigumi Co., Ltd. 4,915,841 3,899,510 2.0
Total Investments in Japanese
Stocks 79,175,731 78,985,391 40.1
Malaysia Conglomerates 1,200,000 Sime Darby BHD 2,737,495 2,998,819 1.5
Total Investments in Malaysian
Stocks 2,737,495 2,998,819 1.5
Singapore Shipbuilding 550,000 Jurong Shipyard, Ltd. 4,403,226 3,658,364 1.9
Total Investments in Singaporean
Stocks 4,403,226 3,658,364 1.9
Thailand Agriculture 333,000 Charoen Pokphand Feedmill Co., Ltd. 1,608,648 1,694,118 0.9
Banking 120,000 Bangkok Bank Co., Ltd. 1,380,245 1,240,064 0.6
Real Estate 197,300 MDX Co., Ltd. - Foreign 1,295,549 358,763 0.2
Total Investments in Thai Stocks 4,284,442 3,292,945 1.7
Total Investments in the Pacific
Basin 104,418,323 104,189,739 52.9
</TABLE>
28
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
WESTERN Shares Value Percent of
EUROPE Industries Held Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C>
France Advertising 52,000 Havas S.A. $ 4,140,514 $ 3,608,967 1.8%
Oil & Related 54,000 Societe Nationale Elf Aquitaine
(Ordinary) 4,038,687 3,681,441 1.9
Total Investments in French Stocks 8,179,201 7,290,408 3.7
Germany Utility 103,000 Veba AG 3,114,393 4,237,165 2.1
Total Investments in German Stocks 3,114,393 4,237,165 2.1
Italy Building 230,000 Italcementi S.p.A. 1,496,298 1,423,679 0.7
Materials
Financial 240,000 ++Istituto Mobiliare Italiano S.p.A.
Services (Ordinary) 1,503,756 1,313,643 0.7
Telecommunications 1,580,000 Societa Finanziara Telefonica
S.p.A. (STET) 4,198,505 4,482,939 2.3
Total Investments in Italian Stocks 7,198,559 7,220,261 3.7
Netherlands Food 22,500 Unilever N.V. 2,439,371 2,942,484 1.5
Publishing 20,000 Verenigde Nederlandse Uitgevbedri
Verigd Bezit N V. (Ordinary) 2,359,724 2,808,532 1.4
Total Investments in Netherlands
Stocks 4,799,095 5,751,016 2.9
Norway Pharmaceuticals 60,000 Hafslund Nycomed 'B' Fria 1,070,293 1,679,537 0.9
Shipbuilding 105,000 Kvaerner A.S. 'B' Shares 5,085,432 4,189,189 2.1
Total Investments in Norwegian
Stocks 6,155,725 5,868,726 3.0
Spain Oil & Related 100,000 Repsol S.A. 3,109,463 2,988,930 1.5
Utility 41,000 Empresa Nacional de Electricidad S.A. 1,716,082 2,040,754 1.0
Total Investments in Spanish Stocks 4,825,545 5,029,684 2.5
Switzerland Machinery 2,100 Sulzer Gebruder AG (Registered) 1,544,641 1,343,303 0.7
Pharmaceuticals 7,200 Ciba-Geigy AG (Registered) 3,769,874 6,244,574 3.2
Total Investments in Swiss Stocks 5,314,515 7,587,877 3.9
United Beverage 410,000 Grand Metropolitan PLC (Ordinary) 2,663,875 2,840,058 1.4
Kingdom
Conglomerates 750,000 BTR PLC (Ordinary) 4,302,732 3,985,380 2.0
Machinery 280,000 Siebe PLC (Ordinary) 2,276,580 3,332,221 1.7
Natural Gas Utilities 390,000 British Gas PLC (Ordinary) 1,848,274 1,486,452 0.8
Publishing 175,000 Reed International PLC (Ordinary) 1,773,302 2,662,455 1.3
Retail 400,000 Boots Company PLC 3,588,607 3,539,397 1.8
Telecommunications 550,000 British Telecommunications PLC 3,513,618 3,274,891 1.7
Total Investments in United
Kingdom Stocks 19,966,988 21,120,854 10.7
Total Investments in Western
Europe 59,554,021 64,105,991 32.5
</TABLE>
29
<TABLE>
<CAPTION>
Face
Amount Short-Term Securities
<S> <S> <C> <S> <C> <C>
United Commercial $ 5,104,000 Ford Motor Credit Co., 5.87%
States Paper** due 11/01/1995 5,104,000 5,104,000 2.6
Total Investments in Short-Term
Securities 5,104,000 5,104,000 2.6
Total Investments $184,395,368 185,776,419 94.3
============
Unrealized Appreciation on Forward Foreign Exchange Contracts*** 12,452,034 6.3
Liabilities in Excess of Other Assets (1,151,318) (0.6)
------------ ------
Net Assets $197,077,135 100.0%
============ ======
<FN>
++Non-income producing security.
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the
Portfolio.
***Forward foreign exchange contracts as of October 31, 1995 were as
follows:
Foreign Unrealized
Currency Expiration Appreciation
Sold Date (Note 1c)
YEN 6,920,000,000 January 1996 $12,452,034
Total (US$ Commitment--$81,125,440) $12,452,034
===========
See Notes to Financial Statements.
</TABLE>
30
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$184,395,368)
(Note 1a) $185,776,419
Unrealized appreciation on forward foreign exchange
contracts (Note 1c) 12,452,034
Cash 833,930
Foreign cash (Note 1b) 823,871
Receivables:
Securities sold $ 1,362,737
Beneficial interest sold 605,236
Dividends 533,674 2,501,647
------------
Deferred organization expenses (Note 1f) 49,367
Prepaid registration fees and other assets (Note 1f) 19,964
------------
Total assets 202,457,232
------------
Liabilities: Payables:
Securities purchased 4,161,757
Beneficial interest redeemed 707,308
Distributor (Note 2) 174,003
Investment adviser (Note 2) 130,502
Administration fee (Note 2) 43,501
Commissions 28,833 5,245,904
------------
Accrued expenses and other liabilities 134,193
------------
Total liabilities 5,380,097
------------
Net Assets: Net assets $197,077,135
============
Net Assets Common shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 1,605,047
Paid-in capital in excess of par 182,434,994
Accumulated investment loss--net (897,752)
Undistributed realized capital gains on investments and
foreign currency transactions--net 84,978
Unrealized appreciation on investments and foreign currency
transactions--net 13,849,868
------------
Net assets--Equivalent to $12.28 per share based on 16,050,472
shares of beneficial interest outstanding $197,077,135
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $579,725 foreign withholding tax) $ 3,928,148
Income Interest and discount earned 322,487
(Notes 1d & 1e): ------------
Total income 4,250,635
------------
</TABLE>
31
<TABLE>
<S> <C> <C> <C>
Expenses: Distribution fees (Note 2) $ 1,644,757
Investment advisory fees (Note 2) 1,644,757
Account maintenance fees (Note 2) 548,251
Administration fees (Note 2) 548,251
Custodian fees 223,064
Professional fees 68,863
Transfer agent fees (Note 2) 65,263
Registration fees (Note 1f) 47,553
Printing and shareholder reports 41,256
Amortization of organization expenses (Note 1f) 26,607
Trustees' fees 24,418
Pricing fees 9,746
Other 255,601
------------
Total expenses 5,148,387
------------
Investment loss--net (897,752)
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 7,293,932
(Loss) on Foreign currency transactions--net (7,191,339) 102,593
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (20,825,013)
(Notes 1b, 1c, Foreign currency transactions--net 12,649,522 (8,175,491)
1e & 3): ------------ ------------
Net realized and unrealized loss on investments and
foreign currency transactions (8,072,898)
------------
Net Decrease in Net Assets Resulting from Operations $ (8,970,650)
============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment loss--net $ (897,752) $ (1,326,690)
Realized gain on investments and foreign currency
transactions--net 102,593 7,972,536
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net (8,175,491) 13,095,611
------------ ------------
Net increase (decrease) in net assets resulting from
operations (8,970,650) 19,741,457
------------ ------------
Distributions to Realized gain on investments--net (6,621,521) (834,656)
Shareholders ------------ ------------
(Note 1g): Net decrease in net assets resulting from distributions
to shareholders (6,621,521) (834,656)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from
Interest beneficial interest transactions (59,817,607) 77,824,155
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (75,409,778) 96,730,956
Beginning of year 272,486,913 175,755,957
------------ ------------
End of year $197,077,135 $272,486,913
============ ============
See Notes to Financial Statements.
</TABLE>
32
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have Period
been derived from information provided in the Sept 14,
financial statements. 1992++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1993++++ 1992++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.83 $ 11.74 $ 9.60 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment loss--net (.05) (.12) (.08) (.02)
Realized and unrealized gain (loss) on
investments--net (.18) 1.26 2.22 (.38)
-------- -------- -------- --------
Total from investment operations (.23) 1.14 2.14 (.40)
-------- -------- -------- --------
Less distributions from realized gain on
investments--net (.32) (.05) -- --
-------- -------- -------- --------
Net asset value, end of period $ 12.28 $ 12.83 $ 11.74 $ 9.60
======== ======== ======== ========
Total Investment Based on net asset value per share (1.68%) 9.74% 22.29% (4.00%)+++
Return: ======== ======== ======== ========
Ratios to Expenses, excluding account maintenance and
Average distribution fees and net of reimbursement 1.35% 1.27% 1.76% 2.50%*
Net Assets: ======== ======== ======== ========
Expenses, net of reimbursement 2.35% 2.27% 2.76% 3.50%*
======== ======== ======== ========
Expenses 2.35% 2.27% 2.76% 4.45%*
======== ======== ======== ========
Investment loss--net (.41%) (.56%) (.86%) (2.77%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $197,077 $272,487 $175,756 $ 16,636
Data: ======== ======== ======== ========
Portfolio turnover 17.31% 24.64% 32.54% --%
======== ======== ======== ========
<FN>
*Annualized.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
33
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 investment company. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the
over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price.
Short-term securities are valued at amortized cost, which
approximates market value. Other 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 their 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.
* 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.
* 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.
* Financial futures contracts--The Fund may purchase or sell
interest rate 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.
* 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.
(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, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Costs related to the organization of the Fund are charged to expense
over a five-year period. Prepaid registration fees are charged to
expense as the related shares are issued.
34
NOTES TO FINANCIAL STATEMENTS (concluded)
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend date.
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.
Certain states in which shares of the Fund qualify for sale impose
limitations on the expenses of the Fund. The most restrictive annual
expense limitation requires that the Investment Adviser reimburse
the Fund to the extent that expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily
net assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
The Investment Adviser's obligation to reimburse the Fund is limited
to the amount of the investment advisory fee. No fee payment will be
made to the Investment Adviser during any fiscal year which will
cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
The Fund has an Administrative Agreement with Princeton
Administrators, Inc. (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.
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"), which is an indirect subsidiary of ML & Co.,
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.
35
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, 1995, MLFD earned $2,193,008 under the Plan,
all of which was paid to MLPF&S pursuant to the agreement.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., acts as the Fund's transfer agent.
In addition, MLPF&S received $60,793 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
October 31, 1995.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, the Investment Adviser (including their affiliated
companies), MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1995 were $37,171,265 and
$107,675,309, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995,
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 7,293,932 $ 1,381,051
Foreign currency transactions (39,222) 16,783
Forward foreign exchange contracts (7,152,117) 12,452,034
----------- -----------
Total $ 102,593 $13,849,868
=========== ===========
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $1,369,488, of which $16,216,662
related to appreciated securities and $14,847,174 related to
depreciated securities. The aggregate cost of investments at October
31, 1995 for Federal income tax purposes was $184,406,931.
4. Beneficial Interest Transactions:
Transactions in shares of beneficial interest were as follows:
For the Year Ended Dollar
October 31, 1995 Shares Amount
Shares sold 1,857,251 $ 21,980,972
Shares issued to shareholders in
reinvestments of distributions 501,369 5,855,982
------------ ------------
Total issued 2,358,620 27,836,954
Shares redeemed (7,550,747) (87,654,561)
------------ ------------
Net decrease (5,192,127) $(59,817,607)
============ ============
For the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 10,276,710 $128,040,343
Shares issued to shareholders in
reinvestments of distributions 56,819 680,122
------------ ------------
Total issued 10,333,529 128,720,465
Shares redeemed (4,065,998) (50,896,310)
------------ ------------
Net increase 6,267,531 $ 77,824,155
============ ============
5. Commitments:
At October 31, 1995, the Fund had foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments,
under which it had agreed to purchase and sell various foreign
currencies with approximate values of $3,336,000 and $1,358,000,
respectively.
36
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.............. 2
Hedging Techniques........................... 3
Investment Restrictions...................... 6
Management of the Fund......................... 10
Trustees and Officers........................ 10
Compensation of Trustees..................... 11
Investment Adviser........................... 12
Purchase of Shares............................. 13
Redemption of Shares........................... 15
Portfolio Transactions and Brokerage........... 16
Determination of Net Asset Value............... 17
Shareholder Services........................... 18
Taxes.......................................... 19
Performance Data............................... 22
General Information............................ 23
Description of Shares........................ 23
Computation of Offering Price
Per Share................................. 24
Independent Auditors......................... 24
Custodian.................................... 24
Transfer Agent............................... 24
Administrator................................ 24
Legal Counsel................................ 24
Reports to Shareholders...................... 25
Additional Information....................... 25
Report of Independent Auditors................. 26
Financial Statements........................... 27
</TABLE>
Code #16459-0296
Statement of
Additional Information
(Art Work)
- ------------------------------------------------------
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
Investment Adviser:
Merrill Lynch (Suisse) Investment Management S.A.
February 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
