<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1998
SECURITIES ACT FILE NO. 33-49354
INVESTMENT COMPANY ACT FILE NO. 811-6725
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES)
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MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
JOEL H. GOLDBERG, ESQ. LAWRENCE A. ROGERS, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
919 THIRD AVENUE, NEW YORK, NEW YORK P.O. BOX 9011, PRINCETON, NEW JERSEY
10022 08543-9011
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[X]IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
OF RULE 485, OR
[_]60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A) OF
RULE 485, OR
[_]ON (DATE) PURSUANT TO PARAGRAPH (B) OF RULE 485,
OR
[_]ON (DATE) PURSUANT TO PARAGRAPH (A) OF RULE 485
[_]75 DAYS AFTER FILING PURSUANT TO PARAGRAPH
(A)(II)
[_]ON (DATE) PURSUANT TO PARAGRAPH (A)(II) OF RULE
485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_]THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW
EFFECTIVE DATE FOR A PREVIOUSLY FILED POST-
EFFECTIVE AMENDMENT.
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<PAGE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
POST-EFFECTIVE AMENDMENT NO. 6 ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
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<C> <S> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... Fee Table
Item 3. Condensed Financial
Information................ Financial Highlights
Item 4. General Description of
Registrant................. Cover Page; Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund...... Fee Table; Investment Objective and
Policies; Portfolio Transactions;
Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of
Fund Performance........... Not Applicable
Item 6. Capital Stock and Other
Securities................. Cover Page; Purchase of Shares;
Additional Information
Item 7. Purchase of Securities Being
Offered.................... Cover Page; Fee Table; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.... Fee Table; Shareholder Services;
Purchase of Shares; Repurchase and
Redemption of Shares
Item 9. Pending Legal Proceeding.... Not Applicable
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Back Cover Page
Item 12. General Information and
History.................... General Information
Item 13. Investment Objectives and
Policies................... Investment Objective and Policies
Item 14. Management of the
Registrant................. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................. Management of the Fund
Item 16. Investment Advisory and
Other Services............. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices............ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities................. General Information
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered.................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.................. Dividends and Distributions; Taxes
Item 21. Underwriters................ Purchase of Shares
Item 22. Calculation of Performance
Data....................... Performance Data
Item 23. Financial Statements........ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to
the Registration Statement.
<PAGE>
PROSPECTUS
JANUARY 29, 1998
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
that seeks the highest total investment return that is consistent with prudent
risk through investment in a diversified international portfolio of equity
securities, other than United States 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(R) Service
and of the Merrill Lynch Strategic Portfolio AdvisorSM Service. The Fund is
designed for Merrill Lynch Consults(R) Service and Merrill Lynch Strategic
Portfolio AdvisorSM 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") that may be purchased at a price equal
to the next determined net asset value per share. Shares of the Fund are not
subject to any sales charge, but are subject to an ongoing account maintenance
fee at an annual rate of 0.25% of average daily net assets and an ongoing
distribution fee at an annual rate of 0.75% of average daily net assets.
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 $5.35) for
confirming purchases and repurchases. Such fee is presently waived for clients
of the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio AdvisorSM Service. Purchases and redemptions made directly through
Merrill Lynch Financial Data Services, Inc. (the "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 NOR HAS THE COMMISSION PASSED UPON THE ACCU-
RACY 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 January 29, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, 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. The
Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
----------------
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(a):
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 FISCAL YEAR ENDED OCTOBER 31, 1997:
Investment Adviser Fees(b)................................... 0.75%
Administrative Fees(c)....................................... 0.25%
12b-1 Fees(d):
Account Maintenance Fees.................................... 0.25%
Distribution Fees........................................... 0.75%
OTHER EXPENSES:
Custodian Fees............................................... 0.10%
Shareholder Servicing Costs(e)............................... 0.02%
Other........................................................ 0.32%
--------------
Total Other Expenses......................................... 0.44%
--------------
TOTAL FUND OPERATING EXPENSES................................. 2.44%
==============
</TABLE>
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(a) Each client of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio AdvisorSM 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.
(b) See "Management of the Fund--Investment Adviser"--page 9.
(c) See "Management of the Fund--Administrator"--page 10.
(d) See "Purchase of Shares--Distribution Plan"--page 12.
(e) See "Management of the Fund--Transfer Agency Services"--page 10.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 2.44% and (2) a 5% annual return
throughout the periods: $25 $76 $130 $278
</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 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 Conduct Rules of the
National Association of Securities Dealers, Inc. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Such fee is presently waived for clients of the Merrill Lynch
Consults(R) Service and of the Merrill Lynch Strategic Portfolio AdvisorSM
Service. Purchases and Redemptions made directly through the Transfer Agent are
not subject to the processing fee. See "Purchase of Shares" and "Repurchase and
Redemption of Shares."
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Ernst & Young
LLP, independent auditors. The Financial Highlights should be read in
conjunction with the financial statements for the fiscal year ended October 31,
1997 and the independent auditors' report thereon, which 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 Fund's audited financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPT. 14,
FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
--------------------------------------------------- OCT. 31,
INCREASE (DECREASE) IN 1997++ 1996++ 1995++ 1994++ 1993++ 1992++
NET ASSET VALUE: -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 12.09 $ 12.28 $ 12.83 $ 11.74 $ 9.60 $ 10.00
-------- -------- -------- -------- -------- -------
Investment income
(loss)--net........... .10 (.05) (.05) (.12) (.08) (.02)
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... .97 .76 (.18) 1.26 2.22 (.38)
-------- -------- -------- -------- -------- -------
Total from investment
operations............. 1.07 .71 (.23) 1.14 2.14 (.40)
-------- -------- -------- -------- -------- -------
Less dividends and dis-
tributions:
In excess of investment
income--net........... (.44) (.44) -- -- -- --
Realized gain on in-
vestments--net........ (.35) (.46) (.32) (.05) -- --
-------- -------- -------- -------- -------- -------
Total dividends and dis-
tributions............. (.79) (.90) (.32) (.05) -- --
-------- -------- -------- -------- -------- -------
Net asset value, end of
period................. $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74 $ 9.60
======== ======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:
Based on net asset value
per share.............. 9.26% 5.93% (1.68%) 9.74% 22.29% (4.00%)#
======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. 2.44% 2.37% 2.35% 2.27% 2.76% 3.50%*
======== ======== ======== ======== ======== =======
Expenses................ 2.44% 2.37% 2.35% 2.27% 2.76% 4.45%*
======== ======== ======== ======== ======== =======
Investment income
(loss)--net............ .84% (.42%) (.41%) (.56%) (.86%) (2.77%)*
======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $107,951 $174,921 $197,077 $272,487 $175,756 $16,636
======== ======== ======== ======== ======== =======
Portfolio turnover...... 28.62% 38.16% 17.31% 24.64% 32.54% --
======== ======== ======== ======== ======== =======
Average Commission rate
paid##................. $ .0076 $ .0010 -- -- -- --
======== ======== ======== ======== ======== =======
</TABLE>
- --------
* Annualized.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
3
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS
Distribution of shares of the Fund is limited to clients of the Merrill Lynch
Consults(R) Service and of the Merrill Lynch Strategic Portfolio AdvisorSM
Service, customized full service approaches to investment management. Pursuant
to the Merrill Lynch Consults(R) Service, Merrill Lynch offers to assist
clients in selecting and retaining, from a roster of managers, one or more
professional portfolio managers who generally emphasize investment in United
States securities. Merrill Lynch Strategic Portfolio AdvisorSM 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(R) Service and Merrill Lynch Strategic
Portfolio AdvisorSM 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(R) Service and the Merrill
Lynch Strategic Portfolio AdvisorSM 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
that are moving in different directions are combined into a single portfolio,
there is an offsetting effect that 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 or lower
volatility than a non-diversified portfolio that invests only in 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 U.S. 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
4
<PAGE>
be registered with the Securities and Exchange Commission nor will the issuers
thereof be subject to the reporting requirements of such agency.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments that 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 provisions under certain foreign laws comparable to
the 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 that is consistent with prudent risk through investment in a diversified
international portfolio of equity securities, other than United States equity
securities. Total investment return is the aggregate of income from and capital
value changes in the Fund's portfolio securities. The investment objective of
the Fund described in this paragraph is a fundamental policy that may not be
changed without the approval of the holders of a majority of the
5
<PAGE>
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 strategy that permits the Fund to take a flexible
approach and vary its policies as to geographic and industry diversification
based upon its evaluation of international economic and market trends. This
evaluation could include such factors as the condition and growth potential of
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political considerations.
Under normal circumstances, the Fund will invest in issuers domiciled in at
least three countries other than the United States. It is expected that more
than 50% of the Fund's assets will be invested in equity securities of
companies located in Western Europe and the Far East, although the Fund may
invest in capital markets throughout the world (excluding the United States).
For purposes of the Fund's objective, equity securities include securities
convertible into equity securities and securities the values of which are
indexed to the market values of equity securities or indices of equity
securities. A United States closed-end investment company will be considered to
be a non-United States investment if it, in turn, primarily invests in non-
United States securities. The Fund may invest in foreign securities in the form
of depositary receipts, including American Depositary Receipts (ADRs) and
European Depositary 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 of and is
ultimately responsible for such determinations.
As part of the Merrill Lynch Consults(R) Service, Merrill Lynch may provide
information to its clients regarding the possible change in risk posture of a
client's domestic Merrill Lynch Consults(R) Service account due to an
investment in the Fund. Risk classes are assigned to each domestic Merrill
Lynch Consults(R) Service investment manager based upon an approximation of its
10 year standard deviation (which is used as a measure of volatility) as
calculated by Merrill Lynch Consults(R) Service according to information
provided by the manager. A risk class is assigned to the Fund based upon an
approximation of the 10 year standard deviation of the Morgan Stanley Europe,
Asia, Far East Index ("EAFE Index"), a market weighted, unmanaged index, as a
general proxy for non-domestic equity investments. Any change in risk will be
estimated only as it relates to the client's domestic Merrill Lynch Consults(R)
Service account and the Fund shares held for that account and not for assets
held in other domestic Merrill Lynch Consults(R) Service accounts or outside of
the Merrill Lynch Consults(R) Service. The Fund, which commenced operations in
1992, does not allocate its assets proportionately to the weighting of the EAFE
Index and may invest in countries
6
<PAGE>
that are not included in the EAFE Index. As a consequence, the Fund's
performance may not correlate completely to the EAFE Index. Projections of risk
posture based on a measurement of past performance of an investment manager or
of an index may not accurately predict future risk posture or performance.
OTHER INVESTMENT PRACTICES
Portfolio Strategies Involving Indexed and Inverse Securities, Options,
Futures and Foreign Exchange Transactions. The Fund may use certain derivative
instruments, including indexed and inverse securities, options and futures, and
may purchase and sell foreign exchange. Transactions involving such instruments
expose the Fund to certain risks. The Fund's use of these instruments and the
associated risks are described in detail in the Appendix attached to this
Prospectus.
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 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 Conduct Rules of the National Association of Securities Dealers, Inc.,
("NASD") 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. The Fund's portfolio turnover rate for the fiscal
year ended October 31, 1997 was 28.62%.
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 could
experience delays and incur costs or possible losses in connection with
disposition of the collateral. The Fund may not invest more than 15% 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 that cannot be
readily resold because of legal or contractual restrictions or that are
otherwise not readily marketable, including repurchase agreements and
7
<PAGE>
purchase and sale contracts maturing in more than seven days, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. Securities that 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
securities the Fund has the right to convert into readily marketable securities
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, 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 that 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
any such 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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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*--Chairman of Merrill Lynch Asset Management, L.P., ("MLAM")
and its affiliate, Fund Asset Management, L.P. ("FAM"); Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.").
James H. Bodurtha--Executive Vice President and Director, The China
Business Group, Inc.
Herbert I. London--John M. Olin Professor of Humanities, Gallatin Division
of New York University.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* 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 140 registered investment companies with an aggregate of over
$3.4 billion in assets as of December 31, 1997. As compensation for its
services to the Fund, the Investment Adviser receives a monthly fee at the
annual rate of 0.75% of the average daily net assets of the Fund. For the
fiscal year ended October 31, 1997, the fee paid by the Fund to the Investment
Adviser was $1,061,746 (based upon average net assets of approximately $141.6
million).
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,
1997, 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
persons" of FAM as defined under the Investment Company Act because of their
power to
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<PAGE>
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, 1997, the ratio of total
expenses to average net assets was 2.44%.
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, 1997,
the total fee paid by the Fund to the Administrator was $353,915.
The principal address of the Administrator is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of up to $11.00 per shareholder
account and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts that close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end
of the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
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<PAGE>
beneficial interest of a person on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended October 31, 1997, the total fee paid by the Fund to the Transfer
Agent was $32,850 pursuant to the Transfer Agency Agreement.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser 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" that 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(R) Service by Merrill Lynch Funds Distributor, Inc., an
indirect subsidiary of ML & Co., and Merrill Lynch. The minimum initial
purchase is $5,000, and the minimum subsequent purchase is $1,000. Shares of
the Fund are offered to clients of Merrill Lynch Strategic Portfolio AdvisorSM
Service on the same terms as offered to clients of Merrill Lynch Consults(R)
Service. Merrill Lynch Strategic Portfolio AdvisorSM Service is a service
designed by Merrill Lynch to provide business and individual clients with a
comprehensive package of consulting, investment and account services.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share. As to purchase orders received by
securities dealers, the applicable offering price will be based on the net
asset value determined as of 15 minutes after the close of business on the New
York Stock Exchange ("NYSE") (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 $5.35) to confirm a
sale of shares to such customers.
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<PAGE>
Such fee is presently waived for clients of the Merrill Lynch Consults(R)
Service and of the Merrill Lynch Strategic Portfolio AdvisorSM 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 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, 1997, the Fund paid the
Distributor $1,415,661 pursuant to the Distribution Plan, of which $1,061,746
was paid to Merrill Lynch for providing distribution-related services and
$353,915 was paid to Merrill Lynch for providing account maintenance activities
to the Fund.
The payments made 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, 1996, the last
date at which such fully allocated accrual data is available, the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch since
the Fund commenced operations on September 14, 1992 exceeded expenses for such
period by approximately $1,493,000 (0.91% of net assets at that date). As of
October 31, 1997, direct cash revenues for the period since commencement of
operations exceeded direct cash expenses by approximately $5,540,000 (5.13% 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 NASD Conduct Rules 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%
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<PAGE>
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.
REPURCHASE AND 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. 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.
REPURCHASE
The Fund 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 NYSE
(generally, 4:00 p.m., New York time), 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 NYSE, 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 NYSE
(generally, 4:00 p.m., New York time), in order to obtain that day's closing
price. The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund. Securities firms that do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a repurchase of shares to such customers. Such fee is
presently waived for clients of the Merrill Lynch Consults(R) Service and of
Merrill Lynch Strategic Portfolio AdvisorSM Service. Repurchases made 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,
however, may redeem shares as set forth below.
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
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<PAGE>
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. Redemption requests should not be sent
to the Fund. 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. Normally this delay will not exceed 10 days.
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(R) Service and of
Merrill Lynch Strategic Portfolio AdvisorSM Service. If a client terminates the
Merrill Lynch Consults(R) Service or the Merrill Lynch Strategic Portfolio
AdvisorSM 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
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<PAGE>
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.
Distribution of shares of the Fund (other than reinvestment of dividends and
capital gains distributions of the Fund) is limited to current clients of the
Merrill Lynch Consults(R) Service and of Merrill Lynch Strategic Portfolio
AdvisorSM Service. If a client terminates the Merrill Lynch Consults(R)
Service or the Merrill Lynch Strategic Portfolio AdvisorSM Service, the
client's shares may be retained in the client's Merrill Lynch brokerage
account, subject to the consent of Merrill Lynch.
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. 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 date of the dividend or distribution. Shareholders should contact
the Merrill Lynch Consults(R) Service or the Merrill Lynch Strategic Portfolio
AdvisorSM Service or their financial consultant or by written notification or
telephone call (1-800-MER-FUND) to the Transfer Agent if the shareholder's
account is maintained with the Transfer Agent if they wish to elect to receive
their dividends or capital gains distributions in cash, in which event payment
will be mailed on or about the payment date. The Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Merrill Lynch Asset Information and Measurement(R) Service. Clients of the
Merrill Lynch Consults(R) Service and the Merrill Lynch Strategic Portfolio
Advisor SM Service are currently provided, without incremental charge, the
Merrill Lynch Asset Information and Measurement(R) Service ("AIM(R)"). AIM(R)
currently provides, through quarterly reports, the ability to monitor and
evaluate performance of a Merrill Lynch Consults(R) Service or Merrill Lynch
Strategic Portfolio AdvisorSM 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.
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<PAGE>
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. 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 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, 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.
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 capital gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Additional Information--Determination of
Net Asset Value." 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 and elect the
special tax treatment afforded regulated investment companies ("RICs") under
the Internal Revenue Code of 1986, as amended (the
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<PAGE>
"Code"). As long as it so qualifies, the Fund (but not its shareholders) will
not be subject to Federal income tax on the part of its net ordinary income and
net realized capital gains 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 capital gains are taxable to
shareholders as capital gains, regardless of the length of time a shareholder
has owned Fund shares. Recent legislation created additional categories of
capital gains taxable at different rates. Any loss upon the sale or exchange of
Fund shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Although the Fund may
invest in certain municipal securities, it is not anticipated that any portion
of the dividends paid by the Fund will qualify for tax-exempt treatment to
shareholders.
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, and the categories of any capital gain distributions. If the
Fund pays a dividend in January 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
Fund and received by its shareholders on December 31 of the year in which the
dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens generally will be subject to a 30% United States withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Non-resident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Investment income received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. Certain shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. If
more than 50% in value of the Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be eligible
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund generally will be required to include their
proportionate share of such taxes in their United States income tax returns as
gross income, treat such proportionate share as taxes paid by them, and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain limitations and the shareholders and the Fund satisfying
certain minimum stock ownership holding periods, use them as foreign tax
credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. Foreign tax credits cannot be claimed by
17
<PAGE>
certain retirement accounts. A shareholder that is a non-resident alien
individual or a foreign entity may be subject to United States withholding tax
on the income resulting from the Fund's election described in this paragraph
but may not be able to claim a credit or deduction against such United States
tax for the foreign taxes treated as having been paid by such shareholder. The
Fund will report annually to its shareholders the amount per share of such
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
gains 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 which will be treated as ordinary 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.
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 and gains on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.
18
<PAGE>
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 NYSE (generally 4:00 p.m., New York time) on each day during
which the NYSE is open for trading. The net asset value per share 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the primary
market. Long positions in securities traded in the over the counter ("OTC")
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or
in the case of options traded in the OTC market, the last bid price. 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.
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. 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 advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
19
<PAGE>
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, and 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.
20
<PAGE>
APPENDIX
PORTFOLIO STRATEGIES INVOLVING INDEXED AND INVERSE SECURITIES,
OPTIONS, FUTURES AND FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options and futures and to purchase and sell
foreign exchange, as described below. Such instruments, which may be regarded
as derivatives, are referred to collectively herein as "Strategic Instruments."
Indexed and Inverse Securities
The Fund may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (an "index"). In
particular, the Fund may invest in securities the values of which are indexed
to the market values of equity securities, indices of equity securities,
currencies or currency units. As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of an equity securities index or a basket of equity securities or based
on the relative changes of two equity securities indices. In addition, the Fund
may invest in securities the potential return of which is based inversely on
the change in an index. For example, the Fund may invest in securities that pay
a higher rate of interest when a particular index decreases and pay a lower
rate of interest (or do not fully retain principal) when the value of the index
increases. If the Fund invests in such securities, it may be subject to reduced
or eliminated interest payments or loss of principal in the event of an adverse
movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Fund believes that indexed securities may provide portfolio management
flexibility that permits the Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Options on Securities and Securities Indices
Purchasing Options. For hedging purposes the Fund is authorized to purchase
put options on securities held in its portfolio or on securities indices, the
performance of which is substantially correlated with securities held in its
portfolio. When the Fund purchases a put option, in consideration for an
upfront payment (the "option premium"), the Fund acquires a right to sell to
another party specified securities owned by the Fund at a specified price (the
"exercise price") on or before a specified date (the "expiration date"), in the
case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index declines below a specified
level on or before the expiration date, in the case of an option on a
securities index. The purchase of a put option limits the Fund's risk of loss
in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the market
value of the portfolio holdings associated with the put option increases rather
than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
21
<PAGE>
For hedging purposes, the Fund is also authorized to purchase call options on
securities indices, the performance of which substantially correlates with the
performance of the types of securities it intends to purchase. When the Fund
purchases a call option on a securities index, in consideration for the option
premium the Fund acquires a right to receive from another party a payment based
on the amount a specified securities index increases beyond a specified level
on or before the expiration date. The purchase of a call option on an index may
protect the Fund from the risks associated with attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive
(an "anticipatory hedge").
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options on
securities held in its portfolio or on securities indices, the performance of
which is substantially correlated to securities held in its portfolio. When the
Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options on securities to earn income, through the receipt of option premiums.
The Fund may write call options on securities for hedging purposes. In the
event the party to which the Fund has written an option fails to exercise its
rights under the option because the value of the underlying securities is less
than the exercise price, the Fund will partially offset any decline in the
value of the underlying securities through the receipt of the option premium.
By writing a call option, however, the Fund limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.
The Fund may also write put options on securities indices for hedging
purposes. When the Fund writes a put option on a securities index, in return
for an option premium the Fund agrees to pay to another party an amount based
on any decline in a specified securities index below a specified level on or
before the expiration date. In the event the party to which the Fund has
written an option fails to exercise its rights under the option because the
value of the securities index has not declined below the specified level on or
before the expiration date, the Fund will profit by the amount of the option
premium. However, by writing a put option on the index, the Fund will be
obligated to make a cash payment reflecting any decline in the index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying index falls below the specified price,
which loss potentially may substantially exceed the amount of option premium
received by the Fund for writing the put option. The Fund will write a put
option on a securities index only if the Fund is writing the put in connection
with trading strategies involving combinations of options (for example the sale
and purchase of options with identical expiration dates on the same index but
different exercise prices--a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency Instruments"
below.
22
<PAGE>
A call option will also be considered covered if the Fund owns the securities
it would be required to deliver upon exercise of the option (or, in the case of
an option on a securities index, securities that substantially replicate the
performance of such index) or owns a call option, warrant or convertible
instrument that is immediately exercisable for, or convertible into, such
security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing
any loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
23
<PAGE>
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for purposes
of hedging against possible variations in foreign exchange rates. Such
transactions may be affected with respect to hedges on non-U.S. dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
Forward foreign exchange transactions are OTC contracts to purchase or sell a
specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. The Fund may enter into a foreign
exchange transaction for purposes of hedging a portfolio position by selling
forward a currency in which a portfolio position of the Fund is denominated or
by purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a
call option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities that it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, that are denominated in such
currency.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements that do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that
24
<PAGE>
(i) the currency exchange rate movement is so generally anticipated that the
Fund is not able to enter into a hedging transaction at an effective price, or
(ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.
Risk Factors in Options, Futures and Currency Instruments
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments, the
Fund will experience a gain or loss that will not be completely offset by
movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such
instruments satisfy the criteria set forth below under "Additional Risk Factors
of OTC Transactions; Limitations on the Use of OTC Strategic Instruments."
However, there can be no assurance that, at any specific time, either a liquid
secondary market will exist for a Strategic Instrument or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may,
therefore, not be possible to close a position in a Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign exchange
transactions, futures transactions, sales of put options) may expose the Fund
to potential losses that exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments
Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which the Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Investment Adviser
anticipates the Fund can receive on each business day at least two independent
bids or offers, unless a quotation from only one dealer is available, in which
case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently
25
<PAGE>
outstanding that are held by the Fund, the market value of the securities
underlying OTC call options currently outstanding that have been sold by the
Fund and margin deposits on the Fund's outstanding OTC options exceed 15% of
the total assets of the Fund, taken at market value, together with all other
assets of the Fund that are deemed to be illiquid or are otherwise not readily
marketable.
Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
that have substantial capital or that have provided the Fund with a third-party
guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments
The Fund may not use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from
purchasing directly.
26
<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 08536-9081
ADMINISTRATOR
Princeton Administrators, LP
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08536-9011
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
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 REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAV-
ING 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
Other Investment Practices................................................ 7
Investment Restrictions................................................... 8
Management of the Fund..................................................... 9
Board of Trustees......................................................... 9
Investment Adviser........................................................ 9
Administrator............................................................. 10
Transfer Agency Services.................................................. 10
Code of Ethics............................................................ 11
Purchase of Shares......................................................... 11
Distribution Plan......................................................... 12
Repurchase and Redemption of Shares........................................ 13
Repurchase................................................................ 13
Redemption................................................................ 13
Shareholder Services....................................................... 14
Performance Data........................................................... 15
Additional Information..................................................... 16
Dividends and Distributions............................................... 16
Taxes..................................................................... 16
Determination of Net Asset Value.......................................... 19
Organization of the Fund.................................................. 19
Shareholder Reports....................................................... 20
Shareholder Inquiries..................................................... 20
Appendix--Options, Futures and Foreign Exchange Transactions............... 21
</TABLE>
Code # 16458-0198
PROSPECTUS
[GRAPHIC]
=========================
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
Investment Adviser:
Merrill Lynch (Suisse) Investment Management S.A.
January 29, 1998
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 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Consults International Portfolio, a Massachusetts business
trust (the "Fund"), is a diversified, open-end management investment company
that seeks the highest total investment return that is consistent with prudent
risk through investment in a diversified international portfolio of equity
securities, other than United States securities. Total investment return is the
aggregate of income and capital value changes. Distribution of shares of the
Fund is limited to current clients of the Merrill Lynch Consults(R) Service and
of the Merrill Lynch Strategic Portfolio AdvisorSM Service. The Fund is
designed for Merrill Lynch Consults(R) Service and Merrill Lynch Strategic
Portfolio AdvisorSM Service clients who seek to internationally diversify a
portion of their investment portfolio.
The Fund offers shares that may be purchased at a price equal to the next
determined net asset value per share. Shares of the Fund are not subject to any
sales charge, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets and an ongoing distribution
fee at an annual rate of 0.75% of average daily net assets.
----------------
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 January
29, 1998 (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 listed 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 January 29, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek the highest total investment
return that is consistent with prudent risk through investment in a diversified
international portfolio of equity securities, other than United States
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, any effects of movements in the various securities
markets may be offset by changes in foreign currency exchange rates. Exchange
rates frequently move independently of securities markets in a particular
country. As a result, gains in a particular securities market may be affected
by changes in exchange rates.
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 may invest in the securities of foreign issuers in the form of
depositary receipts, including American Depositary Receipts (ADRs) and European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs), or other
securities convertible into securities of foreign issuers. Depositary receipts
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by an American
bank or trust company that evidence ownership of underlying securities issued
by a foreign corporation. EDRs are receipts issued in Europe that evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are
designed for use in the United States securities markets and EDRs, in bearer
form, are designed for use in European securities markets. GDRs are tradeable
both in the U.S. and Europe and are designed for use throughout the world.
HEDGING TECHNIQUES
Reference is made to the Appendix to the Prospectus for information with
respect to various portfolio strategies involving indexed and inverse
securities, options, futures and foreign exchange transactions. The Fund may
seek to hedge its portfolio against movements in the equity markets and
exchange rates between
2
<PAGE>
currencies through the use of options and futures transactions and forward
foreign exchange transactions. Although certain risks are involved in options
and futures transactions (as discussed in the Appendix to 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 the Fund may utilize involving options and futures.
Options on Securities and Securities Indices. The Fund may write (i.e., sell)
covered call options on the equity securities held in its portfolio or on
securities indices, the performance of which is substantially correlated with
the securities held in the Fund's portfolio. In addition, the Fund may write
put options on securities indices. These transactions are described more fully
in the Appendix to the Prospectus. The following is further information
regarding covered call options.
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 on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio. The Fund may also purchase call options on
securities indices. These transactions are described more fully in the Appendix
to the Prospectus.
Futures. As described in the Appendix to the Prospectus, the Fund will limit
transactions in futures and options on futures to financial futures contracts
(i.e., contracts for which the underlying commodity is a currency, or
securities or interest rate index) purchased or sold for hedging purposes. See
the Appendix to the Prospectus. Set forth is further information concerning
futures transactions.
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 that 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 less than 10% 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
3
<PAGE>
futures contracts fluctuates making the long and short positions in the futures
contracts more or less valuable, a process known as "marking 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 that 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.
Foreign Exchange Transactions. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot, i.e., cash, basis at the spot rate
then prevailing for purchasing or selling currency in the foreign exchange
market. Under normal market conditions, this rate 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 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 Appendix to 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.
4
<PAGE>
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.
Risk Factors in Options, Futures and Currency 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 that
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
that will not be completely offset by movements in the price of the currency
that 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 secondary market
will exist for any particular call or put option or futures contract held by
the Fund 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.
5
<PAGE>
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) that may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts that
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.
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 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
6
<PAGE>
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 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.
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Trustees without the approval of shareholders, provides
that the Fund may not:
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.
7
<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 that will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. Such cash will be invested in short-term securities,
which will increase the current income of the Fund. Such loans will not be for
more than 30 days and will be terminable at any time. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans. With respect
to the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
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.
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 (65)--President and Trustee (1)(2)--Chairman of Merrill Lynch
Asset Management, L.P., doing business as Merrill Lynch Asset Management
("MLAM") (which term as used herein includes its corporate predecessors) and
Fund Asset Management ("FAM") (which term as used herein includes its corporate
predecessors), since 1997; President of MLAM and FAM from 1977 to 1997;
Chairman of Princeton Services, Inc. ("Princeton Services") since 1997;
Director of Princeton Services since 1993; President of Princeton Services from
1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990.
8
<PAGE>
James H. Bodurtha (53)--Trustee (2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (58)--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 1976 to 1993; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Trustee, Hudson
Institute since 1980 and President in 1997; Director, Damon Corporation from
1991 to 1995; Overseer, Center for Naval Analyses from 1953 to 1973; Limited
Partner, Hypertech, L.P. in 1996.
Robert R. Martin (70)--Trustee (2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (68)--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 (45)--Trustee (2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991, and TIBCO from 1994 to 1996.
Terry K. Glenn (57)--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 Merrill Lynch Funds Distributor,
Inc. (the "Distributor") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
Donald C. Burke (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; VP of MLAM from 1990 to 1997; Director of Taxation of MLAM since
1990.
Christine L. Pinto (38)--Vice President and Portfolio Manager (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.
9
<PAGE>
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of FAM and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981;
Treasurer of the Distributor since 1984.
Lawrence A. Rogers (50)--Secretary (1)(2) Director (Legal Advisory) of MLAM
since 1997; Attorney in private practice prior thereto.
- --------
(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 December 31, 1997, 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 (each
a "non-affiliated Trustee") a fee of $2,500 per year plus $250 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit
Committee, which consists of all of the non-affiliated Trustees, $500 per year
plus $125 for each meeting attended. For the fiscal year ended October 31,
1997, fees and expenses paid to the non-affiliated Trustees aggregated
$21,679.
COMPENSATION OF TRUSTEES
The following table sets forth, for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees, and, for the
calendar year ended December 31, 1997, the aggregate compensation paid by all
investment companies advised by FAM and its affiliate, MLAM ("FAM/MLAM Advised
Funds") to the non-affiliated 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 4,500 None 148,500
Herbert I. London 4,500 None 148,500
Robert R. Martin 4,500 None 148,500
Joseph L. May 4,500 None 148,500
Andre F. Perold 4,500 None 148,500
</TABLE>
- --------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46
portfolios); Mr. Martin (22 registered investment companies consisting of
46 portfolios); Mr. May (22 registered investment companies consisting of
46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios).
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.
10
<PAGE>
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 an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). As discussed in the
Prospectus, the Investment Adviser receives for its services to the Fund under
the Investment Advisory Agreement monthly compensation at the annual rate of
0.75% of average daily net assets of the Fund. For the fiscal years ended
October 31, 1995, 1996 and 1997, the total management fees paid by the Fund to
the Investment Adviser were $1,644,757, $1,525,916 and $1,061,746,
respectively.
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 years ended October 31, 1995, 1996
and 1997, 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 or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., a subsidiary of ML & Co.
The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services to the Fund 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
11
<PAGE>
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."
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
12
<PAGE>
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. Pursuant to the Distribution Plan, the
Fund pays the Distributor ongoing distribution and account maintenance fees,
which are accrued daily and paid monthly, at the annual rates of .75% and .25%,
respectively, of the average daily net assets of the Fund. For the fiscal year
ended October 31, 1997, the Fund paid the Distributor $1,415,661 pursuant to
the Distribution Plan, of which $353,915 was paid to Merrill Lynch for
providing account maintenance activities and $1,061,746 was paid to Merrill
Lynch for providing distribution-related services to the Fund. For the fiscal
year ended October 31, 1996, the Fund paid the Distributor $2,034,555 pursuant
to the Distribution Plan, of which $508,639 was paid to Merrill Lynch for
providing account maintenance activities and $1,525,916 was paid to Merrill
Lynch for providing distribution-related services to 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 $548,251 was paid to Merrill Lynch for
providing account maintenance activities and $1,644,757 was paid to Merrill
Lynch for providing distribution-related services to the Fund.
The maximum sales charge rule in the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules 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.
13
<PAGE>
The following table sets forth comparative information as of October 31,
1997 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, 1997.
DATA CALCULATED AS OF OCTOBER 31, 1997
(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............. $376,548 $23,534 $7,207 $30,741 $6,403 $24,338 $810
</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 Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
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
14
<PAGE>
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 Conduct Rules of the NASD and policies established by the
Board of Trustees of the Fund, the Investment Adviser may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund.
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 depositary
receipts, including ADRs or EDRs, or GDRs, or securities convertible into
foreign equity securities. Depositary receipts may be listed on stock exchanges
or traded in over-the-counter ("OTC") 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 OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Securities and Exchange Commission. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions. However,
affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions. See "Investment Objective and
Policies--Investment Restrictions."
15
<PAGE>
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, 1997, the Fund paid total brokerage
commissions of $477,435, of which $59,811 or approximately 12.5% was paid to
Merrill Lynch for effecting transactions involving 14.1% of the aggregate
amount of transactions in which the Fund paid brokerage commissions. For the
fiscal year ended October 31, 1996, the Fund paid total brokerage of $528,752,
of which $107,010, or approximately 20.2%, was paid to Merrill Lynch for
effecting transactions involving 20.1% of the aggregate amount of transactions
in which the Fund paid brokerage commissions. For the fiscal year ended October
31, 1995, the Fund paid total brokerage of $471,006, of which $72,382, or
approximately 15.4%, was paid to Merrill Lynch for effecting transactions
involving 15.1% of the aggregate amount of transactions in which the Fund paid
brokerage commissions.
Portfolio Turnover. The Fund has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the Investment Adviser, investment
considerations warrant such action. As a result, the Fund's portfolio turnover
rate may vary greatly from year to year or during periods within a year. Also,
the use of covered call options at times when the underlying securities are
appreciating in value may result in higher portfolio turnover than would
otherwise be the case. The Fund pays brokerage commissions in connection with
writing call options and effecting closing purchase transactions, as well as in
connection with purchases and sales of portfolio securities. A high rate of
portfolio turnover would result in correspondingly greater brokerage commission
expenses. Portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of
purchases and sales of Government securities and of all other securities,
including options, whose maturity or expiration dates at the time of
acquisition were one year or less) by the monthly average value of the
securities in the Fund during the fiscal year. For the fiscal years ended
October 31, 1997 and 1996 the rates of portfolio turnover were 28.62% and
38.16%, respectively.
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 ("NYSE") (generally, 4:00 p.m., New York time) on each day
during which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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
16
<PAGE>
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 depositary receipts, that are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded on
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. Securities that are traded both in the OTC
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 OTC
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 OTC market, the last bid price. Other investments, including futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Trustees.
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 NYSE. The values of such securities used in
computing the net asset value of the Fund's shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the close of the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of the NYSE 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, that 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(R) Service and of the Merrill Lynch Strategic Portfolio
AdvisorSM Service. Shareholders will receive statements of dividends and
capital gains distributions.
17
<PAGE>
If a client terminates the Merrill Lynch Consults(R) Service or the Merrill
Lynch Strategic Portfolio AdvisorSM 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 date of the dividend or distribution. Shareholders
should contact the Merrill Lynch Consults(R) Service or the Merrill Lynch
Strategic Portfolio AdvisorSM Service or their financial consultant, or the
Transfer Agent by telephone (1-800-MER-FUND) or by written notification if they
wish to elect to receive either their dividends or capital gains distributions,
or both, in cash, in which event payment will be mailed on or about the payment
date. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
MERRILL LYNCH ASSET INFORMATION AND MEASUREMENT(R) SERVICE
Clients of the Merrill Lynch Consults(R) Service and of the Merrill Lynch
Strategic Portfolio AdvisorSM Service are currently provided, without
incremental charge, the Merrill Lynch Asset Information and Measurement(R)
Service ("AIM(R)"). AIM(R) currently provides, through quarterly reports, the
ability to monitor and evaluate performance of their Merrill Lynch Consults(R)
Service or Merrill Lynch Strategic Portfolio AdvisorSM 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 and elect the
special tax treatment afforded regulated investment companies ("RICs") under
the Internal Revenue Code of 1986, as amended (the "Code"). As long as it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains that it distributes to 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
even though reinvested in Fund shares. Distributions made from the Fund's net
realized
18
<PAGE>
capital gains are taxable to a shareholder as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares, and
even though reinvested in Fund shares. 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.
Any net capital gains (i.e., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
dividends or capital gains distributions, and also designating the amounts of
various categories of capital gain income in capital gain dividends. It is not
expected that any portion of the dividends paid by the Fund will be eligible
for the corporate dividends received deduction. If the Fund pays a dividend
that was declared in the previous October, November or December to shareholders
of record in such a month, then such dividend or distribution will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which the dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens generally will be subject to a 30% United States withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Non-resident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Investment income received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. Certain shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. If
more than 50% in value of the Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be eligible
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund generally will be required to include their
proportionate share of such taxes in their United States income tax returns as
gross income, treat such proportionate share as taxes paid by them and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain restrictions and the shareholders and the Fund satisfying
certain minimum stock ownership holding periods, use them as foreign tax
credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. Foreign tax credits cannot be claimed by certain retirement
accounts. A shareholder that is a nonresident alien individual or a foreign
entity may be subject to United States withholding tax on the income resulting
from the Fund's election described in this paragraph but may not be able to
claim a credit or deduction against such United States tax for the foreign
taxes treated as having been paid by such shareholder. The Fund will report
annually to its shareholders the amount per share of such withholding taxes.
19
<PAGE>
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.
Upon a sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. Such gain or
loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands. In the case of an individual, any such capital gain
will be treated as short-term capital gain if the shares were held for not more
than 12 months, gain taxable at the maximum rate of 28% if such shares were
held for more than 12, but not more than 18 months, and long-term capital gain
taxable at the maximum rate of 20% if such shares were held for more than 18
months. In the case of a corporation, any such capital gain will be treated as
long-term capital gain, taxable at the same rates as ordinary income, if such
shares were held for more than 12 months. Any capital loss will be treated as
long-term capital loss if the shares were held for more than one year.
When you sell shares in the Fund, you may realize a gain or loss. Generally,
any loss realized on a sale of shares of the Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The Fund may invest in equity securities of investment companies (or similar
investment entities) organized under foreign law or of ownership interests in
special accounts, trusts or partnerships. If the Fund purchases shares of an
investment company (or similar investment entity) organized under foreign law,
the Fund will be treated as owning shares in a passive foreign investment
company ("PFIC") for United States Federal income tax purposes. The Fund may be
subject to United States Federal income tax, and an additional tax in the
nature of interest, on a portion of distributions from such company and on gain
from the disposition of such shares (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid
the taxes on excess distributions. However, such election may cause the Fund to
recognize income (treated as ordinary income) in a particular year in excess of
the distributions received from such PFICs.
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; Code Section 1258, which deals with "conversion
transactions," may apply to recharacterize certain capital gains as ordinary
income for tax purposes and Code Section 1259, which deals with "Constructive
Sales" of appreciated financial positions (e.g. stock), may treat the Fund as
having recognized income before the time that such income is economically
recognized by the Fund.
SPECIAL RULES FOR OPTIONS, FUTURES AND FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from forward foreign exchange
contracts relating to investments in stock, securities or foreign currencies
will be qualifying income for purposes of determining whether the Fund
qualifies as a RIC. It is currently unclear, however, who will be treated as
the issuer of a foreign currency instrument or how forward foreign exchange
contracts will be valued for purposes of the RIC diversification requirements
applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from forward contracts
will be treated as ordinary income or loss under Code Section 988. In certain
circumstances, the Fund may elect capital gain or loss treatment for such
transactions. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income. 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 and gains on the sale or exchange
of shares of the Fund may also be subject to state and local taxes.
21
<PAGE>
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, 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) any 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 any maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth is total return information for shares of the Fund for the period
indicated.
<TABLE>
<CAPTION>
REDEEMABLE VALUE
OF A
HYPOTHETICAL
EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT AT
ON A HYPOTHETICAL THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
One Year Ended October 31, 1997............. 9.26 % $1,092.60
Inception (September 14, 1992) to October
31, 1997................................... 7.74 % $1,465.90
<CAPTION>
FOR YEAR ENDED OCTOBER 31,
- -------------------------- ANNUAL TOTAL RETURN
<S> <C> <C>
1997........................................ 9.26 % $1,092.60
1996........................................ 5.93 % $1,059.30
1995........................................ (1.68)% $ 983.20
1994........................................ 9.74 % $1,097.40
1993........................................ 22.29 % $1,222.90
Inception (September 14, 1992) to October
31, 1992................................... (4.00)% $ 960.00
<CAPTION>
AGGREGATE TOTAL RETURN
<S> <C> <C>
Inception (September 14, 1992) to October
31, 1997................................... 46.59 % $1,465.90
</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. 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, 1997, is calculated as follows:
<TABLE>
<S> <C>
Net Assets..................................................... $107,950,567
============
Number of Shares Outstanding................................... 8,727,544
============
Net Asset Value Per Share (net assets divided by number of
shares outstanding)........................................... $ 12.37
Sales Charge................................................... none
------------
Offering Price................................................. $ 12.37
============
</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 32246-6484, acts as the Fund's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"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 January 1, 1998.
----------------
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, 1997, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years
in the period then ended and financial highlights for each of the years
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, 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, 1997, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and financial highlights for
each of the indicated years, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Princeton, New Jersey
December 5, 1997
26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
27
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
LATIN Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Argentina Banking 100,989 Banco de Galicia y Buenos Aires S.A. (ADR)* $ 1,892,201 $ 2,448,983 2.3%
------------------------------------------------------------------------------------------------------------------------
Oil & Related 40,000 YPF S.A. (ADR)* 1,019,077 1,280,000 1.2
------------------------------------------------------------------------------------------------------------------------
Total Investments in Argentina 2,911,278 3,728,983 3.5
====================================================================================================================================
Brazil Electric Utilities 3,000,000 Centrais Eletricas Brasileiras S.A.--Eletrobras 'B'
(Preferred) 1,546,789 1,298,077 1.2
14,000,000 Companhia Energetica de Minas Gerais S.A. (CEMIG)
(Preferred) 418,580 558,781 0.5
3,500,000 Light-Servicios de Electricidade S.A. 1,369,142 1,162,010 1.1
------------ ------------ ------
3,334,511 3,018,868 2.8
------------------------------------------------------------------------------------------------------------------------
Mining 44,000 Companhia Vale do Rio Doce S.A. (Preferred) 1,037,298 850,145 0.8
US$ 44,000 Companhia Vale do Rio Doce S.A., 0.00%
due 12/31/2049 (b) 0 0 0.0
------------ ------------ ------
1,037,298 850,145 0.8
------------------------------------------------------------------------------------------------------------------------
Steel 45,800 Usinas Siderurgicas de Minas Gerais S.A.--Usiminas
(Preferred) 500,967 332,366 0.3
------------------------------------------------------------------------------------------------------------------------
Total Investments in Brazil 4,872,776 4,201,379 3.9
====================================================================================================================================
Chile Diversified Holdings 68,200 +Quinenco S.A. (ADR)* 1,227,600 997,425 0.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Chile 1,227,600 997,425 0.9
====================================================================================================================================
Mexico Building &
Construction 35,000 +Bufete Industrial, S.A. (ADR)* 761,162 516,250 0.5
600,000 Cemex, S.A. de C.V. 'B' 2,320,739 2,610,250 2.4
75,000 Empresas ICA Sociedad Controladora, S.A. de C.V.
(ADR)* 593,368 998,438 0.9
------------ ------------ ------
3,675,269 4,124,938 3.8
------------------------------------------------------------------------------------------------------------------------
Retail 122,307 Cifra, S.A. de C.V. 'A' 140,043 221,581 0.2
1,000,000 Cifra, S.A. de C.V. 'B' 1,269,922 1,966,627 1.8
------------ ------------ ------
1,409,965 2,188,208 2.0
------------------------------------------------------------------------------------------------------------------------
Total Investments in Mexico 5,085,234 6,313,146 5.8
====================================================================================================================================
Total Investments in Latin America 14,096,888 15,240,933 14.1
====================================================================================================================================
PACIFIC
BASIN
====================================================================================================================================
Australia Publishing 560,000 News Corporation, Ltd. (Ordinary) 2,410,336 2,688,969 2.5
------------------------------------------------------------------------------------------------------------------------
Total Investments in Australia 2,410,336 2,688,969 2.5
====================================================================================================================================
Hong Kong Banking 75,200 HSBC Holdings PLC 1,419,674 1,702,458 1.6
------------------------------------------------------------------------------------------------------------------------
Diversified Holdings 80,000 Hutchison Whampoa Ltd. 771,884 553,687 0.5
200,000 Shanghai Industrial Holdings Ltd. 1,068,267 890,039 0.8
------------ ------------ ------
1,840,151 1,443,726 1.3
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
LATIN Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------
Financial Services 1,584,000 Min Xin Holdings 701,372 476,430 0.4
------------------------------------------------------------------------------------------------------------------------
Railroads 1,250,000 Guangshen Railway Co., Ltd. (Series H) 469,278 388,098 0.4
------------------------------------------------------------------------------------------------------------------------
Real Estate 1,600,000 Guangzhou Investment Co., Ltd. 643,224 382,924 0.3
200,000 Sun Hung Kai Properties Ltd. 2,003,438 1,474,774 1.4
------------ ------------ ------
2,646,662 1,857,698 1.7
------------------------------------------------------------------------------------------------------------------------
Transportation 33,187 GZI Transportation Ltd. 13,111 10,733 0.0
6,636 GZI Transportation Ltd. (Warrants) (a) 880 180 0.0
------------ ------------ ------
13,991 10,913 0.0
------------------------------------------------------------------------------------------------------------------------
Total Investments in Hong Kong 7,091,128 5,879,323 5.4
====================================================================================================================================
Japan Apparel 450,000 Toray Industries, Inc. 3,029,824 2,508,111 2.3
------------------------------------------------------------------------------------------------------------------------
Banking 140,000 Sanwa Bank, Ltd. 2,285,590 1,409,201 1.3
------------------------------------------------------------------------------------------------------------------------
Beverage 110,000 Kirin Brewery Co., Ltd. 1,358,110 924,216 0.9
------------------------------------------------------------------------------------------------------------------------
Chemicals 400,000 Mitsui Chemicals Inc. 2,237,119 1,480,742 1.4
------------------------------------------------------------------------------------------------------------------------
Electrical Equipment 200,000 Furukawa Electric Co., Ltd. 1,066,892 1,031,528 1.0
200,000 Hitachi, Ltd. 1,733,261 1,538,973 1.4
------------ ------------ ------
2,800,153 2,570,501 2.4
------------------------------------------------------------------------------------------------------------------------
Electronics 50,000 Fujitsu Ltd. 739,195 549,039 0.5
200,000 Matsushita Electric Co., Ltd. 3,029,307 3,360,785 3.1
16,000 Murata Manufacturing Co., Ltd. 760,140 649,530 0.6
90,000 Omron Corp. 1,821,396 1,527,327 1.4
------------ ------------ ------
6,350,038 6,086,681 5.6
------------------------------------------------------------------------------------------------------------------------
Insurance 300,000 Nippon Fire & Marine Insurance Co., Ltd. 2,150,386 1,157,974 1.1
------------------------------------------------------------------------------------------------------------------------
Machinery 195,000 Makita Corporation 3,008,235 2,741,452 2.5
------------------------------------------------------------------------------------------------------------------------
Merchandising 50,000 Ito--Yokado Co., Ltd. 2,465,299 2,487,314 2.3
------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 50,000 Banyu Pharmaceutical Co., Ltd. 742,065 727,893 0.7
60,000 Yamanouchi Pharmaceutical Co., Ltd. 1,399,475 1,477,415 1.4
------------ ------------ ------
2,141,540 2,205,308 2.1
------------------------------------------------------------------------------------------------------------------------
Printing 50,000 Dai Nippon Printing Co., Ltd. 913,065 998,253 0.9
------------------------------------------------------------------------------------------------------------------------
Total Investments in Japan 28,739,359 24,569,7532 2.8
====================================================================================================================================
South
Korea Electric Utilities 35,000 Korea Electric Power Corp. 1,136,044 499,479 0.5
------------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 15,000 Seoul City Gas Co., Ltd. 1,211,976 359,375 0.3
------------------------------------------------------------------------------------------------------------------------
Total Investments in South Korea 2,348,020 858,854 0.8
====================================================================================================================================
Total Investments in the Pacific Basin 40,588,843 33,996,8993 1.5
====================================================================================================================================
WESTERN
EUROPE
====================================================================================================================================
France Foods 15,000 Groupe Danone S.A. 2,320,416 2,294,883 2.1
------------------------------------------------------------------------------------------------------------------------
Health/Personal Care 8,000 Sanofi S.A. 690,834 760,451 0.7
------------------------------------------------------------------------------------------------------------------------
Insurance 35,000 Axa-UAP 2,302,026 2,398,092 2.2
------------------------------------------------------------------------------------------------------------------------
Oil & Related 30,000 Elf Aquitaine S.A. 2,278,742 3,715,525 3.5
------------------------------------------------------------------------------------------------------------------------
Total Investments in France 7,592,018 9,168,951 8.5
====================================================================================================================================
</TABLE>
29
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
WESTERN
EUROPE Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Germany Chemicals 50,000 BASF AG $ 1,415,399 $ 1,700,483 1.6%
------------------------------------------------------------------------------------------------------------------------
Total Investments in Germany 1,415,399 1,700,483 1.6
====================================================================================================================================
Italy Banking 100,000 Credito Italiano S.p.A. 140,795 267,191 0.2
------------------------------------------------------------------------------------------------------------------------
Broadcasting--Media 250,000 Mediaset S.p.A. 1,105,533 1,136,229 1.0
------------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 140,000 Italgas S.p.A. 476,677 499,171 0.5
------------------------------------------------------------------------------------------------------------------------
Telecommunications 600,000 Telecom Italia S.p.A. 1,879,458 3,767,310 3.5
------------------------------------------------------------------------------------------------------------------------
Tires & Rubber 460,000 Pirelli S.p.A. 1,019,656 1,166,469 1.1
------------------------------------------------------------------------------------------------------------------------
Total Investments in Italy 4,622,119 6,836,370 6.3
====================================================================================================================================
Netherlands Electronics 40,000 Philips Electronics N.V. 1,581,743 3,133,698 2.9
------------------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 1,581,743 3,133,698 2.9
====================================================================================================================================
Portugal Electric Utilities 80,120 +EDP-Electricidade de Portugal, S.A. 1,413,465 1,409,054 1.3
------------------------------------------------------------------------------------------------------------------------
Total Investments in Portugal 1,413,465 1,409,054 1.3
====================================================================================================================================
Spain Oil & Related 50,000 Repsol S.A. 1,567,118 2,099,828 2.0
------------------------------------------------------------------------------------------------------------------------
Total Investments in Spain 1,567,118 2,099,828 2.0
====================================================================================================================================
Sweden Household Appliances 30,000 Electrolux AB 1,365,221 2,486,066 2.3
------------------------------------------------------------------------------------------------------------------------
Machinery 50,000 Atlas Copco AB (Class A) 919,997 1,470,254 1.3
------------------------------------------------------------------------------------------------------------------------
Metals 25,000 +Granges AB 225,034 409,332 0.4
------------------------------------------------------------------------------------------------------------------------
Total Investments in Sweden 2,510,252 4,365,652 4.0
====================================================================================================================================
Switzerland Banking 15,000 Credit Suisse Group (Registered) 1,554,232 2,120,208 2.0
------------------------------------------------------------------------------------------------------------------------
Foods 1,400 Nestle S.A. (Registered) 1,564,148 1,979,362 1.8
------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 1,866 Novartis AG (Registered) 997,359 2,932,381 2.7
------------------------------------------------------------------------------------------------------------------------
Total Investments in Switzerland 4,115,739 7,031,951 6.5
====================================================================================================================================
Turkey Automobiles 2,000,000 +Tofas Oto Ticaret A.S. 335,413 479,930 0.5
------------------------------------------------------------------------------------------------------------------------
Household Appliances 3,000,000 Arcelik A.S. 395,969 335,406 0.3
------------------------------------------------------------------------------------------------------------------------
Total Investments in Turkey 731,382 815,336 0.8
====================================================================================================================================
United
Kingdom Beverage 410,000 Grand Metropolitan PLC (Ordinary) 2,663,875 3,700,450 3.4
------------------------------------------------------------------------------------------------------------------------
Entertainment & Leisure 320,000 Rank Group PLC 2,323,790 1,787,651 1.7
------------------------------------------------------------------------------------------------------------------------
Insurance 200,000 Commercial Union PLC 2,432,662 2,818,368 2.6
------------------------------------------------------------------------------------------------------------------------
Machinery 100,000 Siebe PLC (Ordinary) 805,619 1,920,852 1.8
------------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 790,000 BG PLC 3,018,263 3,472,296 3.2
------------------------------------------------------------------------------------------------------------------------
Retail 250,000 Boots Company PLC 2,214,174 3,581,676 3.3
------------------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 13,458,383 17,281,293 16.0
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
WESTERN
EUROPE Shares Held/ Value Percent of
(concluded) Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
Total Investments in Western Europe 39,007,618 53,842,616 49.9
====================================================================================================================================
Face
Amount Short-Term Securities
====================================================================================================================================
Commercial Paper** US$2,643,000 General Motors Acceptance Corp., 5.75% due
11/03/1997 2,642,156 2,642,156 2.4
------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 2,642,156 2,642,156 2.4
====================================================================================================================================
Total Investments $ 96,335,505 105,722,604 97.9
============
Unrealized Appreciation on Forward Foreign Exchange Contracts*** 848,046 0.8
Other Assets Less Liabilities 1,379,917 1.3
------------ ------
Net Assets $107,950,567 100.0%
============ ======
====================================================================================================================================
</TABLE>
+ Non-income producing security.
(a) Warrants entitle the Fund to purchase a predetermined number
of shares of common stock. The purchase price and the number
of shares are subject to adjustment under certain conditions
until the expiration date.
(b) Received through a bonus issue from Companhia Vale do Rio Doce
S.A. As of October 31, 1997, the bonds have not commenced
trading and the coupon rate has not been determined.
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest
rate shown is the discount rate paid at the time of purchase
by the Fund.
*** Forward foreign exchange contracts sold as of October 31, 1997
were as follows:
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Note 1c)
-------------------------------------------------------------
Y1,919,300,000 January 1998 $848,046
-------------------------------------------------------------
Total Unrealized Appreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$17,000,000) $848,046
==========
-------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1997
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of October 31, 1997
====================================================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$96,335,505) (Note 1a). ................. $105,722,604
Unrealized appreciation on forward foreign exchange contracts (Note 1c) ......... 848,046
Cash............................................................................. 564
Foreign cash (Note 1b)........................................................... 1,237,264
Receivables:
Securities sold................................................................. $ 1,696,690
Dividends....................................................................... 227,543
Beneficial interest sold........................................................ 98,171 2,022,404
------------
Prepaid registration fees and other assets (Note 1f)............................. 18,691
------------
Total assets..................................................................... 109,849,573
------------
==================================================================================================================================
Liabilities: Payables:
Securities purchased............................................................ 1,248,755
Beneficial interest redeemed.................................................... 269,037
Distributor (Note 2)............................................................ 101,565
Investment adviser (Note 2)..................................................... 76,174
Administration fee (Note 2)..................................................... 25,391
Commissions..................................................................... 19,487 1,740,409
------------
Accrued expenses and other liabilities........................................... 158,597
------------
Total liabilities................................................................ 1,899,006
------------
==================================================================================================================================
Net Assets: Net assets....................................................................... $107,950,567
============
==================================================================================================================================
Net Assets Common shares of beneficial interest, $.10 par value, unlimited
number of shares authorized $ 872,754
Consist of: Paid-in capital in excess of par................................................. 91,695,345
Undistributed net investment income--net (Note 1h)............................... 1,232,371
Undistributed realized capital gains on investments and foreign
currency transactions--net .................................................... 3,929,996
Unrealized appreciation on investments and foreign currency
transactions--net ............................................................. 10,220,101
------------
Net assets--Equivalent to $12.37 per share based on 8,727,544
shares of beneficial interest outstanding ..................................... $107,950,567
============
==================================================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1997
==================================================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $388,839 foreign withholding tax).............................. $ 4,539,809
Income Interest and discount earned..................................................... 117,220
(Notes 1d & 1e): ------------
Total income..................................................................... 4,657,029
------------
==================================================================================================================================
Expenses: Account maintenance and distribution fees (Note 2)............................... $ 1,415,661
Investment advisory fees (Note 2)................................................ 1,061,746
Administration fees (Note 2)..................................................... 353,915
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended October 31, 1997
==================================================================================================================================
<S> <C> <C> <C>
Stamp tax fee.................................................................... 232,951
Custodian fees................................................................... 136,798
Accounting services (Note 2)..................................................... 73,649
Professional fees................................................................ 60,239
Transfer agent fees (Note 2)..................................................... 32,850
Amortization of organization expenses (Note 1f).................................. 22,761
Trustees' fees .................................................................. 21,679
Registration fees (Note 1f)...................................................... 19,504
Pricing fees..................................................................... 8,379
Printing and shareholder reports................................................. 4,294
Other............................................................................ 11,138
------------
Total expenses................................................................... 3,455,564
------------
Investment income--net........................................................... 1,201,465
============
==================================================================================================================================
Realized & Realized gain from:
Unrealized Gain Investments--net................................................................ 3,930,008
on Investments Foreign currency transactions--net.............................................. 901,521 4,831,529
& Foreign ------------
Currency Change in unrealized appreciation/depreciation on:
Transactions -- Investments--net................................................................ 8,208,524
Net (Notes 1b, Foreign currency transactions--net.............................................. 834,325 9,042,849
1c, 1e & 3): ------------
Net realized and unrealized gain on investments and foreign currency
transactions ................................................................... 13,874,378
------------
Net Increase in Net Assets Resulting from Operations............................. $ 15,075,843
============
==================================================================================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended October 31,
------------------------------
Increase (Decrease) in Net Assets: 1997 1996
==================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income (loss)--net.................................................... $ 1,201,465 $ (861,635)
Realized gain on investments and foreign currency transactions--net ............. 4,831,529 25,429,746
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net .................................................... 9,042,849 (12,672,616)
------------ ------------
Net increase in net assets resulting from operations............................. 15,075,843 11,895,495
------------ ------------
==================================================================================================================================
Dividends & In excess of investment income--net.............................................. (5,862,557) (6,862,242)
Distributions to Realized gain on investments--net................................................ (4,613,274) (7,287,890)
Shareholders ------------ ------------
(Note 1g): Net decrease in net assets resulting from dividends and distributions
to shareholders ............................................................... (10,475,831) (14,150,132)
------------ ------------
==================================================================================================================================
Beneficial
Interest Net decrease in net assets derived from beneficial interest transactions ........ (71,570,166) (19,901,777)
Transactions ------------ ------------
(Note 4):
==================================================================================================================================
Net Assets: Total decrease in net assets..................................................... (66,970,154) (22,156,414)
Beginning of year................................................................ 174,920,721 197,077,135
------------ ------------
End of year*..................................................................... $107,950,567 $174,920,721
============ ============
==================================================================================================================================
*Undistributed (accumulated) investment income (loss)--net (Note 1h) ............. $ 1,232,371 $ (8,950,726)
============ ============
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. For the Year Ended October 31,
------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997+ 1996+ 1995+ 1994+ 1993+
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .............. $ 12.09 $ 12.28 $ 12.83 $ 11.74 $ 9.60
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net................... .10 (.05) (.05) (.12) (.08)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net.......... .97 .76 (.18) 1.26 2.22
-------- -------- -------- -------- --------
Total from investment operations ................ 1.07 .71 (.23) 1.14 2.14
-------- -------- -------- -------- --------
Less dividends and distributions:
In excess of investment income--net............. (.44) (.44) -- -- --
Realized gain on investments--net............... (.35) (.46) (.32) (.05) --
-------- -------- -------- -------- --------
Total dividends and distributions................ (.79) (.90) (.32) (.05) --
-------- -------- -------- -------- --------
Net asset value, end of year..................... $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on net asset value per share............... 9.26% 5.93% (1.68%) 9.74% 22.29%
Return: ======== ======== ======== ======== ========
==================================================================================================================================
Ratios to
Average Expenses......................................... 2.44% 2.37% 2.35% 2.27% 2.76%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net.................... .84% (.42%) (.41%) (.56%) (.86%)
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of year (in thousands) .......... $107,951 $174,921 $197,077 $272,487 $175,756
Data: ======== ======== ======== ======== ========
Portfolio turnover............................... 28.62% 38.16% 17.31% 24.64% 32.54%
======== ======== ======== ======== ========
Average commission rate paid++................... $ .0076 $ .0010 -- -- --
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
+ Based on average shares outstanding during the year.
++ For fiscal years beginning on or after September 1,
1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of
equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which
have been converted into US dollars using the prevailing
exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Consults International Portfolio (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities, including depositary
receipts, which are traded on stock exchanges are valued at the last sale price
on the exchange on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market are valued
at the last available bid price prior to the time of valuation. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options
34
<PAGE>
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 fair
value as determined in good faith by or under the direction of the Fund's Board
of Trustees.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Realized and unrealized gains/losses on foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
o Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contract.
o Foreign currency options and futures--The Fund may purchase or sell listed or
over-the-counter foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-US dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
o Financial futures contracts--The Fund may purchase or sell 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.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--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.
35
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend date. Distributions in excess of net investment
income are due primarily to differing tax treatments for foreign currency
transactions.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $21,706,431 have been reclassified between undistributed
net realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
(Suisse) Investment Management S.A. (the "Investment Adviser"). The Investment
Adviser is a subsidiary of Merrill Lynch Bank (Suisse) S.A. which is, in turn,
an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Fund Asset
Management, L.P. ("FAM") and Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") have been retained as sub-advisers (the "Sub-Advisers") to the Fund.
Pursuant to sub-advisory agreements, the Sub-Advisers will provide investment
advisory services with respect to the management of the Fund's cash position.
As compensation for its services to the Fund, the Investment Adviser receives
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The Fund will not pay any incremental fee to the Sub-Advisers for
their services.
The Fund has an Administrative Agreement with Princeton Administrators, L.P.
(the "Administrator"), an indirect subsidiary of ML & Co. The Administrator
performs or arranges for the performance of certain administrative services
(i.e., services other than investment advice and related portfolio activities)
necessary for the operation of the Fund, including maintaining the books and
records of the Fund, preparing reports and other documents required by United
States Federal, state and other applicable laws and regulations to maintain the
registration of the Fund and its shares and providing the Fund with
administrative office facilities. For the services rendered to the Fund and the
facilities furnished, the Fund pays the Administrator a monthly fee equal to
0.25% of the Fund's average daily net assets. Also, accounting services are
provided to the Fund by the Administrator, and the Fund reimburses the
Administrator for its costs in connection with such services on a semi-annual
basis.
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.
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, 1997,
MLFD earned $1,415,661 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 $59,811 in commissions on the execution of
portfolio security transactions for the Fund for the year ended October 31,
1997.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, the Investment Adviser (including their affiliated companies), MLFDS, MLFD,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1997 were $39,399,336 and $117,464,868, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
- ------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ------------------------------------------------------------------------------
Long-term investments ........................ $3,930,008 $ 9,387,099
Foreign currency transactions ................ (128,636) (15,044)
Forward foreign exchange contracts ........... 1,030,157 848,046
---------- -----------
Total ....................................... $4,831,529 $10,220,101
========== ===========
- ------------------------------------------------------------------------------
36
<PAGE>
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $9,387,099, of which $18,970,416 related to appreciated
securities and $9,583,317 related to depreciated securities. The aggregate cost
of investments at October 31, 1997 for Federal income tax purposes was
$96,335,505.
4. Beneficial Interest Transactions:
Transactions in shares of beneficial interest were as follows:
- -----------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1997 Shares Amount
- -----------------------------------------------------------------------------
Shares sold.................................... 1,189,803 $ 15,058,939
Shares issued to shareholders
in reinvestment of dividends
and distributions.............................. 829,254 9,652,518
----------- ------------
Total issued................................... 2,019,057 24,711,457
Shares redeemed................................ (7,759,006) (96,281,623)
----------- ------------
Net decrease................................... (5,739,949) $(71,570,166)
=========== ============
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1996 Shares Amount
- -----------------------------------------------------------------------------
Shares sold................................... 3,894,853 $ 48,570,265
Shares issued to shareholders in
reinvestment of dividends
and distributions............................. 1,089,865 12,925,796
----------- ------------
Total issued.................................. 4,984,718 61,496,061
Shares redeemed............................... (6,567,697) (81,397,838)
----------- ------------
Net decrease.................................. (1,582,979) $(19,901,777)
=========== ============
- -----------------------------------------------------------------------------
5. Commitments:
At October 31, 1997, the Fund entered into forward exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to purchase various foreign currencies with an approximate value of
$1,250,000.
37
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Hedging Techniques........................................................ 2
Investment Restrictions................................................... 6
Management of the Fund..................................................... 8
Trustees and Officers..................................................... 8
Compensation of Trustees.................................................. 10
Investment Adviser........................................................ 10
Purchase of Shares......................................................... 12
Distribution Plan......................................................... 12
Redemption of Shares....................................................... 14
Portfolio Transactions and Brokerage....................................... 14
Determination of Net Asset Value........................................... 16
Shareholder Services....................................................... 17
Investment Account........................................................ 17
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 18
Merrill Lynch Asset Information and Measurement (R) Service............... 18
Taxes...................................................................... 18
Tax Treatment of Forward Foreign Exchange Transactions.................... 21
Special Rules for Options, Futures and Foreign Currency Transactions...... 21
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....................................................... 28
</TABLE>
Code # 16459-0198
STATEMENT OF
ADDITIONAL INFORMATION
[LOGO]
- -------------------------
MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
Investment Adviser:
Merrill Lynch (Suisse) Investment Management S.A.
January 29, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Contained in Part A, the Prospectus:
Financial Highlights for each of the years in the five-year period ended
October 31, 1997, and for the period September 14, 1992 (commencement of
operations) to October 31, 1992.
Contained in Part B, the Statement of Additional Information:
Schedule of Investments as of October 31, 1997.
Statement of Assets and Liabilities as of October 31, 1997.
Statement of Operations for the year ended October 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-year
period ended October 31, 1997.
Financial Highlights for each of the years in the five-year period ended
October 31, 1997.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1 --Amended and Restated Declaration of Trust of Registrant.*
2 --By-Laws of Registrant....
3 --None.
4 --Instruments Defining Rights of Shareholders (Incorporated by
reference to Exhibits 1 and 2 hereof).
5(a) --Investment Advisory Agreement between Registrant and Merrill
Lynch (Suisse) Investment Management S.A.**
5(b) --Sub-Advisory Agreement between Merrill Lynch (Suisse)
Investment Management S.A., Registrant and Fund Asset
Management, Inc.**
5(c) --Sub-Advisory Agreement between Merrill Lynch (Suisse)
Investment Management S.A., Registrant and Merrill Lynch Asset
Management U.K. Limited.**
6 --Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.**
7 --None.
8 --Custody Agreement between Registrant and Brown Brothers
Harriman & Co.**
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial
Data Services, Inc.**
9(b) --Administration Agreement between Registrant and Princeton
Administrators, Inc.**
9(c) --License Agreement Relating to Use of Name between Merrill
Lynch & Co., Inc. and the Registrant.**
10 --Opinion and Consent of Shereff, Friedman, Hoffman & Goodman,
LLP, counsel for Registrant....
11 --Consent of Ernst & Young LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch (Suisse) Investment Management
S.A.**
14 --Not applicable.
15 --Distribution Plan of Registrant.**
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
16 --Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item 22.
17(a) --Financial Data Schedule.
17(b) --Other Exhibits.
--Powers of Attorney for Officers and Trustees.
Arthur Zeikel**
Herbert I. London**
Joseph L. May**
Andre F. Perold+++
Gerald M. Richard+++
Robert R. Martin..
17(c) --Power of Attorney for James H. Bodurtha..
</TABLE>
- --------
* Incorporated by reference to same numbered exhibit to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-1A (File
No. 33-49354).
** Incorporated by reference to same numbered exhibit to Pre-Effective
Amendment No. 2 to Registrant's Registration Statement on Form N-1A (File
No. 33-49354).
+ Incorporated by reference to Exhibit 14 to Pre-Effective Amendment No. 1
to the Registration Statement under the Securities Act of 1933 on Form N-
1 (File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed on
January 26, 1982.
++ Incorporated by reference to Exhibit 14 to Post-Effective Amendment No. 3
to the Registration Statement under the Securities Act of 1933 on Form N-
1A (File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed
December 29, 1983.
+++ Incorporated by reference to Exhibit 17 to Post-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A (File No. 33-49354).
. Incorporated by reference to same numbered exhibit to Post-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form N-1A
(File No. 33-49354).
.. Incorporated by reference to same numbered exhibit to Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form N-1A
(File No. 33-49354).
... Incorporated by reference to same numbered exhibit to Post-Effective
Amendment No. 5 to the Registrant's Registration Statement on Form N-1A
(File No. 33-49354).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1997
-------------- -----------------
<S> <C>
Shares of beneficial interest, par value $0.10 per share... 2,287
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article V and Article XI of Registrant's Declaration of
Trust, Section 9 of the Distribution Agreement, Article IV of the Investment
Advisory Agreement and Article IV of the Sub-Advisory Agreements.
C-2
<PAGE>
(a) Declaration of Trust
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder
shall be subject to any personal liability whatsoever to any Person in
connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from his bad faith, willful misfeasance, gross
negligence or reckless disregard of his duty to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability, he shall
not on account thereof, be held to any personal liability. The Trust shall
indemnify and hold each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by reason of his
being or having been a Shareholder, and shall reimburse such Shareholder for
all legal and other expenses reasonably incurred by him in connection with any
such claim or liability. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of
the Trust to indemnify or reimburse a Shareholder in any appropriate situation
even though not specifically provided herein.
5.2 Non-Liability of Trustees, etc. No Trustee, officer, employee or agent of
the Trust shall be liable to the Trust, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, will misfeasance, gross negligence or reckless disregard of his
duties.
5.3 Mandatory Indemnification. The Trust shall indemnify each of its
Trustees, officers, employees and agents (including persons who serve at its
request as directors, officers or trustees of another organization in which it
has any interest, as a shareholder, creditor or otherwise) against all
liabilities and expenses (including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while in office or thereafter, by reason of
his being or having been such a Trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to have
acted in bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties; provided, however, that as to any matter disposed of by a
compromise payment by such person, pursuant to a consent decree or otherwise,
no indemnification either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the effect that if either
the matter of willful misfeasance, gross negligence or reckless disregard of
duty, or the matter of good faith and reasonable belief as to the best
interests of the Trust, has been adjudicated, it would have been adjudicated in
favor of such person. The rights accruing to any Person under these provisions
shall not exclude any other right to which he may be lawfully entitled;
provided that no Person may satisfy any right of indemnity or reimbursement
granted herein or in Section 5.1 or to which he may be otherwise entitled
except out of the property of the Trust, and no Shareholder shall be personally
liable to any Person with respect to any claim for indemnity or reimbursement
or otherwise. The Trustees may make advance payments in connection with
indemnification under this Section 5.3, provided that the indemnified person
shall have given a written undertaking to reimburse the Trust in the event it
is subsequently determined that he is not entitled to such indemnification.
C-3
<PAGE>
5.4 No Bond Required of Trustees. No Trustee shall, as such, be obligated to
give any bond or surety or other security for the performance of any of his
duties hereunder.
5.5 No Duty or Investigation; Notice in Trust Instruments, etc. No purchaser,
lender, transfer agent or other person dealing with the Trustees or any
officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees or by any officers, employees or
agents of the Trust, in their capacity as such, shall contain an appropriate
recital to the effect that the Shareholders, Trustees, officers, employees and
agents of the Trust shall not personally be bound by or liable thereunder, nor
shall resort be had to their private property for the satisfaction of any
obligation or claim thereunder, and appropriate references shall be made herein
to the Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, Shareholders, officers, employees or
agents of the Trust. The Trustees may maintain insurance for the protection of
the Trust Property, its Shareholders, Trustees, officers, employees and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment
shall deem advisable.
5.6 Reliance on Experts, etc. Each Trustee and officer or employee of the
Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books or account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by any investment adviser, distributor, selected
dealers, accountants, appraisers or other experts or consultants elected with
reasonable care by the Trustees, officers or employees of the Trust, regardless
of whether such counsel or expert may also be a Trustee.
ARTICLE XI
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.
11.3. AMENDMENT PROCEDURE.
(a) This Declaration may be amended by the affirmative vote of the holders of
not less than a majority of the Shares at any meeting of Shareholders or by an
instrument in writing, without a meeting, signed by a majority of the Trustees
and consented to by the holders of not less than a majority of such Shares. The
Trustees may also amend this Declaration without the vote or consent of
Shareholders if they deem it necessary to conform this Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Internal Revenue Code, but
the Trustees shall not be liable for failing so to do.
(b) Nothing contained in this Declaration shall permit the amendment of this
Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessment upon Shareholders.
(b) Distribution Agreement
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning
C-4
<PAGE>
of the Securities Act of 1933 (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
(c) Investment Advisory Agreement; Sub-Advisory Agreements
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties.
Article IV of the Investment Advisory Agreement between Registrant and
Merrill Lynch (Suisse) Investment Management S.A. (the "Investment Adviser")
(Exhibit 5(a) to Registrant's Registration Statement on Form N-1A) limits the
liability of the Investment Adviser to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its duties under the Investment Advisory
Agreement.
Article IV of the Subadvisory Agreements between the Investment Adviser,
Registrant, and Fund Asset Management Inc. (now called Fund Asset Management,
L.P.) ("FAM") and between the Investment Adviser, Registrant, and Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") (Exhibits 5(b) and 5(c),
respectively, to Registrant's Registration Statement on Form N-1A) limits the
liability of FAM and MLAM U.K. to liabilities arising from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties, or
by reason of reckless disregard of their respective obligations and duties
under the Subadvisory Agreements.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Investment Adviser does not act as investment adviser for any other
investment companies registered under the Investment Company Act. The address
of the Investment Adviser and Merrill Lynch Bank (Suisse) S.A. is 7 Rue Munier-
Romilly, 1206 Geneva, Switzerland. For information as to the Investment
Adviser's business, profession, vocation or employment of a substantial nature,
reference is made to the Form ADV, as amended to date, filed by the Investment
Adviser (File No. 801-42073) pursuant to the Investment Advisers Act of 1940,
as amended (the "Advisers Act").
Merrill Lynch Asset Management, L.P. ("MLAM") acts as the investment adviser
for the following open-end registered investment companies: Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Eurofund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Growth
C-5
<PAGE>
Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-
adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value
Equity Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc., and
Worldwide Dollar Vest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators, L.P. ("Princeton Administrators") is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services ("MLFDS") is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-6
<PAGE>
Set forth below is a list of each executive officer and director of FAM
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since January 1, 1995 for his
or her or its own account or in the capacity of director, officer, partner or
trustee.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
- ---- -------------- ---------------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM.
Fund Asset Management, Limited Partner Investment Advisory Services.
Inc. ..................
Princeton Services...... General Partner General Partner of MLAM.
Arthur Zeikel........... Chairman Chairman of MLAM; President of MLAM and
FAM (from 1977 to 1997); Chairman and
Director of Princeton Services;
President of Princeton Services (from
1993 to 1997); Executive Vice President
of ML & Co.
Jeffrey M. Peek......... President President of MLAM (since 1997);
President and Director of Princeton
Services (since 1997); Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Linda L. Feredici....... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Vincent R. Giordano..... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Elizabeth Griffin....... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Norman R. Harvey........ Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Michael J. Hennewinkel.. Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of MLAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services.
Ronald M. Kloss......... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Debra Landsman-Yaros.... Senior Vice Senior Vice President of MLAM; Vice
President President of MLFD; Senior Vice
President of Princeton Services.
Stephen M.M. Miller..... Senior Vice Executive Vice President of Princeton
President Administrators L.P.; Senior Vice
President of Princeton Services.
Joseph T. Monagle, Jr... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Michael L. Quinn........ Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
- ---- -------------- ---------------------------------------
<S> <C> <C>
Richard Reller.......... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services;
Director of MLFD.
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President and MLAM; Senior Vice President and
Treasurer Treasurer of Princeton Services; Vice
President and Treasurer of MLFD.
Gregory D. Upah......... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
Ronald L. Welburn....... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services.
</TABLE>
MLAM U.K. serves as sub-adviser for Merrill Lynch Eurofund. For information
as to MLAM U.K.'s business, profession, vocation or employment of a substantial
nature, reference is made to the Form ADV, as amended to date, filed by MLAM
U.K. (File No. 801-31780) pursuant to the Advisers Act.
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Convertible Holdings, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Growth Fund, Merrill Lynch Global
Resources Trust, Merrill Lynch Healthcare Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real Estate Fund,
Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., Worldwide DollarVest Fund, Inc.,
and Merrill Lynch Short-Term Global Income Fund, Inc. The address of each of
these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1995, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition,
Messrs. Zeikel, Albert, and Richard are officers of one or more of the
registered investment companies listed in the first two paragraphs of this Item
28:
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- -------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel...... Director and Chairman of the Manager; Chairman of
Chairman MLAM; President of MLAM and FAM (from
1977 to 1997); Chairman and Director of
Princeton Services; President of
Princeton Services (from 1993 to 1997);
Executive Vice President of ML & Co.
Alan J. Albert..... Senior Managing Vice President of the Manager.
Director
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- -------------- ----------------------------------
<S> <C> <C> <C>
Nicholas C.D. Director Director of Merrill Lynch Europe PLC;
Hall........ General Counsel of Merrill Lynch
International Private Banking Group.
Gerald M. Senior Vice Senior Vice President and Treasurer of
Richard..... President the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD.
Carol Ann Company Secretary None
Langham.....
Debra Anne Assistant Company None
Searle...... Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the second paragraph of Item
28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., The Municipal Fund Accumulation
Program, Inc., and also acts as principal underwriter for the following closed-
end funds: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Municipal Strategy Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of officers Crook,
Aldrich, Brody, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.............. President and Director Executive Vice President
Richard L. Reller........... Director None
Thomas J. Verage............ Director None
William E. Aldrich.......... Senior Vice President None
Robert W. Crook............. Senior Vice President None
Kevin P. Boman.............. Vice President None
Michael J. Brady............ Vice President None
William M. Breen............ Vice President None
Michael G. Clarke........... Vice President None
Mark A. DeSario............. Vice President None
James T. Fatseas............ Vice President None
Debra W. Landsman-Yaros..... Vice President None
Michelle T. Lau............. Vice President None
Vice President and Treasurer
Gerald M. Richard........... Treasurer
Salvatore Venezia........... Vice President None
William Wasel............... Vice President None
Robert Harris............... Secretary None
</TABLE>
- --------
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536-9011, Merrill Lynch Financial Data Services, Inc.,
4800 Deer Lake Drive East, Jacksonville, Florida and Brown Brothers Harriman &
Co., 40 Water Street, Boston, Massachusetts 02109.
C-9
<PAGE>
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Fund" in the Statement of Additional Information
constituting Part B of the Registration Statement, Registrant is not a party to
any management related service contract.
ITEM 32. UNDERTAKINGS.
a. If requested to do so by the holders of at least 10% of the Fund's
outstanding shares, the Fund will call a meeting of shareholders for the
purpose of voting upon the removal of a trustee or trustees and the Fund will
assist communications with other shareholders as required by Section 16(c) of
the Investment Company Act of 1940.
b. The Registrant will furnish each person to whom a Prospectus is delivered
with a copy of Registrant's latest annual report to shareholders, upon request
and without charge.
C-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND THAT IT HAS DULY CAUSED THIS
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND
STATE OF NEW JERSEY, ON THE 29TH DAY OF JANUARY 1998.
Merrill Lynch Consults
International Portfolio
(REGISTRANT)
By: /s/ Arthur Zeikel
----------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE(S) INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Trustee (Principal January 29,
(ARTHUR ZEIKEL) Executive Officer) 1998
* Treasurer (Principal
- ------------------------------------- Financial and January 29,
(GERALD M. RICHARD) Accounting Officer) 1998
* Trustee
- ------------------------------------- January 29,
(JAMES H. BODURTHA) 1998
* Trustee
- ------------------------------------- January 29,
(HERBERT I. LONDON) 1998
* Trustee
- ------------------------------------- January 29,
(ROBERT R. MARTIN) 1998
* Trustee
- ------------------------------------- January 29,
(JOSEPH L. MAY) 1998
* Trustee
- ------------------------------------- January 29,
(ANDRE F. PEROLD) 1998
*By /s/ Arthur Zeikel
- ------------------------------------- January 29,
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT) 1998
C-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11 --Consent of Ernst & Young LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Globe along with Back cover of Prospectus and
bar below it. back cover of Statement of
Additional Information
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 96335505
<INVESTMENTS-AT-VALUE> 105722604
<RECEIVABLES> 2022404
<ASSETS-OTHER> 2104565
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109849573
<PAYABLE-FOR-SECURITIES> 1248755
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 650251
<TOTAL-LIABILITIES> 1899006
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 92568099
<SHARES-COMMON-STOCK> 8727544
<SHARES-COMMON-PRIOR> 14467493
<ACCUMULATED-NII-CURRENT> 1232371
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3929996
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10220101
<NET-ASSETS> 107950567
<DIVIDEND-INCOME> 4539809
<INTEREST-INCOME> 117220
<OTHER-INCOME> 0
<EXPENSES-NET> (3455564)
<NET-INVESTMENT-INCOME> 1201465
<REALIZED-GAINS-CURRENT> 4831529
<APPREC-INCREASE-CURRENT> 9042849
<NET-CHANGE-FROM-OPS> 15075843
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5862557)
<DISTRIBUTIONS-OF-GAINS> (4613274)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1189803
<NUMBER-OF-SHARES-REDEEMED> 7759006
<SHARES-REINVESTED> 829254
<NET-CHANGE-IN-ASSETS> (66970154)
<ACCUMULATED-NII-PRIOR> (8950726)
<ACCUMULATED-GAINS-PRIOR> 25418173
<OVERDISTRIB-NII-PRIOR> (6862242)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1061746
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3455564
<AVERAGE-NET-ASSETS> 141565951
<PER-SHARE-NAV-BEGIN> 12.09
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> .97
<PER-SHARE-DIVIDEND> (.44)
<PER-SHARE-DISTRIBUTIONS> (.35)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.37
<EXPENSE-RATIO> 2.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "General Information - Independent Auditors" and to the use of
our report dated December 5, 1997, in this Registration Statement on Form N-1A
under the Securities Act of 1933 (File No. 33-49354) and under the Investment
Company Act of 1940 (File No. 811-6725) of Merril Lynch Consults International
Portfolio.
/s/ Ernst & Young LLP
Princeton, New Jersey
January 23, 1998
