AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1999
SECURITIES ACT FILE NO. 33-49354
INVESTMENT COMPANY ACT FILE NO. 811-6725
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 10 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
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)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ.
COUNSEL FOR THE FUND:
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP MERRILL LYNCH ASSET MANAGEMENT
919 THIRD AVENUE P.O. BOX 9011
NEW YORK, NY 10022-9998 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: JOEL H. GOLDBERG, ESQ.
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 27, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (l)
[ ] on (date) pursuant to paragraph (a) (l)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[MERRILL LYNCH LOGO HERE]
[PROSPECTUS GRAPHIC HERE]
Merrill Lynch Consults International Portfolio
[PROSPECTUS GRAPHIC HERE]
February 27, 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
[KEY FACTS GRAPHIC HERE]
KEY FACTS
--------------------------------------------------------------------
The Merrill Lynch Consults International Portfolio at a Glance.....3
Risk/Return Bar Chart..............................................5
Fees and Expenses..................................................6
[DETAILS ABOUT THE FUND GRAPHIC HERE]
DETAILS ABOUT THE FUND
--------------------------------------------------------------------
How the Fund Invests...............................................8
Investment Risks..................................................10
[YOUR ACCOUNT GRAPHIC HERE]
YOUR ACCOUNT
--------------------------------------------------------------------
How to Buy, Sell and Transfer Shares..............................16
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MANAGEMENT OF THE FUND
--------------------------------------------------------------------
Merrill Lynch (Suisse) Investment Management S.A.................22
Financial Highlights.............................................23
[FOR MORE INVORMATION GRAPHIC HERE]
FOR MORE INFORMATION
--------------------------------------------------------------------
Shareholder Reports.......................................Back Cover
Statement of Additional Information.......................Back Cover
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
[KEY FACTS GRAPHIC HERE]
THE MERRILL LYNCH CONSULTS INTERNATIONAL
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
COMMON STOCK -- shares of ownership of a corporation.
PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets.
CONVERTIBLE SECURITIES --
corporate securities (usually preferred stock or bonds) that are exchangeable
for a fixed number of other securities (usually common stock) at a set price or
formula.
INDEXED SECURITIES -- derivative securities the values of which are linked to
equity securities or securities indices.
What are the Fund's objective and goals?
The investment objective of the Fund is to seek the highest total investment
return that is consistent with prudent risk through investment in a diversified
international portfolio of equity securities, other than United States equity
securities. In other words, it tries to choose investments that will both
provide high current income and increase in value, without undue risk. The Fund
cannot guarantee that it will achieve its goals.
What are the Fund's main investment strategies?
The Fund invests primarily in a diversified portfolio of equity securities of
companies located outside the United States that Fund management believes are
undervalued or have good prospects for earnings growth. A company's stock is
considered undervalued when its price is less than what Fund management
believes it is worth. A company whose earnings per share grow faster than
inflation and the economy in general usually has a higher stock price over time
than companies with slower earnings growth.
Equity securities include COMMON STOCKS, PREFERRED STOCKS, CONVERTIBLE
SECURITIES and INDEXED SECURITIES. The Fund will normally invest at least 65%
of its total assets in equity securities of companies located in at least three
foreign countries, and expects to invest at least 50% of its assets in
securities of companies located in Western Europe and the Far East. Fund
management believes that an internationally diversified portfolio may offer
higher total investment return than a portfolio of securities of one securities
market. This is because the securities markets of different countries may move
independently of one another and when they are combined into one portfolio,
risk may be reduced. Fund management will make investments based on its
assessment of international economic and market trends including its evaluation
of the condition and growth potential of various economies and securities
markets, currency and taxation considerations and other financial, social,
national and political factors.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore,
the value of Fund shares -- may go up or down. These changes may occur because
a stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the
Fund's investments goes down, you may lose money. Investments that Fund
management selects may underperform stock market indexes or other funds with
similar investment objectives and investment strategies.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
3
<PAGE>
THE MERRILL LYNCH CONSULTS INTERNATIONAL
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
[KEY FACTS GRAPHIC HERE]
Key Facts
MERRILL LYNCH CONSULTS(R) SERVICE offers to assist clients in selecting and
retaining, from a roster of managers, one or more professional portfolio
managers who generally emphasize investment in United States securities.
MERRILL LYNCH STRATEGIC PORTFOLIO ADVISOR(R) SERVICE provides business and
individual clients with a comprehensive package of consulting, investment and
account services.
The Fund will invest most of its assets in non-U.S. securities. Foreign
investing involves special risks -- including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
Who should invest?
You may buy shares of the Fund if you are a client of the MERRILL LYNCH
CONSULTS(R) SERVICE or of the MERRILL LYNCH STRATEGIC PORTFOLIO ADVISOR(R)
SERVICE.
The Fund may be an appropriate investment for you if you:
o Are investing with long term goals, such as retirement or funding a
child's education.
o Want a professionally managed and diversified international portfolio.
o Are looking for exposure to a variety of foreign markets.
o In seeking total investment return, you are willing to accept the risk
that the value of your investment may decline.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
4
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for each complete calendar year since the Fund's inception. The table compares
the Fund's average annual total returns for the periods shown with those of the
Morgan Stanley Capital International Europe, Asia, Far East (EAFE) Index. How
the Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
[RISK/BAR CHART GRAPHIC APPEARS HERE]
22.37% 1.94% 9.68% 5.01% 3.82% 2.91%
- ----------------------------------------------
1993 1994 1995 1996 1997 1998
During the period shown in the bar chart, the highest return for a quarter was
14.04% (quarter ended June 30, 1997) and the lowest return for a quarter was
- -18.22% (quarter ended September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE
CALENDAR YEAR ENDED) PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------- ---------- ------------ ----------------
<S> <C> <C> <C>
Merrill Lynch Consults
International Portfolio 2.91% 4.64% 6.69%+
Morgan Stanley
Capital International
EAFE Index* 20.00% 9.19% 11.53%++
- -------------------------- ----- ---- -----
</TABLE>
* This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East. Past performance is not
predictive of future performance.
+ Inception date is September 14, 1992.
++ Since September 30, 1992.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
5
<PAGE>
FEES AND EXPENSES
- --------------------------------------------------------------------------------
[KEY FACTS GRAPHIC HERE]
Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating
the Fund.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT
MAINTENANCE) FEES -- fees used to compensate securities dealers for account
maintenance activities.
This table shows the fees and expenses that you may pay if you buy and hold
shares of the Fund. Future expenses may be greater or less than those indicated
below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT): (A)
- ------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) None
Maximum Sales Charge (Load)
imposed on Dividend Reinvestments None
Redemption Fee None
Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
MANAGEMENT FEE 0.75%
DISTRIBUTION AND/OR SERVICE (12B-1) FEES(B) 1.00%
Other Expenses (including transfer agency fees)(c) 0.70%
Administrative Fees (c) 0.25%
Total Annual Fund Operating Expenses(d) 2.70%
- ------------------------------------------------------ -----
</TABLE>
(a) Each client of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio AdvisorSM Service is charged an annual fee of up
to 3% (charged on a quarterly basis) of the value of the client's
portfolio. This fee is not charged on the portion of the client's assets
maintained in the Fund. A client investing directly in the Fund will not
be subject to the 3% charge at any time while the assets remain in the
Fund.
(b) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in other
Fund materials.
(c) The Fund pays the Transfer Agent $11.00 per shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. The Fund also pays
a $0.20 monthly closed account charge, which is assessed upon all accounts
that close during the year. This fee begins the month following the month
the account is closed and ends at the end of the calendar year. For the
fiscal year ended October 31, 1998, the Fund paid the Transfer Agent fees
totaling $34,506. The Administrator provides accounting services to the
Fund at its cost. For the fiscal year ended October 31, 1998, the Fund
reimbursed the Administrator $150,624 for these services.
(d) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. This fee is currently waived
for clients of the Merrill Lynch Consults(R) Service and of the Merrill
Lynch Strategic Portfolio AdvisorSM Service.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
6
<PAGE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ------------- --------- --------- ---------
<S> <C> <C> <C>
$273 $838 $1,430 $3,032
- ------------- ---- ------ ------
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
7
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
ABOUT THE
PORTFOLIO MANAGER
Christophe Velay is a Vice President and the portfolio manager of the Fund. Mr.
Velay has been a Portfolio Manager of Merrill Lynch Bank (Suisse) S.A. since
1986. Mr. Velay has been primarily responsible for the management of the
Fund's portfolio since 1998.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch (Suisse) Investment Management S. A.
The Fund's main goal is to provide the highest total investment return that is
consistent with prudent risk. The Fund tries to achieve its goal by investing
in a diversified portfolio of equity securities of companies located outside
the United States. In selecting securities, the Fund emphasizes those
securities that Fund management believes to be undervalued or have good
prospects for earnings growth.
The Fund will normally invest at least 65% of its total assets in equity
securities of companies located in at least three foreign countries, and
expects to invest at least 50% of its assets in securities of companies located
in Western Europe and the Far East. The Fund may also invest in capital markets
throughout the world (except in the United States). Equity securities consist
of:
o Common Stock
o Preferred Stock
o Securities Convertible into Common Stock, including American Depositary
Receipts and European Depositary Receipts
o Derivative securities, such as indexed and inverse securities, the
values of which are indexed or linked to the market values of other
equity securities or indices of equity securities, options and
futures.
The Fund considers a company to be "located" in the country where:
o it is legally organized,
o the primary trading market for its securities is located, or
o at least 50% of the company's (and its subsidiaries) non-
current assets, capitalization, gross revenues or profits have been
located during one of the last two fiscal years.
Under this definition, the Fund considers American Depositary Receipts to be
securities of companies located outside the United States. An investment in a
U.S. closed-end fund will be considered to be a non-U.S. investment if the
closed-end fund primarily invests in non-U.S. securities.
A company's stock is considered undervalued when the stock's current price is
less than Fund management believes a share of the company is worth. Fund
management feels a company's worth can be assessed by several factor, such as
o financial resources
o value of assets
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
8
<PAGE>
o sales and earnings growth
o product development
o quality of management
o overall business prospects
A company's stock may become undervalued when most investors fail to perceive
the company's strengths in one or more of these areas. A company whose earnings
per share grow faster than inflation and the economy in general usually has a
higher stock price over time than companies with slower earnings growth.
Fund management believes that an internationally diversified portfolio may
offer higher total investment return than a portfolio of securities of one
securities market. Historically, the securities markets of many countries
generally have moved independently of one another due to different economic,
financial, political and social factors. Fund management believes that when a
single portfolio combines securities of markets that are moving in different
directions, the total risk of the portfolio may be reduced, while the total
investment return of the portfolio may be increased. Exchange rates move
independently of the securities markets in a particular country, however, and
any gains made in a particular market may be adversely affected by changes in
exchange rates. Fund management will use a flexible investment approach and
will vary its policies as to geographic and industry diversification based on
its assessment of international economic and market trends. Its evaluation
could include the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other financial,
social, national and political factors.
The Fund may use derivative instruments including indexed and inverse
securities, options, futures and currency forwards. Derivatives are financial
instruments whose value is derived from another security, a commodity (such as
oil or gold) or an index such as the Morgan Stanley Capital International
Europe, Asia, Far East Index. The Fund may use indexed and inverse securities
to seek enhanced returns, hedge other positions, or vary portfolio leverage
with greater efficiency than would otherwise be possible under certain market
conditions. The Fund may purchase and sell options, futures and forward
currency contracts for hedging purposes. In addition, the Fund may write (or
sell) options on securities to earn income.
The Fund may invest in repurchase agreements, illiquid securities and may
engage in securities lending. As a temporary measure for defensive purposes or
to provide for redemptions, the Fund may hold cash or cash equivalents (in
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
9
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
U.S. dollars or foreign currencies) and short term securities, including money
market securities, without limitation. Investments in short term securities can
be sold easily and have limited risk of loss but earn only limited returns.
Therefore, the Fund may not achieve its investment objective.
INVESTMENT RISKS
- --------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
STOCK MARKET AND SELECTION RISK -- Stock market risk is the risk that the stock
markets will go up or down in value, including the possibility that the markets
will go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform stock market indexes
or other funds with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may make
it difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain foreign markets may not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
10
<PAGE>
of capital controls, nationalization of companies or industries, expropriation
of assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK -- Securities in which the Fund invests are usually denominated
or quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for Fund management to
completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
11
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures
and trade regulations also may involve certain risks (such as delays in payment
for or delivery of securities) not typically generated by the settlement of
U.S. investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Fund to carry out transactions. If the
Fund cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any
losses incurred.
Transactions effected on behalf of the Fund by the Investment Adviser may be
subject to Swiss federal transactional taxes of 0.15%.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
12
<PAGE>
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected:
o If the transition to euro, or EMU as a whole, does not proceed as
planned.
o If a participating country withdraws from EMU.
o If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the
euro as a distinct currency.
Risks associated with certain types of securities in which the Fund may invest
include:
CONVERTIBLE SECURITIES -- Convertible securities are generally debt securities
or preferred stocks that may be converted into common stock. Convertible
securities typically pay current income as either interest (debt security
convertibles) or dividends (preferred stocks). A convertible's value usually
reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like
regular debt securities; that is, if market interest rates rise, the value of a
convertible usually falls. Since it is convertible into common stock, the
convertible also has the same types of market and issuer risk as the value of
the underlying common stock.
DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
13
<PAGE>
[DETAILS ABOUT THE FUND GRAPHIC HERE]
Details About the Fund
involve leverage can result in losses that greatly exceed the amount originally
invested.
LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes including anticipatory
hedges. The Fund may also use written options to earn income. Hedging is a
strategy in which the Fund uses a derivative to offset the risk that other Fund
holdings may decrease in value. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different manner than
anticipated by the Fund or if the cost of the derivative outweighs the benefit
of the hedge. Hedging also involves the risk that changes in the value of the
derivative will not match those of the holdings being hedged as expected by the
Fund, in which case any losses on the holdings being hedged may not be reduced.
There can be no assurance that the Fund's hedging strategy will reduce risk or
that hedging transactions will be either available or cost effective. The Fund
is not required to use hedging and may choose not to do so.
BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, options.
SECURITIES LENDING -- The Fund may lend securities to financial institutions,
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.
ILLIQUID SECURITIES -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
14
<PAGE>
RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market. Restricted securities may be illiquid. The Fund may get only limited
information about the issuer, so it may be less able to predict a loss. In
addition, if Fund management receives material adverse non-public information
about the issuer, the Fund will not be able to sell the security.
Rule 144A securities are restricted securities that can be resold to qualified
institutional buyers but not to the general public. Rule 144A securities may
have an active trading market, but carry the risk that the active trading
market may not continue.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
15
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
HOW TO BUY, SELL, AND TRANSFER SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are offered for sale to clients of the Merrill Lynch
Consults(R) Service and Merrill Lynch Strategic Portfolio Advisor(R) Service by
Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc., an affiliate of Merrill Lynch.
You will not pay a sales charge when you buy or sell shares, but you will pay
distribution fees of 0.75% and account maintenance fees of 0.25% each year
under a distribution plan that the Fund has adopted under Rule 12b-1 under the
Investment Company Act of 1940. The Distributor uses the money that it receives
from the distribution fees to cover the costs of marketing, advertising and
compensating the Merrill Lynch Financial Consultant who assists you in
purchasing Fund shares.
The chart below summarizes how to buy, sell and transfer through Merrill Lynch
or other securities dealers. Shares of the Fund may not be exchanged for shares
of any other fund. Because the selection of a mutual fund involves many
considerations, your Merrill Lynch Financial Consultant may help you with this
decision.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
16
<PAGE>
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES
- ---------------------- ------------------------------
<S> <C><C>
Buy Shares Determine the amount of
your investment
------------------------------
Have your Merrill Lynch
Financial Consultant submit
your purchase order
------------------------------
Add to Your Purchase additional shares
Investment ------------------------------
Acquire additional shares
through the automatic
dividend reinvestment plan
------------------------------
Transfer Shares Transfer to a participating
to Another securities dealer
Securities Dealer ------------------------------
Transfer to a
non-participating securities
dealer
------------------------------
Terminate your Retain your shares of the
Merrill Lynch Fund with Merrill Lynch
Consults(R) Service
or the Merrill Lynch
Strategic Portfolio
AdvisorSM Service
account
Transfer shares to another
securities dealer
------------------------------
Sell your shares
==============================
<CAPTION>
IF YOU WANT TO INFORMATION IMPORTANT FOR YOU TO KNOW
- ---------------------- ---------------------------------------------------------------------------
<S> <C>
Buy Shares The minimum initial investment for the Fund is $5,000 for all
accounts.
---------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed within
fifteen minutes after the close of business on the New York Stock
Exchange will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase.
This fee is currently $5.35. This fee is currently waived for clients of
the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio AdvisorSM Service.
---------------------------------------------------------------------------
Add to Your The minimum investment for additional purchases is $1,000.
Investment ---------------------------------------------------------------------------
All dividends and capital gains distributions are automatically
reinvested without a sales charge.
---------------------------------------------------------------------------
Transfer Shares Subject to the consent of Merrill Lynch, you may transfer your Fund
to Another shares to another securities dealer that has entered into an
Securities Dealer agreement with Merrill Lynch. All shareholder services will be
available for the transferred shares. You may only purchase
additional shares of funds previously owned before the transfer. All
future trading of these assets must be coordinated by the receiving
firm.
---------------------------------------------------------------------------
You must either:
o Transfer your shares to an account with the Transfer Agent; or
o Sell your shares.
---------------------------------------------------------------------------
Terminate your Shares of the Fund are only distributed to current clients of the Merrill
Merrill Lynch Lynch Consults(R) Service and of Merrill Lynch Strategic Portfolio
Consults(R) Service AdvisorSM Service (other than reinvestment of dividends and capital
or the Merrill Lynch gains distributions of the Fund). If you wish to terminate the Merrill
Strategic Portfolio Lynch Consults(R) Service or the Merrill Lynch Strategic Portfolio
AdvisorSM Service AdvisorSM Service, your shares of the Fund may be retained in a Merrill
account Lynch brokerage account, subject to the consent of Merrill Lynch.
---------------------------------------------------------------------------
See "Transfer shares to another securities dealer" above.
---------------------------------------------------------------------------
See "Sell Your Shares" below.
===========================================================================
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
17
<PAGE>
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ------------------ ------------------------------- ------------------------------------------------------------------------
<S> <C><C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within fifteen minutes after that
day's close of business on the New York Stock Exchange (the
New York Stock Exchange generally closes at 4:00 p.m. Eastern time).
Any redemption request placed after that time will be priced at the
net asset value at the close of business on the next business day.
Dealers must submit redemption requests to the Fund not more than
thirty minutes after the close of business on the New York Stock
Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. This fee is currently waived for clients of the Merrill Lynch
Consults(R) Service and of Merrill Lynch Strategic Portfolio AdvisorSM
Service. No processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
========================================================================
</TABLE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
18
<PAGE>
OTHER SERVICES
- --------------------------------------------------------------------------------
Clients of the Merrill Lynch Consults(R) Service and the Merrill Lynch
Strategic Portfolio AdvisorSM Service are currently provided, without
incremental charge, the Merrill Lynch Asset Information and Measurement(R)
Service. This Service provides, through quarterly reports, the ability to
monitor and evaluate performance of a Merrill Lynch Consults(R) Service or
Merrill Lynch Strategic Portfolio 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.
If you are a client of the Merrill Lynch Consults(R) Service, you may receive
information regarding the possible change in risk posture to your domestic
account due to an investment in the Fund. Each domestic investment manager
employed by the Merrill Lynch Consults(R) Service is assigned a risk class,
based on its performance over the last 10 years, as calculated by Merrill Lynch
Consults(R) Service according to information provided by the manager. The Fund
is also assigned a risk class based on its performance over the last 10 years
compared to the EAFE Index, a market weighted, unmanaged index. This
information is provided only to clients who have domestic Merrill Lynch
Consults(R) Service accounts and own shares of the Fund in that account. The
Fund does not allocate its assets proportionately to the weightings of the EAFE
Index and may invest in countries that are not included in the EAFE Index.
Thus, the Fund's performance may not correlate to the EAFE Index. Projections
of risk posture based on a measurement of past performance of an investment
manager or of an index may not accurately predict future risk posture or
performance.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
19
<PAGE>
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
[YOUR ACCOUNT GRAPHIC HERE]
Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value. The Fund calculates its net asset value (generally by using market
quotations) each day the New York Stock Exchange is open, fifteen minutes after
the close of business on the Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in determining your price is the
next one calculated after your purchase or redemption order is placed. Foreign
securities owned by the Fund may trade on weekends or other days when the Fund
does not price its shares. As a result, the Fund's net asset value may change
on days when you will not be able to purchase or redeem the Fund's shares. If
an event occurs after the close of a foreign exchange that is likely to
significantly affect the Fund's net asset value, "fair value" pricing may be
used. This means that the Fund may value its foreign holdings at prices other
than their last closing prices, and the Fund's net asset value will reflect
this.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------
The Fund will distribute any net investment income and any net realized long or
short term capital gains at least annually. If your account is with Merrill
Lynch and you would like to receive DIVIDENDS in cash, contact your Merrill
Lynch Financial Consultant. If your account is with the Transfer Agent and you
would like to receive dividends in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares, any gain on the transaction may be
subject to tax. The Fund intends to make distributions that will either be taxed
as ordinary income or capital gains. Capital gains dividends received by
individuals are generally taxed at different rates than ordinary income
dividends.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
20
<PAGE>
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital gains,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short term capital gains) will generally be subject to a
30% U.S. witholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. The Fund
expects to make an election that will generally require shareholders to include
in income their share of foreign withholding taxes paid by the Fund.
Shareholders may be entitled to treat these taxes as taxes paid by them, and
therefore, deduct such taxes in computing their taxable income or, in some
cases, to use them as foreign tax credits against the U.S. income taxes
otherwise owed.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal income
tax law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
21
<PAGE>
[MANAGEMENT OF THE FUND GRAPHIC HERE]
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A.
- --------------------------------------------------------------------------------
Merrill Lynch (Suisse) Investment Management S.A., the Fund's Investment
Adviser, manages the Fund's investments and its business operations under the
overall supervision of the Fund's Board of Trustees. The Investment Adviser has
the responsibility for making all investment decisions for the Fund. The
Investment Adviser and the Fund have hired Merrill Lynch Asset Management U.K.
Limited, and Fund Asset Management, L.P. affiliates of the Investment Adviser
and the Fund, to manage the Fund's daily cash assets. The Fund does not pay any
incremental fee for these services, although the Investment Adviser may pay a
fee for services it receives. The Fund pays the Investment Adviser a fee at the
annual rate of 0.75% of the average daily net assets of the Fund.
The Investment Adviser is part of the Merrill Lynch Asset Management Group,
which had approximately $507 billion in investment company and other portfolio
assets under management as of January 1999. This amount includes assets managed
for Merrill Lynch affiliates.
Princeton Administrators L.P., an affiliate of the Investment Adviser, provides
administrative services to the Fund.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests, and this could hurt the Fund's investment returns.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
22
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Ernst & Young LLP, whose report, along with the Fund's financial
statements, are included in the Fund's annual report to shareholders, which is
available upon request.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
INCREASE (DECREASE) IN ----------------------------------------------------------------------
NET ASSET VALUE: 1998+ 1997+ 1996+ 1995+ 1994+
- -------------------------------------------------------- ----------- ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
Investment income (loss) -- net .05 .10 ( .05) ( .05) ( .12)
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net ( .40) .97 .76 ( .18) 1.26
Total from investment operations ( .35) 1.07 .71 ( .23) 1.14
Less dividends and distributions:
Investment income -- net ( .18) -- -- -- --
In excess of investment income -- net ( .11) ( .44) ( .44) -- --
Realized gain on investments -- net ( .46) ( .35) ( .46) ( .32) ( .05)
Total dividends and distributions ( .75) ( .79) ( .90) ( .32) ( .05)
Net asset value, end of year $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83
TOTAL INVESTMENT RETURN:
Based on net asset value per share ( 2.79)% 9.26% 5.93% ( 1.68)% 9.74%
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.70% 2.44% 2.37% 2.35% 2.27%
Investment income (loss) -- net .39% .84% ( .42)% ( .41)% ( .56)%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $60,442 $ 107,951 $174,921 $ 197,077 $272,487
Portfolio turnover 48.78% 28.62% 38.16% 17.31% 24.64%
- -------------------------------------------------------- ------- ---------- -------- ----------- --------
</TABLE>
+ Based on average shares outstanding.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
23
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
POTENTIAL
INVESTORS
Open an account (two options).
(1)
MERRILL LYNCH
FINANCIAL CONSULTANT
OR SECURITIES DEALER
Advises shareholders on their Fund investments.
DISTRIBUTORS
MERRILL LYNCH FUNDS DISTRIBUTORS,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
(2)
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.
THE FUND
THE BOARD OF TRUSTEES
OVERSEES THE FUND.
COUNSEL
SWIDLER BERLIN
SHEREFF FRIEDMAN, LLP
919 Third Avenue
New York, New York 10033-9998
Provides legal advice to the Fund.
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
202 Carnegie Center
Princeton, New Jersey 08543-5321
Audits the financial statements
of the Fund on behalf of the shareholders.
CUSTODIAN
BROWN BROTHERS HARRRIMAN & CO.
40 Water Street
Boston, Massachusetts 02109
Holds the Fund's assets for safekeeping.
INVESTMENT ADVISER
MERRILL LYNCH (SUISSE)
INVESTMENT MANAGEMENT S.A.
18 Rue De Contamines
1211 Geneva 3, Switzerland
Telephone Number
0041-22-703-1616
Manages the Fund's day-to-day activities.
ADMINISTRATOR
PRINCETON ADMINISTRATION, LP
800 Scudders Mill Road
Plainsboro, New Jersey 08536
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
Provides administrative services
to the Fund.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
[FOR MORE INFORMATION GRAPHIC HERE]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-6725
Code #16458-02-99
(c)Merrill Lynch (Suisse)
Investment Management S.A.
[MERRILL LYNCH LOGO HERE]
[PROSPECTUS GRAPHIC HERE]
Merrill Lynch Consults
International Portfolio
[PROSPECTUS GRAPHIC HERE]
February 27, 1999
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
----------------
Merrill Lynch Consults International Portfolio, a Massachusetts business
trust (the "Fund"), is a diversified, open-end management investment company
that seeks the highest total investment return that is consistent with prudent
risk through investment in a diversified international portfolio of equity
securities, other than United States securities. Total investment return is the
aggregate of income and capital value changes. Distribution of shares of the
Fund is limited to current clients of the Merrill Lynch Consults(R) Service and
of the Merrill Lynch Strategic Portfolio 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. The Fund's
distributor is Merrill Lynch Funds Distributors, a division of Princeton Funds
Distributor, Inc.
----------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
February 27, 1999 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
----------------
MERRILL LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A. -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is February 27, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ........................................................ 3
Convertible Securities ................................................................. 4
Foreign Investment Risks ............................................................... 5
Derivatives ............................................................................ 6
Foreign Exchange Transactions .......................................................... 9
Risk Factors in Options, Futures and Currency Instruments .............................. 10
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives . 10
Additional Limitations on the Use of Derivatives ....................................... 11
Other Investment Policies, Practices, and Risk Factors ................................. 11
Investment Restrictions ................................................................ 13
Portfolio Turnover ..................................................................... 15
Management of the Fund ................................................................... 15
Trustees and Officers .................................................................. 15
Compensation of Trustees ............................................................... 16
Management and Advisory Arrangements ................................................... 17
Code of Ethics ......................................................................... 19
Purchase of Shares ....................................................................... 19
Distribution Plans ..................................................................... 20
Redemption of Shares ..................................................................... 21
Redemption ............................................................................. 22
Repurchase ............................................................................. 22
Pricing of Shares ........................................................................ 22
Determination of Net Asset Value ....................................................... 22
Computation of Offering Price Per Share ................................................ 23
Portfolio Transactions and Brokerage ..................................................... 24
Transactions in Portfolio Securities ................................................... 24
Shareholder Services ..................................................................... 25
Investment Account ..................................................................... 25
Automatic Dividend Reinvestment Plan.................................................... 26
Merrill Lynch Asset Information and Measurement(R) Service ............................. 26
Dividends and Taxes ...................................................................... 26
Dividends .............................................................................. 26
Taxes .................................................................................. 27
Tax Treatment of Forward Foreign Exchange Transactions ................................. 28
Special Rules for Certain Foreign Currency Transactions ................................ 29
Performance Data ......................................................................... 29
General Information ...................................................................... 30
Description of Shares .................................................................. 30
Independent Auditors ................................................................... 31
Custodian .............................................................................. 31
Transfer Agent ......................................................................... 31
Administrator .......................................................................... 32
Legal Counsel .......................................................................... 32
Reports to Shareholders ................................................................ 32
Shareholder Inquiries .................................................................. 32
Additional Information ................................................................. 32
Financial Statements ..................................................................... 32
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek the highest total
investment return that is consistent with prudent risk through investment in a
diversified international portfolio of equity securities, other than United
States equity securities. Total investment return is the aggregate of income
from and capital value changes in the Fund's portfolio securities. The
investment objective of the Fund described in this paragraph is a fundamental
policy that may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. There can be no assurance
that the Fund will achieve its investment objective.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
In pursuing the Fund's investment objective, its management will utilize a
fully-managed investment strategy that permits the Fund to take a flexible
approach and vary its policies as to geographic and industry diversification
based upon its evaluation of international economic and market trends. This
evaluation could include such factors as the condition and growth potential of
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political considerations.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility may be reduced when the various markets are combined into a single
portfolio. Of course, any effects of movements in the various securities
markets may be offset by changes in foreign currency exchange rates. Exchange
rates frequently move independently of securities markets in a particular
country. As a result, gains in a particular securities market may be affected
by changes in exchange rates.
Under normal circumstances, the Fund will invest at least 65% of its total
assests in equity securities of companies located in at least three countries
other than the United States. It is expected that more than 50% of the Fund's
assets will be invested in equity securities of companies located in Western
Europe and the Far East, although the Fund may invest in capital markets
throughout the world (excluding the United States). For purposes of the Fund's
objective, equity securities include securities convertible into equity
securities and securities the values of which are indexed to the market values
of equity securities or indices of equity securities. A United States
closed-end investment company will be considered to be a non-United States
investment if it, in turn, primarily invests in non-United States securities.
The Fund reserves the right, as a temporary defensive measure and to provide
for redemptions, to hold cash or cash equivalents (in United States dollars or
foreign currencies) and short-term securities, including money market
securities. Transactions effected by the Fund may be subject to Swiss federal
transactional taxes of 0.15%. Merrill Lynch (Suisse) Investment Management S.A.
(the "Investment Adviser") believes that such transactional taxes will not
materially affect the performance of the Fund.
The Fund may invest in the securities of foreign issuers in the form of
depositary receipts, including American Depositary Receipts (ADRs) and European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs), or other
securities convertible into securities of foreign issuers. Depositary receipts
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by an American
bank or trust company that evidence ownership of underlying securities issued
by a foreign corporation. EDRs are receipts issued in Europe that evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are
designed for use in the United States securities markets and EDRs, in bearer
form, are designed for use in European securities markets. GDRs are tradeable
both in the U.S. and Europe and are designed for use throughout the world.
3
<PAGE>
As part of the Merrill Lynch Consults(R) Service, Merrill Lynch may
provide information to its clients regarding the possible change in risk
posture of a client's domestic Merrill Lynch Consults(R) Service account due to
an investment in the Fund. Risk classes are assigned to each domestic Merrill
Lynch Consults(R) Service investment manager based upon an approximation of its
10 year standard deviation (which is used as a measure of volatility) as
calculated by Merrill Lynch Consults(R) Service according to information
provided by the manager. A risk class is assigned to the Fund based upon an
approximation of the 10 year standard deviation of the Morgan Stanley Europe,
Asia, Far East Index ("EAFE Index"), a market weighted, unmanaged index, as a
general proxy for non-domestic equity investments. Any change in risk will be
estimated only as it relates to the client's domestic Merrill Lynch Consults(R)
Service account and the Fund shares held for that account and not for assets
held in other domestic Merrill Lynch Consults(R) Service accounts or outside of
the Merrill Lynch Consults(R) Service. The Fund, which commenced operations in
1992, does not allocate its assets proportionately to the weighting of the EAFE
Index and may invest in countries that are not included in the EAFE Index. As a
consequence, the Fund's performance may not correlate completely to the EAFE
Index. Projections of risk posture based on a measurement of past performance
of an investment manager or of an index may not accurately predict future risk
posture or performance.
CONVERTIBLE SECURITIES
Convertible securities entitle the holder to receive interest payments
paid on corporate debt securities or the dividend preference on a preferred
stock until such time as the convertible security matures or is redeemed or
until the holder elects to exercise the conversion privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared
to common stock dividends and decreased risks of decline in value relative to
the underlying common stock due to their fixed-income nature. As a result of
the conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible
securities held by the Fund are denominated in United States dollars, the
underlying equity securities may be quoted in the currency of the country where
the issuer is domiciled. With respect to convertible securities denominated in
a currency different from that of the underlying equity securities, the
conversion price may be based on a fixed exchange rate established at the time
the security is issued. As a result, fluctuations in the exchange rate between
the currency in which the debt security is denominated and the currency in
which the share price is quoted will affect the value of the convertible
security.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value
of the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to
a point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be
4
<PAGE>
subject to redemption at the option of the issuer at a price established in the
charter provision, indenture or other governing instrument pursuant to which
the convertible security was issued. If a convertible security held by the Fund
is called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security under certain
circumstances.
FOREIGN INVESTMENT RISKS
FOREIGN MARKET RISK. Because the Fund invests in foreign securities, the
Fund offers you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK. The economies of certain foreign markets often do
not compare favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources,
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK AND EXCHANGE RISK. Securities in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that currency loses
value because the currency is worth fewer U.S. dollars. Similarly when the U.S.
dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty
on European Union (the "Maastricht Treaty") seeks to set out a framework for
the European Economic and Monetary Union ("EMU") among the countries that
comprise the European Union ("EU"). Among other things, EMU establishes a
single common European currency (the "euro") that was introduced on January 1,
1999 and is expected to replace the existing national currencies of all EMU
participants by July 1, 2002. EMU took effect for the initial EMU participants
as of January 1, 1999, and was implemented over the weekend of January 1, 1999
through January 3, 1999 ("conversion weekend"). Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and thereafter,
were listed, traded, and made dividend and other payments only in euros.
5
<PAGE>
Because any participating country may opt out of EMU within the first
three years, it is possible that a significant participant could choose to
abandon EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
the participants' national currencies and a significant increase in exchange
rate volatility, a resurgence in economic protectionism, an undermining of
confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt and inflation
rates that were introduced in anticipation of EMU. Also, withdrawal from EMU at
any time after the conversion weekend by an initial participant could cause
disruption of the financial markets as securities redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on the Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to Fund shareholders under foreign or, in certain
limited circumstances, U.S. tax laws.
In addition, computer, accounting, and trading systems must be capable of
recognizing the euro as a distinct currency immediately after the conversion
weekend. Like other investment companies and business organizations, the Fund
could be adversely affected if the computer, accounting, and trading systems
used by the Investment Adviser, the Fund's service providers, or other entities
with which the Fund or its service providers do business have not properly
addressed this issue prior to January 4, 1999.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the United States securities laws do.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much detail as U.S. accounting standards, it may be harder for the Fund's
portfolio manager to completely and accurately determine a company's financial
condition.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES. The Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on the Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount the Fund can earn on its investments.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
DERIVATIVES
The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options and futures and to purchase and sell
foreign exchange, as described below.
6
<PAGE>
INDEXED AND INVERSE SECURITIES
The Fund may invest in securities the potential return of which is based
on the change in particular measurements of value or rate ("an index"). In
particular, the Fund may invest in securities the values of which are indexed
to the market values of equity securities, indices of equity securities,
currencies or currency units. As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of an equity securities index or a basket of equity securities, or based
on the relative changes of two equity securities indices. In addition, the Fund
may invest in securities the potential return of which is based inversely on
the change in an index (that is, a security the value of which will move in the
opposite direction of changes). For example, the Fund may invest in securities
that pay a higher rate of interest when a particular index decreases and pay a
lower rate of interest (or do not fully return principal) when the value of the
index increases. If the Fund invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of an
adverse movement in the relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Fund believes that indexed securities may provide portfolio management
flexibility that permits the Fund to seek enhanced returns, hedge other
portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING OPTIONS. For hedging purposes the Fund is authorized to
purchase put options on securities held in its portfolio or on securities
indices, the performance of which is substantially correlated with securities
held in its portfolio. When the Fund purchases a put option, in consideration
for an upfront payment (the "option premium") the Fund acquires a right to sell
to another party specified securities owned by the Fund at a specified price
(the "exercise price") on or before a specified date (the "expiration date"),
in the case of an option on securities, or to receive from another party a
payment based on the amount a specified securities index declines below a
specified level on or before the expiration date, in the case of an option on a
securities index. The purchase of a put option limits the Fund's risk of loss
in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the market
value of the portfolio holdings associated with the put option increases rather
than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
For hedging purposes, the Fund is also authorized to purchase call options
on securities indices the performance of which substantially correlates with
the performance of the types of securities it intends to purchase. When the
Fund purchases a call option on a securities index, in consideration for the
option premium the Fund acquires a right to receive from another party a
payment based on the amount a specified securities index increases beyond a
specified level on or before the expiration date. The purchase of a call option
on an index may protect the Fund from the risks associated with attempting to
identify specific securities in which to invest in a market the Fund believes
to be attractive (an "anticipatory hedge").
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
WRITING OPTIONS. The Fund is authorized to write (I.E., sell) call options
on securities held in its portfolio or on securities indices, the performance
of which is substantially correlated to securities held in its portfolio. When
the Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options on securities to earn income, through the receipt of option premiums.
The Fund may write call options on securities for hedging purposes. In the
event the party to which the Fund has written an option fails to exercise its
rights under the option because the value of the underlying securities is less
than
7
<PAGE>
the exercise price, the Fund will partially offset any decline in the value of
the underlying securities through the receipt of the option premium. By writing
a call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
The Fund may also write put options on securities indices for hedging
purposes. When the Fund writes a put option on a securities index, in return
for an option premium the Fund agrees to pay to another party an amount based
on any decline in a specified securities index below a specified level on or
before the expiration date. In the event the party to which the Fund has
written an option fails to exercise its rights under the option because the
value of the securities index has not declined below the specified level on or
before the expiration date, the Fund will profit by the amount of the option
premium. However, by writing a put option on the index, the Fund will be
obligated to make a cash payment reflecting any decline in the index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying index falls below the exercise price,
which loss potentially may substantially exceed the amount of option premium
received by the Fund for writing the put option. The Fund will write a put
option on a securities index only if the Fund is writing the put in connection
with trading strategies involving combinations of options -- for example, the
sale and purchase of options with identical expiration dates on the same index
but different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures, and Currency
Instruments" below. A call option will also be considered covered if the Fund
owns the securities it would be required to deliver upon exercise of the option
(or, in the case of option on a securities index, securities that substantially
correlate with the performance of such index) or owns a call option, warrant or
convertible instrument that is immediately exercisable for, or convertible
into, such security.
TYPES OF OPTIONS. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions" below.
FUTURES
The Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the prior
day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
8
<PAGE>
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (I.E., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against possible variations in foreign
exchange rates. Such transactions may be affected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund.
Forward foreign exchange transactions are OTC contracts to purchase or
sell a specified amount of a specified currency or multinational currency unit
at a price and future date set at the time of the contract. Spot foreign
exchange transactions are similar but require current, rather than future,
settlement. The Fund will enter into foreign exchange transactions only for
purposes of hedging either a specific transaction or a portfolio position. The
Fund may enter into a foreign exchange transaction for purposes of hedging a
specific transaction by, for example, purchasing a currency needed to settle a
security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. The Fund may also hedge portfolio
positions through currency swaps, which are transactions in which one currency
is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the US dollar through the use of currency options. Currency options are
similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated in
such currency.
RISK FACTORS IN HEDGING FOREIGN CURRENCY RISKS. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements that do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the
9
<PAGE>
Fund will only engage in hedging activities from time to time and may not be
engaging in hedging activities when movements in currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange
rate movements, even if correctly anticipated, in the event that (i) the
currency exchange rate movement is so generally anticipated that the Fund is
not able to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing markets) and
it is not possible to engage in effective foreign currency hedging.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Derivatives for hedging purposes involves the risk of imperfect
correlation in movements in the value of the Derivatives and the value of the
instruments being hedged. If the value of the Derivative moves more or less
than the value of the hedged instruments the Fund will experience a gain or
loss which will not be completely offset by movements in the value of the
hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Derivative or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a Derivative without incurring
substantial losses, if at all.
Certain transactions in Derivatives (such as forward foreign exchange
transactions, futures transactions or sales of put options) may expose the Fund
to potential losses, that exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transactions, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
DERIVATIVES
Certain Derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, may be substantially less liquid than other instruments
in which the Fund may invest. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. The Fund will therefore acquire
illiquid OTC instruments (i) if the agreement pursuant to which the instrument
is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Investment Adviser anticipates the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding that are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding that have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceed 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable.
Because Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Derivatives traded in
10
<PAGE>
OTC markets only with financial institutions which have substantial capital or
that have provided the Fund with a third-party guaranty or other credit
enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF DERIVATIVES
The Fund may not use any Derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
OTHER INVESTMENT POLICIES, PRACTICES, AND RISK FACTORS
SECURITIES LENDING. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction (5)
below). In return, the Fund receives collateral in an amount equal to at least
100% of the current market value of the loaned securities in cash or securities
issued or guaranteed by the United States Government. The Fund receives
securities as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by the Fund for
the loaned securities, which increases the Fund's yield. The Fund may receive a
flat fee for its loans. The loans are terminable at any time and the borrower,
after notice, is required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees
in connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent the value of the collateral
falls below the market value of the borrowed securities.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This insulates the Fund
from fluctuations in the market value of the underlying security during such
period, although, to the extent the repurchase agreement is not denominated in
U.S. dollars, the Fund's return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days (together with other illiquid securities).
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
The Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of the default under such a
repurchase agreement, instead of the contractual fixed rate of return, the rate
of return to the Fund shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. In such
event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller to perform.
ILLIQUID OR RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
11
<PAGE>
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Fund may obtain
access to material nonpublic information which may restrict the Fund's ability
to conduct portfolio transactions in such securities.
144A SECURITIES. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities which the Fund's
management determines are as liquid as publicly registered non-investment grade
debt securities. The Board of Directors has adopted guidelines and delegated to
the Fund's management the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. This investment practice could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
BORROWING AND LEVERAGE
The Fund may borrow money from a bank but only as a temporary measure for
extraordinary or emergency purposes including to meet redemption or settle
securities transactions. Borrowing leverages the Fund, and creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will
have to pay on the borrowings, the Fund's return will be greater than if
leverage had not been used. Conversely, if the income or capital appreciation
from the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than if
leverage had not been used, and therefore the amount available for distribution
to shareholders as dividends and other distributions will be reduced. In the
latter case, the Investment Adviser in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it expects that the
benefits to the Fund's shareholders of maintaining the leveraged position will
outweigh the current reduced return.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
SUITABILITY. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Investment Adviser and
its affiliates. Because of its emphasis on an international portfolio of equity
securities other than United States equity securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares in
the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in an international portfolio of equity securities other than United
States equity securities, including the risk of loss of principal.
12
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
1. Invest in the securities of any one issuer if, immediately after and
as a result of such investment, (i) the value of the holdings of the Fund
in the securities of such issuer exceeds 5% of the Fund's total assets,
taken at market value, except that such restriction shall not apply to
securities issued or guaranteed by the United States Government or any of
its agencies or instrumentalities; and (ii) the Fund owns more than 10% of
the outstanding voting securities of such issuer.
2. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
3. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of investments
for the purpose of exercising control or management.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of the Fund's total assets, taken at market value, would be invested in
such securities. Investments by the Fund in wholly-owned investment
entities created under the laws of certain countries will not be deemed an
investment in other investment companies.
5. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
6. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
7. Make short sales of securities or maintain a short position in
securities. This restriction does not apply to hedging transactions or
positions.
8. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts or
other securities shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities as set forth in (9)
below.
9. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans may be made only in
accordance with the guidelines set forth below.
10. Issue senior securities, borrow money or pledge its assets in excess
of 20% of its total assets taken at market value (including the amount
borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions. For the purpose of
13
<PAGE>
this restriction, collateral arrangements with respect to the writing of
options, and, if applicable, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are
deemed to be the issuance of a senior security.
11. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are otherwise not readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if at the time of acquisition more than 15% of its
net assets would be invested in such securities. Securities which the Fund
has the right to put to the issuer or a stand-by bank or broker and receive
the principal amount of redemption price thereof less transaction costs, on
no more than seven days' notice or when the Fund has the right to convert
such securities into a readily marketable security in which it could
otherwise invest upon not less than seven days' notice, are not subject to
this restriction. The Fund may purchase, without regard to the foregoing
limitation, securities which are not registered under the Securities Act of
1933, as amended (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers," as defined under Rule 144A under the
Securities Act ("Rule 144A securities"), provided that the Fund's Board of
Trustees determines that such securities are liquid.
12. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter in selling portfolio securities.
13. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral exploration or
development activities.
14. Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest or such currencies and the
United States dollar and purchase and sell stock index and currency options
and warrants, stock index futures, financial futures and currency futures
contracts and related options on such futures.
An exception to investment restriction (1) above permits the Fund to
purchase securities, pursuant to the exercise of subscription rights, subject
to the condition that such purchase will not result in the Fund ceasing to be a
diversified investment company. Far Eastern and European corporations
frequently issue additional capital stock by means of subscription rights
offerings to existing shareholders at a price substantially below the market
price of the shares. The failure to exercise such rights would result in the
Fund's interest in the issuing company being diluted. The market for such
rights is not well developed and, accordingly, the Fund may not always realize
full value on the sale of rights. Therefore, the exception applies in cases
where the limits set forth in the investment restrictions would otherwise be
exceeded by exercising rights or have already been exceeded as a result of
fluctuations in the market value of the Fund's portfolio securities with the
result that the Fund would otherwise be forced either to sell securities at a
time when it might not otherwise have done so or to forego exercising the
rights.
Subject to investment restriction (9) above, the Fund may from time to
time lend securities from its portfolio to brokers, dealers and financial
institutions such as banks and trust companies and receive collateral in cash
or securities issued or guaranteed by the United States government that will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. Such cash will be invested in short-term securities,
which will increase the current income of the Fund. Such loans will not be for
more than 30 days and will be terminable at any time. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans. With respect
to the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each
14
<PAGE>
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Board of
Trustees of the Fund to the extent necessary to comply with changes to the
Federal tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
PORTFOLIO TURNOVER
The Fund has not placed any limit on its rate of portfolio turnover and
securities may be sold without regard to the time they have been held when, in
the opinion of the Investment Adviser, investment considerations warrant such
action. As a result, the Fund's portfolio turnover rate may vary greatly from
year to year or during periods within a year. Also, the use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover than would otherwise be the case. The Fund
pays brokerage commissions in connection with writing call options and
effecting closing purchase transactions, as well as in connection with
purchases and sales of portfolio securities. A high rate of portfolio turnover
would result in correspondingly greater brokerage commission expenses.
Portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases and
sales of Government securities and of all other securities, including options,
whose maturity or expiration dates at the time of acquisition were one year or
less) by the monthly average value of the securities in the Fund during the
fiscal year.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Trustees"). The Trustees are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.
Information about the Trustees, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE (1)(2) -- Chairman of Merrill
Lynch Asset Management, L.P. ("MLAM") and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1997;
President of MLAM and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997 and Director thereof since 1993;
President of Princeton Services from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54) -- TRUSTEE (2)(3) -- 36 Popponosset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, the China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (59) -- TRUSTEE (2)(3) -- New York University --
Gallatin Division, 113-115 University Place, New York, New York 10003. John M.
Olin Professor of Humanities, New York University since 1993 and Professor
thereof since 1980; Dean, Gallatin Division of New York University from 1976 to
1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Trustee, Hudson Institute since 1980 and
15
<PAGE>
President in 1997; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech, L.P.
in 1996.
ROBERT R. MARTIN (71) -- TRUSTEE (2)(3) -- 513 Grand Hill, St. Paul
Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments,
Inc. from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to
1989; Director, Carnegie Capital Management from 1977 to 1985 and Chairman
thereof in 1979; Director, Securities Industry Association from 1981 to 1982
and Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (69) -- TRUSTEE (2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman,
The May Corporation (personal holding company) from 1972 to 1983; Director,
Signal Apparel Company since 1972.
ANDR- F. PEROLD (46) -- TRUSTEE (2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991, and TIBCO from 1994 to 1996.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT (1)(2) -- Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Funds Distributor, Inc.
("PFD") since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
ALAN J. ALBERT (51) -- SENIOR VICE PRESIDENT (1)(2) -- Managing Director
of Private Investment Management Group of Merrill Lynch Mercury Asset
Management since 1997; Senior Managing Director of Merrill Lynch Asset
Management U.K. Limited from 1993 to 1997; Vice President of MLAM since 1986.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER (1)(2) -- Senior Vice
President and Treasurer of FAM and MLAM since 1999; Senior Vice President and
Treasurer of Princeton Services since 1999; Vice President of PFD since 1999;
First Vice President of MLAM from 1997 to 1999; Vice President of MLAM from
1990 to 1997; Director of Taxation of MLAM since 1990.
CHRISTOPHE VELAY (42) -- VICE PRESIDENT AND PORTFOLIO MANAGER (1) --
Portfolio Manager of Merrill Lynch Bank (Suisse) S.A. since 1986.
LORRAINE D. MANDEL (50) -- SECRETARY (1)(2) -- Director (Legal Advisory)
of MLAM since 1998; Second Vice President and Assistant General Counsel,
General Reinsurance Corporation, 1992-1998.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which MLAM or FAM acts as Investment Adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
As of February 1, 1999, the officers and Trustees of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
COMPENSATION OF TRUSTEES
The Fund pays each non-affiliated Trustee a fee of $2,500 per year plus
$250 per meeting attended, together with such Trustee's actual out-of-pocket
expenses relating to attendance at meetings. The Fund also compensates members
of its Audit Committee, which consists of all the non-affiliated Trustees, $500
per year plus $125 for each meeting attended.
The following table shows the compensation earned by the non-affiliated
Trustees for the fiscal year ended October 31, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
FAM and MLAM ("FAM/MLAM Advised Funds") for the calendar year December 31,
1998.
16
<PAGE>
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
TRUSTEE FROM FUND FUND EXPENSES TRUSTEES(1)
- --------------------------- -------------- --------------------- -------------------
<S> <C> <C> <C>
James H. Bodurtha ......... $4,500 None $148,500
Herbert I. London ......... 4,500 None 148,500
Robert R. Martin .......... 4,500 None 148,500
Joseph L. May ............. 4,500 None 148,500
Andre F. Perold ........... 4,500 None 148,500
</TABLE>
- ----------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
MANAGEMENT SERVICES. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Board of Trustees, the Investment Adviser is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings
in light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
MANAGEMENT FEE. The Fund has entered into an investment advisory agreement
with the Investment Adviser (the "Investment Advisory Agreement"), pursuant to
which the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.75% of the average daily net assets of the
Fund. The table below sets forth information about the total investment
advisory fees paid by the Fund to the Investment Adviser for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, INVESTMENT ADVISORY FEE
- ------------------------------- ------------------------
<S> <C>
1998 ........................ $ 683,792
1997 ........................ $1,061,746
1996 ........................ $1,525,916
</TABLE>
PAYMENT OF FUND EXPENSES. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Trustees of the Fund who are
affiliated persons of ML & Co. or any of its affiliates. The Fund pays all
other expenses incurred in the operation of the Fund, including among other
things: taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements
of additional information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor"); charges of the custodian,
any sub-custodian and transfer agent; fees of Princeton Administrators, L.P.
(the "Administrator") expenses of redemption of shares; commission fees;
expenses of registering the shares under Federal, state or foreign laws; fees
and expenses of unaffiliated Trustees; accounting and pricing costs (including
the daily calculations of net asset value); insurance; interest; brokerage
costs; litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. As required by the Fund's distribution
agreement, its underwriters will pay certain of the promotional expenses of the
Fund incurred in connection with the offering of shares of the Fund.
ORGANIZATION OF THE INVESTMENT ADVISER. The Investment Adviser is a
subsidiary of Merrill Lynch Bank (Suisse), S.A. which is, in turn, an indirect
subsidiary of ML & Co., a financial services holding company and the parent of
Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
17
<PAGE>
The Investment Adviser has also entered into sub-advisory agreements with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") and Fund Asset
Management, L.P. ("FAM") pursuant to which MLAM U.K. and FAM provide investment
advisory services with respect to the management of the Fund's cash position.
The Fund does not pay any incremental fee for this service. For the fiscal
years ended October 31, 1996, 1997 and 1998, the Investment Adviser did not pay
any fees to MLAM U.K. and FAM for investment advisory services provided to the
Fund. The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co. ML & Co. and Princeton Services
are "controlling persons" of FAM because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Investment Advisory Agreement and each Sub-Advisory Agreement will remain
in effect from year to year if approved annually (a) by the Board of Trustees
of the Fund or by a majority of the outstanding shares of the Fund and (b) by a
majority of the Trustees who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such party. The
Investment Advisory Agreement is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party or by vote of
a majority of the outstanding voting securities of the Fund. Each Sub-Advisory
Agreement also provides that it will terminate in the event of its assignment
or upon the termination of the Investment Advisory Agreement and further
provides that such agreement may be terminated on 60 days' written notice by
the Investment Adviser, the respective Sub-Adviser or by vote of the majority
of the outstanding voting securities of the Fund.
ADMINISTRATIVE SERVICES. Princeton Administrators, LP (the
"Administrator"), an indirect subsidiary of ML & Co., acts as the Fund's
administrator under the terms of the administration agreement between the
Administrator and the Fund (the "Administration Agreement"). The Administrator
performs or arranges for the performance of certain administrative services
(I.E., services other than investment advice and related portfolio activities)
necessary for the operation of the Fund, including maintaining the books and
records of the Fund, preparing reports and other documents required by United
States federal, state and other applicable laws and regulations to maintain the
registration of the Fund and its shares, and providing the Fund with
administrative office facilities. For the services rendered to the Fund and the
facilities furnished, the Fund pays the Administrator a monthly fee equal to
0.25% of the Fund's average daily net assets. For the fiscal year ended October
31, 1998, the total fee paid by the Fund to the Administrator was $227,924 for
these services. Also, accounting services are provided to the Fund by the
Administrator and the Fund reimburses the Administrator for its costs in
connection with such services on a semi-annual basis. For the fiscal year ended
October 31, 1998, the Fund reimbursed the Administrator $150,624 for these
services.
The principal address of the Administrator is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per shareholder account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co.
DISTRIBUTION EXPENSES. The Fund has entered into a distribution agreement
with Merrill Lynch Funds Distributor, a division of Princeton Funds
Distributor, Inc. (the "Distributor") in connection with the continuous
18
<PAGE>
offering of shares of the Fund (the "Distribution Agreement"). The Distribution
Agreement obligates the Distributor to pay certain expenses in connection with
the offering of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and
investors. The Distributor also pays for other supplementary sales literature
and advertising costs. The Distribution Agreement is subject to the same
renewal requirements and termination provisions as the Investment Advisory
Agreement described above.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on
short-term trading in securities. In addition, no employee may purchase or sell
any security that at the time is being purchased or sold (as the case may be),
or to the knowledge of the employee is being considered for purchase or sale,
by any fund advised by the Investment Adviser. Furthermore, the Codes provide
for trading "blackout periods" which prohibit trading by investment personnel
of the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
Shares of the Fund are offered continuously for sale to clients of the
Merrill Lynch Consults(R) Service by Merrill Lynch Funds Distributor, Inc., an
indirect subsidiary of ML & Co., and Merrill Lynch. The minimum initial
purchase is $5,000, and the minimum subsequent purchase is $1,000. Shares of
the Fund are offered to clients of Merrill Lynch Strategic Portfolio 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") (the NYSE generally closes at 4:00 p.m., Eastern
time), on the day the orders are placed with the Distributor, provided the
orders are received by the Distributor within fifteen minutes after the close
of business on the NYSE. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. If the purchase orders are not received by
the Distributor within fifteen minutes after the close of business on the NYSE,
such orders shall be deemed received on the next business day. Any order may be
rejected by the Distributor or the Fund. The Fund or the Distributor may
suspend the continuous offering of the Fund's shares to the general public at
any time in response to conditions in the securities markets or otherwise and
may thereafter resume such offering from time to time. Neither the Distributor
nor the dealers are permitted to withhold placing orders to benefit themselves
by a price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Such fee is
presently waived for clients of the Merrill Lynch Consults(R) Service and of
the Merrill Lynch Strategic Portfolio AdvisorSM Service.
19
<PAGE>
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the distribution plan pursuant to Rule 12b-1 under
the Investment Company Act (the "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor.
Pursuant to the Distribution Plan, the Fund pays the Distributor ongoing
distribution and account maintenance fees, which are accrued daily and paid
monthly, at the annual rates of 0.75% and 0.25%, respectively, of the average
daily net assets of the Fund. Pursuant to a sub-agreement with the Distributor,
Merrill Lynch also provides account maintenance activities and distribution
services to the Fund. The ongoing account maintenance fee compensates the
Distributor and Merrill Lynch for providing account maintenance activities to
the Fund's shareholders. The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing shareholder and distribution
services and bearing distribution-related expenses of the Fund, including
payments to financial consultants for selling shares of the Fund. For the
fiscal year ended October 31, 1998, the Fund paid the Distributor $911,697
pursuant to the Distribution Plan, of which $683,773 was paid to Merrill Lynch
for providing distribution-related services and $227,924 was paid to Merrill
Lynch for providing account maintenance activities to the Fund.
The Fund's Distribution Plan is subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of the Distribution
Plan, the non-interested Trustees must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plan to the Fund
and its shareholders. The Distribution Plan further provides that, so long as
the Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving the Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that the Distribution Plan will benefit the Fund and its
related shareholders. The Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the non-interested Trustees or by
the vote of the holders of a majority of the outstanding voting securities of
the Fund. The Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without shareholder approval, and all material
amendments are required to be approved by the vote of Trustees, including a
majority of the non-interested Trustees who have no direct or indirect
financial interest in the Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
the Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of the Distribution Plan or such report,
the first two years in an easily accessible place.
Among other things, the Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and distribution fees paid to the
Distributor. Payments under the Distribution Plan are based on a percentage of
average daily net assets regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues from the Distribution Plan may be
more or less than distribution-related expenses. Information with respect to
the distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan annually, as of December 31 of each year,
on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees and the expenses consist of financial consultant
compensation.
As of December 31, 1997, the last date at which such fully allocated
accrual data is available, the fully allocated accrual revenues of the
Distributor and Merrill Lynch since the Fund commenced operations on September
14, 1992 exceeded the fully allocated accrual expenses for such period by
approximately $1,848,000 (1.84% of net assets at that date). As of October 31,
1998, direct cash revenues for the period since commencement of operations
exceeded direct cash expenses by approximately $6,114,495 (10.12% of net assets
at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch and there is no assurance that
the Board of Trustees of the Fund will approve the continuance of
20
<PAGE>
the Distribution Plan from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plan. In their review of the
Distribution Plan, the Trustees will not be asked to take into consideration
expenses incurred in connection with the distribution of shares of other funds
for which the Distributor acts as distributor.
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee but not the
account maintenance fee. As applicable to the Fund, the maximum sales charge
rule limits the aggregate distribution fee payments payable by the Fund to (1)
6.25% of the eligible gross sales of shares of the Fund (defined to exclude
shares issued pursuant to dividend reinvestments), plus (2) interest on the
unpaid balance, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution
fee). To the extent payments would exceed the maximum permitted by the NASD,
the Fund will not make further payments of the distribution fee; however, the
Fund will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1998 with respect to the shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period September 14, 1992 (commencement
of operations of the Fund) to October 31, 1998.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1998
--------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) SALES CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- -------------- ------------- --------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted ......... $386,707 $24,169 $9,608 $33,777 $7,087 $26,690 $453
</TABLE>
- ----------
(1) Purchase price of all eligible shares sold since September 14, 1992
(commencement of operations of the Fund) other than shares acquired
through dividend reinvestment.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments is amortizing the unpaid balance. No assurance
can be given that payments of the distribution fee will reach either the
voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. There will be no charge for redemption if the redemption
request is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through the date
of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the net asset value of such shares at
such time.
21
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the Transfer
Agent's register. The signature(s) on the redemption requests must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (E.G., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (E.G., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on the NYSE on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund. Securities firms that do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a repurchase of shares to such customers. Such fee is
currently waived for clients of the Merrill Lynch Consults(R) Service and of
Merrill Lynch Strategic PortfolioSM Service. Repurchases made directly through
the Transfer Agent on accounts held at the Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem Fund shares as
set forth above.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
22
<PAGE>
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
on each day the NYSE is open for trading. The NYSE generally closes at 4:00
p.m., Eastern time. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held
by the Portfolio plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, the Administrator and Distributor, are accrued daily.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Trustees as the primary market.
Securities traded in the over-the-counter ("OTC") market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Trustees of
the Fund. Such valuations and procedures will be reviewed periodically by the
Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for shares of the
Fund based on the value of the Fund's net assets and number of shares
outstanding on October 31, 1998 is set forth below.
<TABLE>
<S> <C>
Net Assets .................................................................... $ 60,441,797
============
Number of Shares Outstanding .................................................. 5,360,740
============
Net Asset Value Per Share (net assets divided by number of shares outstanding) $ 11.27
Sales Charge .................................................................. none
------------
Offering Price ................................................................ $ 11.27
============
</TABLE>
23
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations
facilities and the firm's risk in positioning the securities involved. The
portfolio securities of the Fund generally are traded on a principal basis and
normally do not involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the Fund primarily consists of
dealer or underwriter spreads. While reasonable competitive spreads or
commissions are sought, the Fund will not necessarily be paying the lowest
spread or commission available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund may invest may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions
involving more widely traded securities.
Subject to obtaining the best net results, broker-dealers who provide
supplemental investment research (such as information concerning economic data
and market forecasts) to the Investment Adviser may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under its Investment Advisory Agreement and the expense of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. Supplemental investment research obtained from such
broker-dealers might be used by the Investment Adviser in servicing all of its
accounts and all such research might not be used by the Investment Adviser in
connection with the Fund. Consistent with the Conduct Rules of the NASD and
policies established by the Trustees of the Fund, the Investment Adviser may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
For the fiscal year ended October 31, 1998, brokerage commissions paid to
Merrill Lynch aggregated $30,933, which comprised 9.8% of the Fund's aggregate
brokerage commissions paid and involved 9.8% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year. For
the fiscal year ended October 31, 1997, brokerage commissions paid to Merrill
Lynch aggregated $59,811, which comprised 12.5% of the Fund's aggregate
brokerage commissions paid and involved 14.1% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year. For
the fiscal year ended October 31, 1996, brokerage commissions paid to Merrill
Lynch aggregated $107,010, which comprised 20.20% of the Fund's aggregate
brokerage commissions paid and involved 20.1% of the Fund's aggregate dollar
amount of transactions involving payment of commissions during the year.
Aggregate brokerage commissions paid by the Fund are set forth in the following
table:
<TABLE>
<CAPTION>
BROKERAGE
FISCAL YEAR COMMISSIONS
ENDED OCTOBER 31, PAID
- ------------------- ------------
<S> <C>
1998 $314,844
1997 $477,435
1996 $528,752
</TABLE>
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own accounts, affiliated persons of
the Fund, including Merrill Lynch and any of its affiliates, will not serve as
the Fund's dealer in such transactions. However, affiliated persons of the Fund
may serve as its broker in listed or over-the-counter transactions conducted on
an agency basis provided that, among other things, the fee or commission
received by such
24
<PAGE>
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures adopted by the Board of Trustees of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Trustees have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund. Securities may be held by, or be appropriate investments for, the
Fund as well as other funds or investment advisory clients of the Investment
Adviser or MLAM.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate act as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or an
affiliate during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse
effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Distribution of shares of the Fund (other than reinvestment of dividends
and capital gains distributions of the Fund) is limited to current clients of
the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio AdvisorSM Service. Shareholders will receive statements of dividends
and capital gains.
If a client terminates the Merrill Lynch Consults(R) Service or the
Merrill Lynch Strategic Portfolio 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
may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
25
<PAGE>
Subject to the consent of Merrill Lynch, shareholders may transfer their
account to another securities dealer that has entered into an agreement with
Merrill Lynch. Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder either must redeem the shares so that the
cash proceeds can be transferred to the account at the new firm or continue to
maintain a retirement account at Merrill Lynch for those shares. Shareholders
interested in transferring their shares from Merrill Lynch may request their
new brokerage firm to maintain such shares in an account registered in the name
of the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for his or her shares and
then must turn the certificates over to the new firm for re-registration in the
new brokerage firm's name.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested in additional full and fractional
shares of the Fund. Such reinvestment will be at the net asset value of shares
of the Fund as of the close of business on the NYSE on the monthly payment date
for such dividends.
Shareholders may, at any time, by contacting the Merrill Lynch Consults(R)
Service or the Merrill Lynch Strategic Portfolio AdvisorSM Service or their
financial consultant, or by written notification to Merrill Lynch if their
account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than reinvested in shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
MERRILL LYNCH ASSET INFORMATION AND MEASUREMENT(R) SERVICE
Clients of the Merrill Lynch Consults(R) Service and of the Merrill Lynch
Strategic Portfolio 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.
DIVIDENDS AND TAXES
DIVIDENDS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized capital gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Shareholder Services -- Automatic Dividend
Reinvestment Plan" for information as to how to elect either dividend
reinvestment or cash payments.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as the Fund so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax on
the part of its net ordinary income and net realized capital gains that it
distributes to shareholders. The Fund intends to distribute substantially all
of such income. To qualify for this treatment, the Fund must, among other
things, (a) derive at least
26
<PAGE>
90% of its gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies and certain financial futures,
options and forward contracts (the "Income Test"); and (b) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of its assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount no greater than 5% of its assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income even though reinvested in Fund shares. Distributions made from
the Fund's net realized capital gains are taxable to a shareholder as long-term
capital gains, regardless of the length of time the shareholder has owned Fund
shares, and even though reinvested in Fund shares. Any loss upon the sale or
exchange of Fund Shares held for six months or less will be treated as long term
capital loss to the extent of any capital gains dividends received by the
shareholder.
Any net capital gains dividends (I.E., the excess of net capital gains from
the sale of assets held for more than 12 months over net short-term capital
losses, and including such gains from certain transactions in futures and
options) distributed to shareholders will be taxable as long-term capital gains
to the shareholders, whether or not reinvested and regardless of the length of
time a shareholder has owned his or her shares. The maximum capital gains rate
for individuals is 20% with respect to assets held for more than 12 months. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gains dividends. It is not expected that
any portion of the dividends paid by the Fund will be eligible for the corporate
dividends received deduction. If the Fund pays a dividend that was declared in
the previous October, November or December to shareholders of record in such a
month, then such dividend will be treated for tax purposes as being paid by the
Fund and received by its shareholders on December 31 of the year in which the
dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens generally will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Non-resident shareholders
are urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Investment income received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Certain
shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% in value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible to file an election with the Internal Revenue Service pursuant
to which shareholders of the Fund generally will be required to include their
proportionate share of such taxes in their United States income tax returns as
gross income, treat such proportionate share as taxes paid by them and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain restrictions and the shareholders and the Fund satisfying
certain minimum stock ownership holding periods, use them as foreign tax
credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. Foreign tax credits cannot be claimed by certain retirement
accounts. A shareholder that is a nonresident alien individual or a foreign
entity may be subject to United States withholding tax on the income resulting
from the Fund's election described in this paragraph but may not be able to
claim a credit or deduction against such United States tax for the foreign
taxes treated as having been paid by such shareholder. The Fund will report
annually to its shareholders the amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally,
27
<PAGE>
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Upon a sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. Such gain or
loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands. In the case of an individual, any such capital gain
will be treated as short-term capital gain if the shares were held for not more
than 12 months and long-term capital gain taxable at the maximum rate of 20% if
such shares were held for more than 12 months. In the case of a corporation,
any such capital gain will be treated as long-term capital gain, taxable at the
same rates as ordinary income, if such shares were held for more than 12
months. Any capital loss will be treated as long-term capital loss if the
shares were held for more than one year. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
When you sell shares in the Fund, you may realize a gain or loss.
Generally, any loss realized on a sale of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment
of dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The Fund may invest in equity securities of investment companies (or
similar investment entities) organized under foreign law or of ownership
interests in special accounts, trusts or partnerships. If the Fund purchases
shares of an investment company (or similar investment entity) organized under
foreign law, the Fund, will be treated as owning shares in a passive foreign
investment company ("PFIC") for United States Federal income tax purposes. The
Fund may be subject to United States Federal income tax, and an additional tax
in the nature of interest, on a portion of distributions from such company and
on gain from the disposition of such shares (collectively referred to as
"excess distributions"), even if such excess distributions are paid by the Fund
as a dividend to its shareholders. The Fund may be eligible to make an election
with respect to certain PFICs in which it owns shares that will allow it to
avoid the taxes on excess distributions. However, such election may cause the
Fund to recognize income (treated as ordinary income) in a particular year in
excess of the distributions received from such PFICs.
TAX TREATMENT OF FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Unless the Fund is eligible to make and makes a special
election, such options, futures or forward foreign exchange contracts that are
"Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, I.E., each option, futures or forward
foreign exchange contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from transactions in
options, futures or forward foreign exchange contracts will be 60% long-term
and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options, futures or forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in forward foreign exchange contracts. Similarly, Code Section 1091, which deals
with "wash sales," may cause the Fund to postpone recognition of certain losses
for tax purposes; Code Section 1258, which deals with "conversion transactions,"
may apply to recharacterize certain capital gains as ordinary income for tax
purposes and Code Section 1259, which deals with "Constructive Sales" of
appreciated financial positions (E.G. stock), may treat the Fund as having
recognized income before the time that such income is economically recognized by
the Fund.
28
<PAGE>
SPECIAL RULES FOR OPTIONS, FUTURES AND FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from forward foreign
exchange contracts relating to investments in stock, securities or foreign
currencies will be qualifying income for purposes of determining whether the
Fund qualifies as a RIC. It is currently unclear, however, who will be treated
as the issuer of a foreign currency instrument or how forward foreign exchange
contracts will be valued for purposes of the RIC diversification requirements
applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from forward contracts
will be treated as ordinary income or loss under Code Section 988. In certain
circumstances, the Fund may elect capital gain or loss treatment for such
transactions. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income dividends.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividends, and any distributions made before the losses were realized but
in the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in his Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Dividends and gains on the sale or exchange of shares of the Fund may also
be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) any
maximum applicable sales charge will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding any maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
29
<PAGE>
Set forth in the table below is total return information for shares of the
Fund for the period indicated.
<TABLE>
<CAPTION>
EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------------------------- ------------------- ------------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
One Year Ended October 31, 1998 ........... (2.79%) $ 972.10
Five Years Ended October 31, 1998 ......... 3.95% $ 1,213.80
Inception (September 14, 1992) to
October 31, 1998 ........................ 5.95% $ 1,425.00
ANNUAL TOTAL RETURN
Year Ended October 31,
1998 ...................................... (2.79%) $ 972.10
1997 ...................................... 9.26% $ 1,092.60
1996 ...................................... 5.93% $ 1,059.30
1995 ...................................... (1.68%) $ 983.20
1994 ...................................... 9.74% $ 1,097.40
1993 ...................................... 22.29% $ 1,222.90
Inception (September 14, 1992) to
October 31, 1992 ........................ (4.00)% $ 960.00
AGGREGATE TOTAL RETURN
Inception (September 14, 1992) to
October 31, 1998 ........................ 42.50% $ 1,425.00
</TABLE>
On occasion, the Fund may compare its performance to that of the Morgan
Stanley Europe, Asia, Far East Index, Standard & Poor's 500 Index, the Dow
Jones Industrial Average or performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc., MONEY MAGAZINE, U.S. NEWS &
WORLD REPORT, BUSINESS WEEK, CDA INVESTMENT TECHNOLOGY, INC., FORBES MAGAZINE
and FORTUNE MAGAZINE or other industry publications. When comparing its
performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. In addition, from time to time the Fund may
include its risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature.
The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund is an unincorporated business trust organized on June 26, 1992
under the laws of Massachusetts. It is a diversified, open-end management
investment company. The Trustees are authorized to issue an unlimited number of
full and fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional classes of shares of the Trust. The Trust has received an order from
the Commission permitting the issuance and sale of two classes of shares.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Trustees and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Trustees; (ii) approval of an investment
30
<PAGE>
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent auditors. Voting rights for Trustees
are not cumulative. Shares issued are fully paid and nonassessable and have no
preemptive or conversion rights. Redemption rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities. Share certificates are issued by the Transfer Agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may cause a meeting of shareholders to be held for the purpose of
voting on the removal of Trustees at the request of 10% of the outstanding
shares of the Fund. A Trustee may be removed at a special meeting of
shareholders by a vote of a majority of the votes entitled to be cast for the
election of Trustees.
The Declaration of Trust of the Fund contemplates that the Fund may be
terminated, soley upon a vote of the Board of Trustees of the Fund, and without
a vote of shareholders, within five years after it commences operations if the
Fund does not have net assets in excess of $100 million. Shareholders should be
aware that their investment in the Fund may be liquidated in such event. Among
other consequences, this could result in a taxable event for shareholders.
The Declaration of Trust establishing the Fund, dated June 26, 1992 and
amended on July 31, 1992, a copy of which, together with all amendments thereto
(the "Declaration"), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name "Merrill Lynch Consults
International Portfolio" refers to the Trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent or the Fund shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of said Fund but the "Trust Property"
only shall be liable.
INDEPENDENT AUDITORS
Ernst & Young LLP, 202 Carnegie Center, Princeton, New Jersey 08543-5321,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109 (the "Custodian"), acts as custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the United States and with certain
foreign banks and securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell and Transfer -- Through the Transfer Agent" in the Prospectus.
ADMINISTRATOR
Princeton Administrators, LP, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, acts as the Fund's administrator. See "Management and Advisory
Arrangements -- Administrator Services."
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022 is counsel for the Fund.
31
<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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of February 1, 1999.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
32
<PAGE>
CODE #16459-02-99
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
1 -- Amended and Restated Declaration of Trust of Registrant.1
2 -- By-Laws of Registrant.6
3 -- Instruments Defining Rights of Shareholders (Incorporated by reference to Exhibits 1 and 2 hereof)
4(a) -- Investment Advisory Agreement between Registrant and Merrill Lynch (Suisse) Investment
Management S.A.2
4(b) -- Sub-Advisory Agreement between Merrill Lynch (Suisse) Investment Management S.A., Registrant
and Fund Asset Management, Inc.2
4(c) -- Sub-Advisory Agreement between Merrill Lynch (Suisse) Investment Management S.A., Registrant
and Merrill Lynch Asset Management U.K. Limited.2
5 -- Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.2
6 -- None.
7 -- Custody Agreement between Registrant and Brown Brothers Harriman & Co.2
8(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.2
8(b) -- Administration Agreement between Registrant and Princeton Administrators, Inc.2
8(c) -- License Agreement Relating to Use of Name between Merrill Lynch & Co., Inc. and the
Registrant.2
9 -- Opinion of counsel for Registrant.6
10 -- Consent of Ernst & Young LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch (Suisse) Investment Management S.A.2
13 -- Distribution Plan of Registrant.2
14(a) -- Financial Data Schedule.
14(b) -- Other Exhibits.
-- Powers of Attorney for Officers and Trustees.
-- Arthur Zeikel2
-- Herbert I. London2
-- Joseph L. May2
-- Andr- F. Perold3
-- Robert R. Martin.4
14(c) -- Power of Attorney for James H. Bodurtha5
14(d) -- Power of Attorney for Donald C. Burke
15 -- None.
</TABLE>
- ---------
1 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).
2 Incorporated by reference to the corresponding exhibit number in
Pre-Effective Amendment No. 2 to Registrant's Registration Statement on Form
N-1A (File No. 33-49354) as set forth below:
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE
NUMBER TO EXHIBIT NUMBER
- ----------- --------------------------
<S> <C> <C>
4(a) 5(a)
4(b) 5(b)
4(c) 5(c)
5 6
7 8
8(a) 9(a)
8(b) 9(b)
8(c) 9(c)
12 13
13 15
14(b) 17(b)
14(c) 17(c)
</TABLE>
3 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).
C-1
<PAGE>
4 Incorporated by reference to Exhibit 17 to Post-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-1A (File No. 33-49354).
5 Incorporated by reference to Exhibit 17(c) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form N-1A (File No. 33-49354).
6 Incorporated by reference to the corresponding exhibit number in
Post-Effective Amendment No. 5 to Registrant's Registration Statement on
Form N-1A (File No. 33-49354) as set forth below:
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE
NUMBER TO EXHIBIT NUMBER
- --------- --------------------------
<S> <C> <C>
2 2
9 10
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. 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.
(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
C-2
<PAGE>
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.
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 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-3
<PAGE>
(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 26. 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 Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap
Fund, Inc., Merrill Lynch Global Technology 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. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc., and
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
C-4
<PAGE>
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 Corporate High
Yield 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, Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, 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 Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings California Insured
Fund IV, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured
Fund IV, MuniHoldings Insured Fund, Inc., MuniHoldings Michigan Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, 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., and Worldwide Dollar Vest Fund, Inc.
The address of each of these registered 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 MLAM, 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 Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD")
is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1201. The address of The Fund's Transfer
Agent, Financial Data Services ("FDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since October
31, 1996 for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President of substantially all of
the investment companies described in the first two paragraphs of this Item 26.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- --------------------------- ----------------- ----------------------------------------
<S> <C> <C>
Arthur Zeikel President and Director Chairman of MLAM and FAM; 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.
Juerg C. Boller Director and General Manager of the Portfolio Management
Manager Department of Merrill Lynch Bank
(Suisse)
Stephan W. Feller Director Portfolio Manager of the Merrill Lynch Bank (Suisse)
</TABLE>
C-5
<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 October 31, 1996 for his
or her or its own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Zeikel is President, Mr. Burke is Vice President and
Treasurer and Mr. Glenn is Executive Vice President of substantially all of the
investment companies described in the first two paragraphs of this Item 26, and
Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one or more of
such companies.
<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.
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; President and
Director of Princeton Services;
Executive Vice President of ML & Co.;
Managing Director and Co-Head of the
Investment Banking Division of Merrill
Lynch in 1997; Senior Vice President
and Director of the Global Securities
and Economics division of Merrill
Lynch from 1995 to 1997.
Terry K. Glenn .............. Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of PFD; Director of FDS;
President of Princeton Administrators.
Donald C. Burke ............. Senior Vice President Senior Vice President, Treasurer and
and Treasurer Director of Taxation of MLAM; Senior
Vice President and Treasurer of
Princeton Services; Vice President of
PFD; First Vice President of MLAM
from 1997 to 1999; Vice President of
MLAM from 1990 to 1997.
Michael G. Clark ............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director and Treasurer of PFD; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from
1996 to 1997.
Mark A. Desario ............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Linda L. Feredici ........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Vincent R. Giordano ......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Elizabeth A. Griffin ........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Norman R. Harvey ............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
- -------------------------- ----------------------- -----------------------------------------
<S> <C> <C>
Michael J. Hennewinkel ...... Senior Vice President, Senior Vice President, Secretary and
Secretary and General General Counsel of MLAM; Senior
Counsel Vice President of Princeton Services.
Philip L. Kirstein .......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President, Director and Secretary
of Princeton Services.
Ronald M. Kloss ............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Debra W. Landsman-Yaros ..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of PFD.
Stephen M.M. Miller ......... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services.
Joseph T. Monagle, Jr. ...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Brian A. Murdock ............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Gregory D. Upah ............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
Ronald L. Welburn ........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III,
Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch Global Growth Fund,
Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc., The Municipal Fund Accumulation Program, Inc., 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., 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 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 October 31,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel and Albert are officers of one
or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel .......... Director and Chairman of MLAM and FAM;
Chairman 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 MLAM.
Director
Nicholas C.D. Hall ..... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group.
Carol Ann Langham ...... Company Secretary None
Debra Anne Searle ...... Assistant Company None
Secretary
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, 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 26 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. A separate division of PFD acts as
the principal underwriter of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. 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
Michael G. Clark ........... Director and Treasurer None
Thomas J. Verage ........... Director None
Robert W. Crook ............ Senior Vice President None
Michael J. Brady ........... Vice President None
William M. Breen ........... Vice President None
Donald C. Burke ............ Vice President Vice President and Treasurer
James T. Farseas ........... Vice President None
Debra W. Landsman-Yaros .... Vice President None
Michelle T. Lau ............ Vice President None
Salvatore Venezia .......... Vice President None
William Wasel .............. Vice President None
Robert Harris .............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. 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, Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484 and Brown Brothers Harriman &
Co., 40 Water Street, Boston, Massachusetts 02109.
C-8
<PAGE>
ITEM 29. 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 30. UNDERTAKINGS.
Not applicable.
C-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT UNDER RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND
HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, DULY AUTHORIZED, IN THE TOWNSHIP OF
PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 26TH DAY OF FEBRUARY, 1999.
MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO
(Registrant)
By: /S/ ARTHUR ZEIKEL
----------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ------------------------------ ------------------
<S> <C> <C>
/S/ ARTHUR ZEIKEL President and Trustee February 26, 1999
----------------------------------
(ARTHUR ZEIKEL) (Principal Executive
Officer)
DONALD C. BURKE* Vice President and Treasurer
----------------------------------
(DONALD C. BURKE) (Principal Financial and
Accounting Officer)
JAMES H. BODURTHA* Trustee
----------------------------------
(JAMES H. BODURTHA)
HERBERT I. LONDON* Trustee
----------------------------------
(HERBERT I. LONDON)
ROBERT R. MARTIN* Trustee
----------------------------------
(ROBERT R. MARTIN)
JOSEPH L. MAY* Trustee
----------------------------------
(JOSEPH L. MAY)
ANDR- F. PEROLD* Trustee
----------------------------------
(ANDR- F. PEROLD)
*By /S/ ARTHUR ZEIKEL February 26, 1999
------------------------------
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ------------
<S> <C> <C>
10 Consent of Ernst & Young LLP, independent auditors for the Registrant.
14(a) Financial Data Schedule.
14(d) Power of Attorney for Donald C. Burke
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "General Information - Independent Auditors" 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
Merrill Lynch Consults International Portfolio and to the incorporation by
reference therein of our report dated December 3, 1998, with respect to the
financial statements of Merrill Lynch Consults International Portfolio for the
year ended October 31, 1998.
Princeton, New Jersey
February 23, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000889301
<NAME> MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 48,730,486
<INVESTMENTS-AT-VALUE> 56,964,471
<RECEIVABLES> 4,589,142
<ASSETS-OTHER> 163,734
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 61,717,347
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,275,550
<TOTAL-LIABILITIES> 1,275,550
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,358,356
<SHARES-COMMON-STOCK> 5,360,740
<SHARES-COMMON-PRIOR> 8,727,544
<ACCUMULATED-NII-CURRENT> 1,557,351
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,091,910)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,618,000
<NET-ASSETS> 60,441,797
<DIVIDEND-INCOME> 2,692,982
<INTEREST-INCOME> 124,847
<OTHER-INCOME> 0
<EXPENSES-NET> (2,466,027)
<NET-INVESTMENT-INCOME> 351,802
<REALIZED-GAINS-CURRENT> 1,396,964
<APPREC-INCREASE-CURRENT> (2,602,101)
<NET-CHANGE-FROM-OPS> (853,335)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,515,681)
<DISTRIBUTIONS-OF-GAINS> (3,930,011)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 856,874
<NUMBER-OF-SHARES-REDEEMED> (4,761,563)
<SHARES-REINVESTED> 537,886
<NET-CHANGE-IN-ASSETS> (47,508,770)
<ACCUMULATED-NII-PRIOR> 1,232,371
<ACCUMULATED-GAINS-PRIOR> 3,929,996
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 683,792
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,466,027
<AVERAGE-NET-ASSETS> 91,419,659
<PER-SHARE-NAV-BEGIN> 12.37
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> (.40)
<PER-SHARE-DIVIDEND> (.29)
<PER-SHARE-DISTRIBUTIONS> (.46)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.27
<EXPENSE-RATIO> 2.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the person whose name appears below
hereby nominates, constitutes and appoints Arthur Zeikel and Terry K. Glenn
(with full power to each of them to act alone) his true and lawful
attorney-in-fact and agent, for him and on his behalf and in his place and
stead in any and all capacities, to make, execute and sign all amendments and
supplements to the Registration Statement on Form N-1A under the Securities Act
of 1933 and the Investment Company Act of 1940 of MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO (the "Fund"), and to file the same with the Securities
and Exchange Commission, and any other regulatory authority having jurisdiction
over the offer and sale of shares of beneficial interest, par value $0.10 per
share, of the Fund, and any and all exhibits and other documents requisite in
connection therewith, granting unto said attorneys, and each of them full power
and authority to perform each and every act and thing requisite and necessary to
be done in and about the premises as fully to all intents and purposes as the
undersigned himself might or could do.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND THIS 25TH DAY
OF FEBRUARY, 1999.
/s/ DONALD C. BURKE
---------------------------------
Donald C. Burke
Vice President and Treasurer
