As filed with the Securities and Exchange Commission on February 28, 2000
Investment Company Act File No. 811-6725
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 11 |X|
(Check appropriate box or boxes)
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Merrill Lynch Consults International Portfolio
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road,
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant's Telephone Number, Including Area Code)
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Terry K. Glenn
Merrill Lynch Consults International Portfolio
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Counsel for the Fund: Michael J. Hennewinkel, Esq.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP MERRILL LYNCH
The Chrysler Building ASSET MANAGEMENT
405 Lexington Avenue P.O. Box 9011
New York, NY 10174 Princeton, New Jersey 08543-9011
Attention: Joel H. Goldberg, Esq.
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<PAGE>
Table of Contents
PAGE
[CLIPART] DETAILS ABOUT THE FUND
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How the Fund Invests ............................................ 3
Investment Risks ................................................ 5
[CLIPART] YOUR ACCOUNT
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How to Buy, Sell and Transfer Shares ............................ 11
[CLIPART] MANAGEMENT OF THE FUND
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Merrill Lynch (Suisse) Investment Management S.A. ............... 17
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
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On October 26, 1999, the Board of Trustees of the Merrill Lynch Consults
International Portfolio (the "Fund") approved a reorganization (the
"Reorganization") pursuant to which Merrill Lynch International Equity Fund
("International Equity Fund") will acquire substantially all of the assets and
assume substantially all of the liabilities of the Fund in exchange for an equal
aggregate amount of Class C shares of International Equity Fund. In connection
with the Reorganization, such shares will be distributed by the Fund to its
shareholders in liquidation of the Fund. In addition, as part of the
Reorganization, the Fund will terminate its existence as a trust with
transferable shares under Massachusetts law and its registration under the
Investment Company Act of 1940, as amended. At a special shareholders meeting
held on February 16, 2000, the shareholders of the Fund approved the
Reorganization. It is expected that the Reorganization will take place on March
6, 2000.
2 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
Details About the Fund [CLIPART]
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.
HOW THE FUND INVESTS
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The Fund's main objective 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 Convertible Securities, 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 factors, such as
o financial resources
o value of assets
o sales and earnings growth
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 3
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[CLIPART] Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Clive D. Lang is the Portfolio Manager
of the Fund. Mr. Lang has been
associated with Merrill Lynch Asset
Management U.K. Limited ("MLAM UK")
since 1997, prior to which he was the
Chief Investment Officer of Panagora
Asset Management Limited.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch
(Suisse) Investment Management, S.A.
(the "Investment Adviser"), which in
turn receives investment advice through
a subadvisory agreement with MLAM UK.
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 U.S.
dollars or foreign currencies) and short term securities, including
4 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
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.
The Fund may use many different investment strategies and it has certain
investment restrictions, all of which are explained in the Fund's Statement of
Additional Information.
INVESTMENT RISKS
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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.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value, including
the possibility that one or more markets will go down sharply and unpredictably.
Selection risk is the risk that the investments that Fund management selects
will underperform the stock markets 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
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 5
<PAGE>
[CLIPART] Details About the Fund
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 -- 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
6 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
other costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount the Fund
can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a 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.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 7
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[CLIPART] Details About the Fund
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 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.
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
8 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
relatively small market movements may result in large changes in the value
of an investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes including anticipatory hedges.
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
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 9
<PAGE>
[CLIPART] Details About the Fund
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that 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 -- 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
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If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
10 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
Your Account [CLIPART]
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.
HOW TO BUY, SELL, AND TRANSFER SHARES
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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 11
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[CLIPART] Your Account
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<CAPTION>
If You Want to Your Choices Information Important for You to Know
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<S> <C> <C>
Buy Shares Determine the amount of your investment The minimum initial investment for the Fund is $5,000 for
all accounts.
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Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant submit your purchase order net asset value after your order is placed. Any purchase
orders placed prior to the close of business on the New York
Stock Exchange (generally 4:00 p.m. Eastern Standard time)
will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the
net asset value determined on the next business day. The
Fund may reject any order to buy shares and may suspend the
sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35. This fee is currently waived for clients of the
Merrill Lynch Consults(R) Service and of the Merrill Lynch
Strategic Portfolio Advisor(SM) Service.
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Add to Your Investment Purchase additional shares The minimum investment for additional purchases is $1,000.
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Acquire additional shares through the All dividends are automatically reinvested without a sales
automatic dividend reinvestment plan charge.
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Transfer Shares to Another Transfer to a participating securities Subject to the consent of Merrill Lynch, you may transfer
Securities Dealer dealer your Fund shares to another securities dealer that has
entered into an agreement with Merrill Lynch. Certain
shareholder services may not be available for the
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving
firm.
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Transfer to a non-participating You must either:
securities dealer
o Transfer your shares to an account with the
Transfer Agent; or
o Sell your shares.
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Terminate your Merrill Retain your shares of the Fund with Shares of the Fund are only distributed to current clients
Lynch Consults(R) Service Merrill Lynch of the Merrill Lynch Consults(R) Service and of Merrill
or the Merrill Lynch Lynch Strategic Portfolio Advisor(SM) Service (other than
Strategic Portfolio reinvestment of dividends and capital gains distributions of
Advisor(SM) Service the Fund). If you wish to terminate the Merrill Lynch
account Consults(R) Service or the Merrill Lynch Strategic Portfolio
Advisor(SM) Service, your shares of the Fund may be retained
in a Merrill Lynch brokerage account, subject to the consent
of Merrill Lynch.
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Transfer shares to another securities See "Transfer Shares to Another Securities Dealer" above.
dealer
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Sell your shares See "Sell Your Shares" on the following page.
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</TABLE>
12 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
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<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
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<S> <C> <C>
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation of
Consultant or securities dealer submit net asset value after your order is placed. For your
your sales order redemption request to be priced at the net asset value on
the day of your request, you must submit your request to
your dealer prior to that day's close of business on the New
York Stock Exchange (generally prior to 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.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. This fee is currently
waived for clients of the Merrill Lynch Consults(R) Service
and of Merrill Lynch Strategic Portfolio Advisor(SM)
Service. No processing fee is charged if you redeem shares
directly through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
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Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. 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.
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</TABLE>
Because of the high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account if the net asset value of your account
falls below $500 due to redemptions you have made. You will be notified that the
value of your account is less than $500 before the Fund makes an involuntary
redemption. You will then have 60 days to make an additional investment to bring
the value of your account to at least $500 before the Fund takes any action.
This involuntary redemption does not apply to retirement plans or Uniform Gifts
or Transfers to Minors Act accounts.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 13
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[CLIPART] Your Account
OTHER SERVICES
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Clients of the Merrill Lynch Consults(R) Service and the Merrill Lynch Strategic
Portfolio Advisor(SM) Service are currently provided, without incremental
charge, the Merrill Lynch Asset Information and Measurement(R) Service. This
Service provides, through quarterly reports, the ability to monitor and evaluate
performance of a Merrill Lynch Consults(R) Service or Merrill Lynch Strategic
Portfolio Advisor(SM) Service account, including any shares of the Fund held in
the account, and analyzes the risk taken to achieve the return. Shares of the
Fund must be held in the account for a full quarterly period to be subject to
such evaluation.
If you are a client of the Merrill Lynch Consults(R) Service, you may receive
information regarding the possible change in risk posture to your domestic
account due to an investment in the Fund. Each domestic investment manager
employed by the Merrill Lynch Consults(R) Service is assigned a risk class,
based on its performance over the last 10 years, as calculated by Merrill Lynch
Consults(R) Service according to information provided by the manager. The Fund
is also assigned a risk class based on its performance over the last 10 years
compared to the EAFE Index, a market weighted, unmanaged index. This information
is provided only to clients who have domestic Merrill Lynch Consults(R) Service
accounts and own shares of the Fund in that account. The Fund does not allocate
its assets proportionately to the weightings of the EAFE Index and may invest in
countries that are not included in the EAFE Index. Thus, the Fund's performance
may not correlate to the EAFE Index. Projections of risk posture based on a
measurement of past performance of an investment manager or of an index may not
accurately predict future risk posture or performance.
14 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
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HOW SHARES ARE PRICED
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Net Asset Value -- the market value of
the Fund's total assets after deducting
liabilities, divided by the number of
shares outstanding.
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 after the close of
business on the Exchange, based on prices at the time of closing. 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. Securities and assets for which market quotations
are not readily available are generally valued at fair value as determined in
good faith by or under the direction of the Board of Trustees.
DIVIDENDS, AND TAXES
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Dividends -- Ordinary income and capital
gains paid to shareholders. Dividends
may be reinvested in additional Fund
shares as they are paid.
The Fund will distribute at least annually any net investment income and any net
realized long or short term capital gains. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive dividends in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.
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 15
<PAGE>
[CLIPART] Your Account
"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 ordinary 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 or if
the number you have provided is incorrect.
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.
16 MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
<PAGE>
Management of the Fund [CLIPART]
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 Asset Management Group of ML & Co., which
had approximately $550 billion in investment company and other portfolio assets
under management as of January 31, 2000. This amount includes assets managed for
Merrill Lynch affiliates.
The Investment Adviser and the Fund have hired MLAM UK to provide day-to-day
investment advice for the Fund, and Fund Asset Management, L.P. ("FAM") to
manage the Fund's daily cash. MLAM UK and FAM are affiliates of the Investment
Adviser and the Fund.
Princeton Administrators L.P., an affiliate of the Investment Adviser, provides
administrative services to the Fund.
A Note About Year 2000
As the year 2000 began, there were few problems caused by the inability of
certain computer systems to tell the difference between the year 2000 and the
year 1900 (commonly known as the "Year 2000 Problem"). It is still possible that
some computer systems could malfunction in the future because of the Year 2000
Problem or as a result of actions taken to address the year 2000 problem. Fund
management does not anticipate that its services or those of the Fund's other
service providers will be adversely affected, but Fund management will continue
to monitor the situation. If malfunctions related to the Year 2000 Problem do
arise, the Fund and its investments could be negatively affected.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO 17
<PAGE>
---------------------------------
POTENTIAL
INVESTORS
Open an account (two options)
---------------------------------
(1) (2)
- ---------------------------- -----------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER Financial Data Services, Inc.
ADMINISTRATIVE OFFICES
4800 Deer Lake Drive East
Advises shareholders on Jacksonville, Florida 32246-6484
their Fund investments.
- ---------------------------- MAILING ADDRESS
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and
reporting services.
-----------------------------------
----------------------------------------------------
DISTRIBUTORS
Merrill Lynch Funds Distributors,
a Division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Markets the Funds and arranges for their sale.
----------------------------------------------------
- -------------------------- ---------------------------------
COUNSEL CUSTODIAN
------------------
Swidler Berlin THE FUND Brown Brothers Harriman & Co.
Shereff Friedman, LLP 40 Water Street
The Chrysler Building The Board of Boston, Massachusetts 02109
405 Lexington Avenue Trustees oversees
New York, New York 10174 the Fund. Holds the Fund's
assets for safekeeping.
Provides legal advice ------------------
to the Fund.
- -------------------------- ---------------------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
Ernst & Young LLP Merrill Lynch (Suisse)
99 Wood Avenue South Investment Management S.A.
P.O. Box 751 18 Rue De Contamines
Iselin, NJ 08830-0471 1211 Geneva 3, Switzerland
Audits the financial TELEPHONE NUMBER
statements of the Fund on behalf of 0041-22-703-1616
the shareholders.
- ----------------------------------- 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>
================================================================================
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. There can be no assurance that
the investment objective of the Fund will be realized. For more information on
the Fund's investment objectives and policies, see "Investment Objective and
Policies." Distribution of shares of the Fund is limited to current clients of
the Merrill Lynch Consults(R) Service and of the Merrill Lynch Strategic
Portfolio Advisor(SM) Service. The Fund is designed for Merrill Lynch
Consults(R) Service and Merrill Lynch Strategic Portfolio Advisor(SM) Service
clients who seek to internationally diversify a portion of their investment
portfolio.
The Fund offers shares that may be purchased at a price equal to the next
determined net asset value per share. Shares of the Fund are not subject to any
sales charge, but are subject to an ongoing account maintenance fee at an annual
rate of 0.25% of average daily net assets and an ongoing distribution fee at an
annual rate of 0.75% of average daily net assets. The Fund's distributor is
Merrill Lynch Funds Distributors, a division of Princeton Funds Distributor,
Inc.
----------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
February 28, 2000 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
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 28, 2000.
----------
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objective and Policies ......................................... 2
Convertible Securities ................................................. 3
Foreign Investment Risks ............................................... 4
Derivatives ............................................................ 6
Indexed and Inverse Securities ......................................... 6
Options on Securities and Securities Indices ........................... 6
Futures ................................................................ 7
Foreign Exchange Transactions .......................................... 8
Risk Factors in Options, Futures and Currency Instruments .............. 9
Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives ........................................ 9
Additional Limitations on the Use of Derivatives ....................... 10
Other Investment Policies, Practices, and Risk Factors ................. 10
Borrowing and Leverage ................................................. 11
Investment Restrictions ................................................ 12
Portfolio Turnover ..................................................... 14
Management of the Fund .................................................... 14
Trustees and Officers .................................................. 14
Compensation of Trustees ............................................... 16
Management and Advisory Arrangements ................................... 16
Code of Ethics ......................................................... 18
Purchase of Shares ........................................................ 18
Distribution Plans ..................................................... 19
Redemption of Shares ...................................................... 21
Redemption ............................................................. 21
Repurchase ............................................................. 22
Pricing of Shares ......................................................... 22
Determination of Net Asset Value ....................................... 22
Computation of Offering Price Per Share ................................ 23
Portfolio Transactions and Brokerage ...................................... 23
Transactions in Portfolio Securities ................................... 23
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 .................................................................. 26
Tax Treatment of Forward Foreign Exchange Transactions ................. 28
Special Rules for Options, Futures and Foreign Currency Transactions ... 28
Performance Data .......................................................... 29
General Information ....................................................... 30
Description of Shares .................................................. 30
Independent Auditors ................................................... 30
Custodian .............................................................. 30
Transfer Agent ......................................................... 31
Administrator .......................................................... 31
Legal Counsel .......................................................... 31
Reports to Shareholders ................................................ 31
Shareholder Inquiries .................................................. 31
Additional Information ................................................. 31
Financial Statements ...................................................... 31
<PAGE>
On October 26, 1999, the Board of Trustees of the Merrill Lynch Consults
International Portfolio (the "Fund") approved a reorganization (the
"Reorganization") pursuant to which Merrill Lynch International Equity Fund
("International Equity Fund") will acquire substantially all of the assets and
assume substantially all of the liabilities of the Fund in exchange for an equal
aggregate amount of Class C shares of International Equity Fund. In connection
with the Reorganization, such shares will be distributed by the Fund to its
shareholders in Liquidation of the Fund. In addition, as part of the
Reorganization, the Fund will terminate its existence as a trust with
transferable shares under Massachusetts law and its registration under the
Investment Company Act of 1940, as amended. At a special shareholders meeting
held on February 16, 2000, the shareholders of the Fund approved the
Reorganization. It is expected that the Reorganization will take place on March
6, 2000.
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. Reference is made to "How the Fund
Invests" and "Investment Risk" in the Prospectus. The Fund is classified as a
diversified fund under the Investment Company Act of 1940, as amended (the
"Investment Company Act").
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
In pursuing the Fund's investment objective, its management will utilize a
fully-managed investment strategy that permits the Fund to take a flexible
approach and vary its policies as to geographic and industry diversification
based upon its evaluation of international economic and market trends. This
evaluation could include such factors as the condition and growth potential of
various economies and securities markets, currency and taxation considerations
and other pertinent financial, social, national and political considerations.
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility
may be reduced when the various markets are combined into a single portfolio. Of
course, any effects of movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities of companies located in at least three countries
other than the United States. It is expected that more than 50% of the Fund's
assets will be invested in equity securities of companies located in Western
Europe and the Far East, although the Fund may invest in capital markets
throughout the world (excluding the United States). For purposes of the Fund's
objective, equity securities include securities convertible into equity
securities and securities the values of which are indexed to the market values
of equity securities or indices of equity securities. A United States closed-end
investment company will be considered to be a non-United States investment if
it, in turn, primarily invests in non-United States securities. The Fund
reserves the right, as a temporary defensive measure and to provide for
redemptions, to hold cash or cash equivalents (in United States dollars or
foreign currencies) and short-term securities, including money market
securities. Transactions effected by the Fund may be subject to Swiss federal
transactional taxes of 0.15%. Merrill Lynch (Suisse) Investment Management S.A.
(the "Investment Adviser") believes that such transactional taxes will not
materially affect the performance of the Fund.
2
<PAGE>
The Fund may invest in the securities of foreign issuers in the form of
depository receipts, including American Depository Receipts (ADRs) and European
Depository Receipts (EDRs), Global Depository Receipts (GDRs), or other
securities convertible into securities of foreign issuers. Depository receipts
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by an American
bank or trust company 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.
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
3
<PAGE>
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 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. Since the Fund invests in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because securities traded on foreign markets have often,
though not always performed differently than securities in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of 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 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 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.
European Economic and Monetary Union. For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase
4
<PAGE>
competition among companies, reduce government subsidies in certain industries,
and reduce or eliminate currency fluctuations among these European countries.
The Treaty on European Union (the "Maastricht Treaty") set out a framework for
the European Economic and Monetary Union ("EMU") among the countries that
comprise the European Union ("EU"). EMU established a single common European
currency (the "euro") that was introduced on January 1, 1999 and is expected to
replace the existing national currencies of all EMU participants by July 1,
2002. EMU took effect for the initial EMU participants on January 1, 1999.
Certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are listed,
traded, and made dividend and other payments only in euros.
No assurance can be given that the changes planned for the EU can be
successfully implemented or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
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 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.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on 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
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 or 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 it is in the U.S. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than investment companies invested only in the U.S.
Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no
5
<PAGE>
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.
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.
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").
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The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or on securities indices, the performance of
which is substantially correlated to securities held in its portfolio. When the
Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options on securities to earn income, through the receipt of option premiums.
The Fund may write call options on securities for hedging purposes. In the event
the party to which the Fund has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
The Fund may also write put options on securities indices for hedging
purposes. When the Fund writes a put option on a securities index, in return for
an option premium the Fund agrees to pay to another party an amount based on any
decline in a specified securities index below a specified level on or before the
expiration date. In the event the party to which the Fund has written an option
fails to exercise its rights under the option because the value of the
securities index has not declined below the specified level on or before the
expiration date, the Fund will profit by the amount of the option premium.
However, by writing a put option on the index, the Fund will be obligated to
make a cash payment reflecting any decline in the index. Accordingly, when the
Fund writes a put option it is exposed to a risk of loss in the event the value
of the underlying index falls below the 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
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the prior day or be entitled to a payment representing any profit experienced as
a result of the futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying 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 U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and "Additional
Risk Factors of OTC Transactions" 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
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value of the Fund's shares will fluctuate. Moreover, although Currency
Instruments will be used with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Fund's hedging strategies will be ineffective. To the extent that the Fund
hedges against anticipated currency movements that do not occur, the Fund may
realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange
rate movements, even if correctly anticipated, in the event that (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. However, if an OTC option is
sold by the Fund to a primary U.S. Government securities dealer recognized by
the Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount
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by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Because Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of margin,
to the extent that the Fund has unrealized gains in such instruments or has
deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Derivatives traded in OTC 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 331/3% of its total assets. In return, the Fund receives collateral in
an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
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
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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 have contracted or legal restrictions on their
resale and include "private placement" securities that the Fund may buy directly
from the issuer. Restricted securities may be sold in private placement
transactions between 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. In addition, issuers
whose securities are not publicly traded may not be subject to disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses
of registration. Certain of the Fund's investments in private placements may
consist of direct investments and may include investments in smaller,
less-seasoned issuers, which may involve greater risks. These issuers may have
limited product lines, markets or financial resources, or they may be dependent
on a limited management group. In making investments in such securities, the
Fund may obtain access to material nonpublic information which may restrict the
Fund's ability to conduct portfolio transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Trustees has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Directors has adopted
guidelines and delegated to the Investment Adviser 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. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will develop, the Board of Directors will carefully monitor the
Fund's investments in these securities. This investment practice could have the
effect of increasing the level of illiquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these securities.
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
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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.
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,
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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 331/3% 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 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.
13
<PAGE>
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 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 five individuals, four 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.
14
<PAGE>
TERRY K. GLENN (59) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("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.
ARTHUR ZEIKEL (67) -- Trustee(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Advisor and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services, Inc. from
1997 to 1999, Director thereof from 1993 to 1999 and President thereof from 1993
to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
JAMES H. BODURTHA (56) -- Trustee(2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (60) -- Trustee(2)(3) -- 2 Washington Square Village,
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 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.
JOSEPH L. MAY (70) -- Trustee(2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Company since 1972.
ANDRE F. PEROLD (47) -- 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 from 1991 to 1999 and TIBCO from 1994 to 1996 and
Director, Genbel Securities Limited and Gensec Bank since 1999; Director,
Bulldog Research.com since 2000.
DONALD C. BURKE (39) -- Vice President And Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Advisor and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of Investment Advisor from 1997 to 1999;
Vice President of Investment Advisor from 1990 to 1997; Director of Taxation of
Investment Advisor since 1990.
CHRISTOPHE VELAY (42) -- Vice President(1) -- Portfolio Manager of Merrill
Lynch Bank (Suisse) S.A. since 1986.
ROBERT C. DOLL (45) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Advisor and FAM since 1999; Senior Vice President of
Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds,
Inc. in 1999 and Executive Vice President thereof from 1991 to 1999.
ROBERT HARRIS (47) -- Secretary(1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997 and attorney associated
with MLAM since 1980; Secretary of Princeton Funds Distributor, Inc. since 1982.
- ----------
(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, 2000, the officers and Trustees of the Fund as a group
(10 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.
15
<PAGE>
Compensation of Trustees
The Fund pays fees to each non-interested Trustee for service to the Fund.
Effective January 1, 2000, each non-interested Trustee receives an aggregate
annual retainer of $100,000 for his or her services to multiple investment
companies advised by the Investment Adviser or its affiliate, MLAM
("MLAM/FAM-advised funds"). The portion of the annual retainer allocated to each
MLAM/FAM-advised fund is determined quarterly based on the relative net assets
of each fund. As of the date of this Statement of Additional Information, this
annual retainer applies to 52 MLAM/FAM-advised funds. In addition, each
non-interested Trustee receives a fee per in-person board meeting attended and
per in-person Audit and Nominating Committee meeting attended. The annual per
meeting fees to be paid to non-interested Trustees who attend each regular
quarterly meeting of the Board and of the Audit and Nominating Committee would
aggregate $60,000 for all MLAM/FAM-advised funds for which the Trustees serve
and are allocated equally among those funds. The Fund also reimburses the
non-interested Trustees for actual out-of-pocket expenses relating to attendance
at meetings. The Audit and Nominating Committee consists of all of the
non-interested Trustees of the Fund.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended October 31, 1999 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, MLAM ("MLAM/FAM-advised funds"), for the calendar
year ended December 31, 1999.
Total Compensation
Pension or from Fund and
Aggregate Retirement Benefits FAM/MLAM Advised
Compensation Accrued as Part of Funds Paid to
Name of Trustee From Fund Fund Expenses Trustees(1)
- -------------- ------------- -------------- --------------
James H. Bodurtha ...... $4,750 0 $133,500
Herbert I. London ...... $4,750 0 $133,500
Joseph L. May .......... $4,750 0 $133,500
Andre F. Perold ........ $4,500 0 $133,250
- ----------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (31 registered investment companies consisting of 53 portfolios);
Mr. London (31 registered investment companies consisting of 53
portfolios); Mr. Martin (31 registered investment companies consisting of
53 portfolios); Mr. May (31 registered investment companies consisting of
53 portfolios); and Mr. Perold (31 registered investment companies
consisting of 53 portfolios).
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund
with investment advisory and management services. Subject to the supervision of
the Trustees, the Investment Adviser is responsible for the actual management of
the Fund's portfolio and constantly reviews the Fund's holdings in light of its
own research analysis and that from other relevant sources. The responsibility
for making decisions to buy, sell or hold a particular security rests with the
Investment Adviser. The Investment Adviser provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Investment Advisory Fee. The Fund has entered into an investment advisory
agreement with the Investment Adviser (the "Investment Advisory Agreement"),
pursuant to which the Investment Adviser receives for its services to the Fund
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The table below sets forth information about the total investment
advisory fees paid by the Fund to the Investment Adviser for the periods
indicated.
Fiscal Year Ended October 31, Investment Advisory Fee
----------------------------- -----------------------
1999 ................................. $ 349,854
1998 ................................. $ 683,792
1997 ................................. $1,061,746
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. provides day-to-day
investment advice for the Fund and FAM provides investment advisory services
with
16
<PAGE>
respect to the management of the Fund's cash position. For the fiscal years
ended October 31, 1997, 1998 and 1999, the Investment Adviser did not pay any
fees to MLAM U.K. and FAM pursuant to such agreements.
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 Investment Adviser. The Fund pays all other expenses
incurred in the operation of the Fund, including among other things: taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports, prospectuses and statements of additional
information, except to the extent paid by Merrill Lynch Funds Distributor, a
division of PFD (the "Distributor"); charges of the custodian and sub-custodian,
and 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 non-interested
Trustees; accounting and pricing costs (including the daily calculations of net
asset value); insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses; and other expenses properly payable by
the Fund. The Distributor will pay certain promotional expenses of the Fund
incurred in connection with the offering of shares of the Fund. Certain expenses
will be financed by the Fund pursuant to distribution plans in compliance with
Rule 12b-1 under the Investment Company Act. See "Purchase of Shares --
Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a
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.
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 Sub-Advisory Agreements will continue 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, 1999, the total fee paid by the Fund to the Administrator was $116,618 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, 1999, the Fund reimbursed the Administrator $19,796 for these
services.
17
<PAGE>
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 offering of shares of
the Fund (the "Distribution Agreement"). The Distribution Agreement obligates
the Distributor to pay certain expenses in connection with the offering of
shares of the Fund. After the prospectuses, statements of additional information
and periodic reports have been prepared, set in type and mailed to shareholders,
the Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination provisions
as the Investment Advisory Agreement described above.
Code of Ethics
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
the Investment Adviser include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell and Transfer Shares" in the
Prospectus.
Shares of the Fund are offered continuously for sale to clients of the
Merrill Lynch Consults(R) Service by Merrill Lynch Funds Distributor, Inc., an
indirect subsidiary of ML & Co., and Merrill Lynch. The minimum initial purchase
is $5,000, and the minimum subsequent purchase is $1,000. Shares of the Fund are
offered to clients of Merrill Lynch Strategic Portfolio Advisor(SM) Service on
the same terms as offered to clients of Merrill Lynch Consults(R) Service.
Merrill Lynch Strategic Portfolio Advisor(SM) Service is a service designed by
Merrill Lynch to provide business and individual clients with a comprehensive
package of consulting, investment and account services.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined
18
<PAGE>
after receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally 4:00 p.m., Eastern time) which includes
orders received after the determination of net asset value on the previous day,
the applicable offering price will be based on the net asset value on the day
the order is placed with the Distributor, provided that the orders are received
by the Distributor prior to 30 minutes after the close of business on the NYSE
on that day. If the purchase orders are not received prior to 30 minutes after
the close of business on the NYSE on that day, such orders shall be deemed
received on the next business day. Dealers have the responsibility of submitting
purchase orders to the Fund not later than 30 minutes after the close of
business on the NYSE in order to purchase shares at that day's offering price.
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. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Such fee is presently waived for clients of the Merrill Lynch Consults(R)
Service and of the Merrill Lynch Strategic Portfolio Advisor(SM) Service.
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 in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with 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, 1999, the Fund paid the
Distributor $466,473 pursuant to the Distribution Plan, of which $349,855 was
paid to Merrill Lynch for providing distribution-related services and $116,618
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
19
<PAGE>
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, 1998, 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 $2,046,000 (6.22% of net assets at that date). As of January 31,
2000, direct cash revenues for the period since commencement of operations
exceeded direct cash expenses by approximately $6,469,017 (19.66% of net assets
at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch and there is no assurance that the
Board of Trustees of the Fund will approve the continuance of the Distribution
Plan from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plan. In their review of the Distribution Plan,
the Trustees will not be asked to take into consideration expenses incurred in
connection with the distribution of shares of other funds for which the
Distributor acts as distributor.
The maximum sales charge rule in the Conduct Rules of the 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 January 31,
2000 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 January 31, 2000.
<TABLE>
<CAPTION>
Data Calculated as of January 31, 2000
--------------------------------------
(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 ...... $388,112 $24,257 $12,763 $37,020 $7,509 $29,511 $247
Under Distributor's
Voluntary Waiver................ $388,112 $24,257 $ 1,941 $26,198 $7,509 $18,689 $247
</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. See "What are the
Fund's fees and expenses?" in the Prospectus.
(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.
20
<PAGE>
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 market value of the securities held
by the Fund at such time.
Because of the high cost of maintaining smaller shareholder accounts, the
Fund may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will then
have 60 days to make an additional investment to bring the value of your account
to at least $500 before the Fund takes any action. This involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act
accounts ("UGMA/UTMA accounts").
The Fund has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser, and its affiliates and a
syndicate of banks that is intended to provide the Fund with a temporary source
of cash to be used to meet redemption requests from Fund shareholders in
extraordinary or emergency circumstances.
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 request may require a guarantee by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, (the "Exchange Act"), the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures are not
sufficient. In general, signature guarantees are waived on redemptions of less
than $50,000 as long as the following requirements are met: (i) all requests
require the signature(s) of all persons whose name(s) shares are recorded on the
Transfer Agent's register; (ii) all checks must be mailed to the stencil address
of record on the Transfer Agent's register and (iii) the stencil address must
not have changed within 30 days. Certain rules may apply regarding certain
account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies
With Rights of Survivorship, contra broker transactions, and institutional
accounts. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payments
will be mailed within seven days of receipt of a proper notice of redemption.
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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 U.S. 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 U.S. bank) has been
collected for the purchase of such Fund shares, which will usually 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 the close of business
on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such
request is received by the Fund from such dealer not later than 30 minutes after
the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of business on the NYSE, in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund. Securities firms that do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a repurchase of shares to such customers. Such fee is
currently waived for clients of the Merrill Lynch Consults(R) Service and of
Merrill Lynch Strategic Portfolio(SM) Service. Repurchases made directly through
the Transfer Agent on accounts held at the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem Fund shares as set forth above.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of the Fund is determined once daily
Monday through Friday after the close of business on the NYSE on each day the
NYSE is open for trading based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m., Eastern time. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The NYSE is not open for trading on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the fees payable to the Investment Adviser, the
Administrator and Distributor, are accrued daily.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price on the exchange on which such securities are traded as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions, and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Trustees as the primary market. Long positions in
securities traded in the OTC market are valued at the last available bid price
or yield equivalent obtained from one or more dealers or pricing services
approved by the Board of Trustees of the Fund. 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
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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 ask 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. The value of swaps, including interest rate swaps, caps and
floors, will be determined by obtaining dealer quotations. Other investments,
including financial futures contracts and related options, are stated at market
value. Obligations with remaining maturities of 60 days or less are valued at
amortized cost unless the Advisor believes that this method no longer produces
fair valuations. Repurchase agreements will be valued at cost plus accrued
interest. 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.
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, 1999 is set forth below.
Net Assets ................................................ $ 37,789,332
==============
Number of Shares Outstanding .............................. 3,010,649
==============
Net Asset Value Per Share (net assets divided
by number of shares outstanding) ........................ $ 12.55
Sales Charge .............................................. none
--------------
Offering Price ............................................ $ 12.55
==============
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 broker or group of brokers in the execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, the Investment Adviser seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Trustees of the Fund, the Investment Adviser may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund; however, whether or not a particular broker
or dealer sells shares of the Fund neither qualifies nor disqualifies such
broker or dealer to execute transactions for the Fund.
Subject to obtaining the best net results, brokers who provide
supplemental investment research services to the Investment Adviser may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company, industry or economic sector. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. If in the judgment of
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<PAGE>
the Investment Adviser the Fund will benefit from supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to a
broker furnishing such services that are in excess of commissions that another
broker may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Investment Adviser exercises investment
discretion. Conversely, the Fund may be the primary beneficiary of the
supplemental research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transactions costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
Aggregate Brokerage Commissions Paid
Fiscal Year Ended Commissions Paid to Merrill Lynch
---------------- ------------------- ----------------
1999 ............................. $184,094 $20,396
1998 ............................. $314,844 $30,933
1997 ............................. $477,435 $59,811
For the fiscal year ended October 31, 1999, the brokerage commissions paid
to Merrill Lynch represented 11.08% of the aggregate brokerage commissions paid
and involved 8.56% of the Fund's dollar amount of transactions involving payment
of commissions during the year.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Fund may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions"
Section 11(a) of the Exchange Act generally prohibits members of the 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 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.
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<PAGE>
The Board of Trustees of the Fund has considered the possibility of
seeking to recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the Fund to
the Investment Adviser. After considering all factors deemed relevant, the Board
of Trustees made a determination not to seek such recapture. The Board will
reconsider this matter from time to time.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.
Investment Account
Distribution of shares of the Fund (other than reinvestment of dividends)
is limited to current clients of the Merrill Lynch Consults(R) Service and of
the Merrill Lynch Strategic Portfolio Advisor(SM) Service. Shareholders will
receive statements of dividends.
If a client terminates the Merrill Lynch Consults(R) Service or the
Merrill Lynch Strategic Portfolio Advisor(SM) Service, the client's shares may
be retained in the client's Merrill Lynch brokerage account, subject to the
consent of Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Subject to the consent of Merrill Lynch, shareholders may transfer their
Fund shares from Merrill Lynch to another securities dealer that has entered
into a selected dealer agreement with Merrill Lynch. Certain shareholder
services may not be available for the transferred shares. After the transfer,
the shareholder may purchase additional shares of funds owned before the
transfer and all future trading of these assets must be coordinated by the new
firm. If a shareholder wishes to transfer his or her shares to securities dealer
that has not entered into a selected dealer agreement with Merrill Lynch, the
shareholder must either (i) redeem his or her shares, or (ii) continue to
maintain an Investment Account at the Transfer Agent for those shares. The
shareholder may also request the new securities dealer to maintain the shares in
an account at the Transfer Agent registered in the name of the securities dealer
for the benefit of the shareholder whether the securities dealer has entered
into a selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue to
maintain a retirement account at Merrill Lynch for those shares.
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<PAGE>
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 determined after the close of business on the NYSE on the monthly
payment date for such dividends.
Shareholders may, at any time, by contacting the Merrill Lynch Consults(R)
Service or the Merrill Lynch Strategic Portfolio Advisor(SM) Service or their
financial consultant, or by written notification to Merrill Lynch if their
account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent, elect to have subsequent dividends, paid in cash,
rather than reinvested in shares of the Fund or vice versa (provided that, in
the event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares).
Commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. The Fund is not responsible for any failure
of delivery to the shareholder's address of record and no interest will accrue
on amounts represented by uncashed dividend checks. Cash payments can also be
directly deposited to the shareholder's bank account.
Merrill Lynch Asset Information and Measurement(R) Service
Clients of the Merrill Lynch Consults(R) Service and of the Merrill Lynch
Strategic Portfolio Advisor(SM) Service are currently provided, without
incremental charge, the Merrill Lynch Asset Information and Measurement(R)
Service ("AIM(R)"). AIM(R) currently provides, through quarterly reports, the
ability to monitor and evaluate performance of their Merrill Lynch Consults(R)
Service or Merrill Lynch Strategic Portfolio Advisor(SM) Service account,
including shares of the Fund held in the account, and analyzes the risk taken to
achieve the return. Shares of the Fund must be held in the account for a full
quarterly period to be subject to such evaluation.
DIVIDENDS AND TAXES
Dividends
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized capital gains, if any, will be distributed to the Fund's
shareholders at least annually. See "Shareholder Services -- Automatic Dividend
Reinvestment Plan" for information as to how to elect either dividend
reinvestment or cash payments.
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as the Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the part
of its net ordinary income and net realized capital gains that it distributes to
shareholders. The Fund intends to distribute substantially all of such income.
To qualify for this treatment, the Fund must, among other things, (a) derive at
least 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.
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<PAGE>
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. 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.
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 in January 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, 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).
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<PAGE>
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.
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.
28
<PAGE>
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, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) any maximum applicable sales 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.
Set forth below is total return information for shares of the Fund for the
period indicated.
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
One Year Ended October 31, 1999 ........... 13.22% $1,132.20
Five Years Ended October 31, 1999 ......... 4.60% $1,252.40
Inception (September 14, 1992) to
October 31, 1999 ........................ 6.94% $1,613.50
Annual Total Return
Year Ended October 31,
1999 ................................. 13.22% $1,132.20
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, 1999 ........................ 61.35% $1,613.50
29
<PAGE>
On occasion, the Fund may compare its performance to various indices
including the Standard & Poor's 500 Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., ("Morningstar"), CDA Investment Technology, Inc., Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine 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. In addition, from time to time the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons should
not be considered indicative of the Fund's relative performance for any future
period.
Total return figures are based on the Fund's historical performance and
are not intended to indicate future performance. The Fund's total return will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
GENERAL INFORMATION
Description of Shares
The Fund 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.
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 on any of the following matters: (i)
election of Trustees; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Trustees are not cumulative. Shares
issued are fully paid and 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 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, 99 Wood Avenue South, P.O. Box 751, Iselin, NJ
08830-0471, 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., (the "Custodian"), 40 Water Street, Boston,
Massachusetts 02109 acts as custodian of the Fund's assets. Under its contract
with the Fund, the Custodian is authorized, among other things,
30
<PAGE>
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, The Chrysler Building, 405 Lexington
Avenue, New York, New York 10174 is counsel for the Fund.
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.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co. under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of February 1, 2000.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
31
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CODE #16459-02-00
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. Exhibits
Exhibit
Number Description
- ------ -----------
1 -- Amended and Restated Declaration of Trust of Registrant.(1)
2 -- By-Laws of Registrant.(3)
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 among Merrill Lynch (Suisse) Investment
Management S.A., Registrant and Fund Asset Management, Inc.(2)
4(c) -- Sub-Advisory Agreement among Merrill Lynch (Suisse) Investment
Management S.A., Registrant and Merrill Lynch Asset Management U.K.
Limited.(2)
4(d) -- Amendment No. 1 to Sub-Advisory Agreement among Merrill Lynch
(Suisse) Investment Management S.A., Registrant and Merrill Lynch
Asset Management U.K. Limited.
5 -- Not applicable.
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)
8(d) -- Credit Agreement between the Registrant and The Bank of New
York.(4)
9 -- Not applicable.
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 -- None.
- ----------
(1) Incorporated by reference to same numbered exhibit in 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:
Exhibit Incorporated by Reference
Number to Exhibit Number
------ -------------------------
4(a) 5(a)
4(b) 5(b)
4(c) 5(c)
7 8
8(a) 9(a)
8(b) 9(b)
8(c) 9(c)
12 13
13 15
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(3) Incorporated by reference to same numbered exhibit in Post-Effective
Amendment No. 5 to Registrant's Registration Statement on Form N-1A (File
No. 33-49354).
Exhibit Incorporated by Reference
Number to Exhibit Number
------ -------------------------
2 2
(4) Incorporated by reference to Exhibit 8(b) to the Registration Statement on
Form N-1A of Master Premier Growth Trust (File No. 811-09733), filed
December 21, 1999.
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
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<PAGE>
adjudicated, it would have been adjudicated in favor of such person. The rights
accruing to any Person under these provisions shall not exclude any other right
to which he may be lawfully entitled; provided that no Person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to which
he may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification.
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.
C-3
<PAGE>
(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) 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 Disciplined Equity 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
C-4
<PAGE>
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 Index Funds, 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 U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch
Senior Floating Rate Fund II, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Focus Twenty Fund, Inc., Merrill Lynch Funds for
Institutions, Merrill Lynch Large Cap Series Funds 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 Premier Growth 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 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 California Insured Fund V, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings Florida Insured Fund V,
Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Insured Fund III, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan Insured Fund II,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund IV, 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., MuniHoldings New York
Insured Fund IV, 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
C-5
<PAGE>
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, 1997 for his or her own account or in the capacity of director, officer,
partner or trustee.
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
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.
Jurg C. Boller Director and General Manager of the Portfolio
Manager Management Department of Merrill
Lynch Bank (Suisse)
Stephan W. Feller Director Portfolio Manager of the Merrill
Lynch Bank (Suisse)
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, 1997 for his
or her or its own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Glenn is President and Mr. Burke is Vice President and
Treasurer of substantially all of the investment companies described in the
first two paragraphs of this Item 26, and Messrs. Doll, Giordano and Monagle are
officers of one or more of such companies.
Position with Other Substantial Business,
Name FAM Profession, Vocation or Employment
- ---- ------------- ----------------------------------
ML & Co Limited Partner Financial Services Holding
Company; Limited Partner of MLAM.
Princeton Services General Partner General Partner of MLAM.
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.
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.
Gregory A. Bundy . Chief Operating Officer Chief Operating Officer and
and Managing Managing Director of MLAM; Chief
Director Operating Officer and Managing
Director of Princeton Services;
Co-CEO of Merrill Lynch Australia
from 1997 to 1999.
Donald C. Burke .. Senior Vice President Senior Vice President, Treasurer
and Treasurer and 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.
Robert C. Doll ... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Chief Investment Officer
of Oppenheimer Funds, Inc. in 1999
and Executive Vice President
thereof from 1991 to 1999.
C-6
<PAGE>
Position with Other Substantial Business,
Name FAM Profession, Vocation or Employment
- ---- ------------- ----------------------------------
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.
Michael J.
Hennewinkel ..... Senior Vice President Senior Vice President and General
and General Counsel Counsel of MLAM; Senior Vice
President of Princeton Services.
Philip L. Kirstein Senior Vice President Senior Vice President and
and Secretary Secretary of MLAM; Senior Vice
President, Director and Secretary
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.
(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., Merrill Lynch Senior Floating Rate Fund II, 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.,
Merrill Lynch Corporate High Yield 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
Disciplined Equity 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 Inc., Merrill Lynch Growth Fund, Merrill Lynch Global Resources Trust,
Merrill Lynch Healthcare Fund, 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 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 33 King William Street, London EC4R 9AS, 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,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Burke 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>
Positions with Other Substantial Business,
Name MLAM U.K. Profession, Vocation or Employment
- ---- --------------- ----------------------------------
Terry K. Glenn ....... Director and Chairman Executive Vice President of
MLAM and FAM; Executive Vice
President and Director of
Princeton Services; President
and Director of PFD; President
of Princeton Administrators.
Nicholas C.D. Hall ... Director Director of Mercury Asset
Management Ltd and the
Institutional Liquidity Fund
plc; First Vice President and
General Counsel for Merrill
Lynch Mercury Asset Management.
James T. Stratford ... Alternate Director Director of Mercury Asset
Management Group Ltd; Head of
Compliance, Merrill Lynch
Mercury Asset Management.
Donald C. Burke ...... Treasurer Senior Vice President and
Treasurer of FAM and MLAM;
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.
Carol Ann Langham .... Company Secretary None
Debra Anne Searle .... Assistant Company None
Secretary
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 Municipal Strategy Fund, Inc., Merrill
Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating Fund II,
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.
Position(s) and Position(s) and Office(s)
Name Office(s) with PFD with Registrant
- ---- ---------------------- ------------------------
Terry K. Glenn ........... President and Director President and Director
Michael G. Clark ......... Treasurer and Director 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. Fatseas ......... 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
(c) Not applicable.
C-8
<PAGE>
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.
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 Investment Company Act of 1940, the
Registrant has duly caused this 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 28th day of February, 2000.
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
(Registrant)
By /S/ TERRY K. GLENN
------------------------------------------
(Terry K. Glenn, Executive Vice President)
C-10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4(d) Amendment No. 1 to Sub-Advisory Agreement among Merrill Lynch
(Suisse) Investment Management S.A., Registrant and Merrill Lynch
Asset Management U.K. Limited.
10 Consent of Ernst & Young LLP, independent auditors for the
Registrant.
EXHIBIT 4(d)
AMENDMENT NO.1 TO SUB-ADVISORY AGREEMENT
THIS AMENDMENT NO.1 (THE "AMENDMENT") TO THE SUB-ADVISORY AGREEMENT (the
"Sub-Advisory Agreement"), dated as of August 31, 1992, by and among MERRILL
LYNCH (SUISSE) INVESTMENT MANAGEMENT S.A., a corporation organized under the
laws of Switzerland (hereinafter referred to as "MLSIM"), MERRILL LYNCH ASSET
MANAGEMENT U.K. LTD., a corporation organized under the laws of England and
Wales (hereinafter referred to as "MLAM U.K."), and MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO, an unincorporated business trust under the laws of the
Commonwealth of Massachusetts (the "Fund"), is made and entered into as of
September 23, 1999.
PRELIMINARY STATEMENT
WHEREAS, the parties hereto desire to amend the Sub-Advisory Agreement as
set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises, the mutual covenants,
and agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Defined Terms. Except as defined herein, all capitalized terms used
herein shall have the respective meanings ascribed to them in the
Sub-Advisory Agreement.
2. Amendments to Sub-Advisory Agreement. The Sub-Advisory Agreement is
hereby amended as follows:
a. by deleting the fourth WHEREAS clause thereof and replacing it in
its entirety with the following WHEREAS clause:
"WHEREAS, MLAM U.K. is willing to provide to MLSIM certain
investment advisory services with respect to the day-to-day
investment management of the Fund on the terms and conditions
hereinafter set forth."
b. by amending Article I thereof to read in full as follows:
ARTICLE I
DUTIES OF MLAM U.K.
"MLSIM hereby employs MLAM U.K. to act as sub-adviser to MLSIM
and to furnish, or arrange for affiliates to furnish, certain
investment advisory services with respect to the day-to-day
investment management of the Fund, as described below, subject to
the supervision of MLSIM and the Trustees of the
<PAGE>
Fund, for the period and on the terms and conditions set forth in
this Agreement. MLAM U.K. hereby accepts such employment and agrees
during such period to render, or arrange for the rendering of, such
services and to assume the obligations herein set forth for the
compensation from MLSIM provided for herein. MLAM U.K. and its
affiliates shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent
the Fund in any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall provide MLSIM with such investment research,
advice, and supervision as the latter may from time to time consider
necessary for the proper management of the Fund for which MLSIM
determines MLAM U.K. shall serve as sub-advisor. All advice and
recommendations provided by MLAM U.K. shall be subject to the
restrictions of the Declaration of Trust and By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company
Act, and the statements relating to the Fund's investment
objectives, investment policies, and investment restrictions as the
same are set forth in the currently effective prospectus and
statement of additional information relating to the shares of the
Fund under the Securities Act of 1933, as amended (the "Prospectus"
and "Statement of Additional Information," respectively)."
3. Counterparts. This Amendment may be executed in one or more
counterparts, each of which for all purposes shall be deemed to be an
original, and all of which when taken together shall constitute but one
and the same instrument.
4. Miscellaneous. Except as modified herein, all of the terms and
conditions of the Sub-Advisory Agreement, as heretofore in effect, shall
remain in full force and effect and, as modified hereby, the Sub-Advisory
Agreement is hereby ratified and confirmed in all respects.
2
<PAGE>
MERRILL LYNCH (SUISSE) INVESTMENT
MANAGEMENT S.A.
By: /s/ Jurg Boller
---------------------------------
Name: Jurg Boller
Title: Director
MERRILL LYNCH ASSET MANAGEMENT
U.K. LTD.
By: /s/ Terry K. Glenn
---------------------------------
Name: Terry K. Glenn
Title: Director
MERRILL LYNCH CONSULTS
INTERNATIONAL PORTFOLIO
By: /s/ Terry K. Glenn
---------------------------------
Name: Terry K. Glenn
Title: Director
3
Exhibit 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "General Information -
Independent Auditors" in this Registration Statement on Form N-1A 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 15, 1999 with respect to the financial statements of
Merrill Lynch Consults International Portfolio for the year ended October 31,
1999.
/s/ Ernst & Young LLP
---------------------
MetroPark, New Jersey
February 24, 2000
