<PAGE>
As Filed with the Securities and Exchange Commission on October 18, 1999
Securities Act File No. 333-80061
Investment Company Act File No. 811-09375
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No.
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
(Check appropriate box or boxes)
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Merrill Lynch Global Financial Services Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code (609) 282-2800
Terry K. Glenn
Merrill Lynch Global Financial Services Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
--------------
Copies to:
Counsel for the Fund Michael J. Hennewinkel, Esq.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP MERRILL LYNCH
919 Third Avenue ASSET MANAGEMENT
New York, New York 10022 P.O. Box 9011
Attention: Joel H. Goldberg, Esq. Princeton, New Jersey 08543-9011
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Title of Securities Being Registered: Common Stock, par value $.10 per share.
Approximate date of the Proposed Public Offering: As soon as practicable
after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
--------------
Global Financial Services Master Trust has also executed this Registration
Statement.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
October 18, 1999
Merrill Lynch Global Financial Services Fund, Inc.
A subscription period for shares of the Fund will end
on November 23, 1999, unless extended.
This prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
[LOGO OF MERRILL LYNCH APPEARS HERE]
<PAGE>
[GRAPHIC] TABLE OF CONTENTS
PAGE
KEY FACTS
[GRAPHIC] KEY FACTS
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The Merrill Lynch Global Financial Services Fund at a Glance................. 3
Fees and Expenses............................................................ 6
DETAILS ABOUT THE FUND
[GRAPHIC] DETAILS ABOUT THE FUND
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How the Fund Invests......................................................... 8
Investment Risks............................................................ 11
About the Portfolio Manager................................................. 16
YOUR ACCOUNT
[GRAPHIC] YOUR ACCOUNT
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Merrill Lynch Select Pricing SM System...................................... 19
How to Buy, Sell, Transfer and Exchange Shares.............................. 25
Participation in Merrill Lynch Fee-Based Programs........................... 29
MANAGEMENT OF THE FUND
[GRAPHIC] MANAGEMENT OF THE FUND
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Fund Asset Management....................................................... 32
Master/Feeder Structure .................................................... 32
FOR MORE INFORMATION
[GRAPHIC] FOR MORE INFORMATION
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Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
KEY FACTS [GRAPHIC]
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 -- a type of equity security that typically pays dividends at a
fixed rate and gives holders a priority over common stockholders with respect
to dividend payments and liquidation rights.
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.
Debt Securities -- securities such as bonds that evidence an obligation of the
issuer to pay a certain amount of interest, principal or both at specified
times.
THE MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND AT A GLANCE
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What is the Fund's objective?
The investment objective of the Fund is capital appreciation. In other words,
it tries to choose investments that will increase in value. The Fund tries to
achieve its goal by investing at least 65% of its assets in equity securities
of U.S. and foreign financial services companies. The Fund considers a
"financial services" company to be one that, in the most recent fiscal year,
derived at least 50% of its revenues or earnings or devoted at least 50% of its
assets to financial services. Financial services include banking, mortgage
lending and servicing, securities and commodities trading, investment
management, insurance, providing financial guarantees, leasing, credit card
servicing and lending. We cannot guarantee that the Fund will achieve its goal.
What are the Fund's main investment strategies?
The Fund invests primarily in common stock of financial services companies that
Fund management believes have the potential to increase in value. The Fund may
also purchase preferred stock, convertible securities and nonconvertible debt
securities. In managing the portfolio, Fund management will focus primarily on
industry allocation and stock selection. That is, Fund management will attempt
to identify industries within the financial services sector that Fund
management believes may outperform the market generally. Fund management
chooses individual investments within a financial services industry based on
fundamental financial analysis, and seeks to identify companies that are
undervalued relative to the Fund's assessment of their future earnings
potential. The Fund has no stated minimum holding period for investments and
will buy or sell securities whenever Fund management sees an appropriate
opportunity. The Fund has no restrictions on the size of companies in which it
may invest, but will focus mainly on large and medium-sized companies. As a
global financial services fund, the Fund will make investments throughout the
world. The Fund will invest in U.S. companies, but will also invest a
significant portion of its assets in foreign companies. The Fund can buy
securities that are denominated in foreign currencies. The Fund may invest in
certain derivatives (investments whose value is based on indices, securities or
currencies). The Fund may use derivatives for hedging purposes, and may also
use indexed notes and options on securities to seek increased return.
The Fund invests all of its assets in a Portfolio of Global Financial Services
Master Trust (the "Trust") that has the same goals as the Fund. All investments
will be made at the level of the Portfolio. This structure is sometimes called
a "master/feeder" structure. The Fund's investment results
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
3
<PAGE>
[GRAPHIC] KEY FACTS
will correspond directly to the investment results of the underlying Portfolio
in which the Fund invests. For simplicity, this Prospectus uses the term "Fund"
to include the underlying Portfolio in which the Fund invests.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go up or down. Changes in the value of the Fund's
investments in stocks may occur because a particular stock or bond market is
rising or falling. At other times, specific factors--such as the possibility
that a company may default on its obligations--may affect the value of a
particular equity or debt investment. The Fund is also subject to the risk that
the investments selected by Fund management will underperform the market or
other funds with similar investment objectives and investment strategies. If
the value of the Fund's investments goes down, you may lose money. To the
extent the Fund invests in debt securities, it is subject to interest rate
risk, which is the tendency for the price of debt securities to decline as
interest rates rise. Derivatives are volatile and involve significant risks,
including leverage risk and credit risk. Leverage risk is the risk that
relatively small market movements may result in large changes in the value of
an investment. Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to the Fund.
As a sector fund investing in financial services companies, the Fund is subject
to the risks associated with investments in financial services companies, in
addition to the general risks of the stock and bond markets. This means the
Fund is more vulnerable to price fluctuations of financial services companies
and other factors that particularly affect financial services industries than a
more broadly diversified mutual fund. In particular, the prices of stock issued
by many financial services companies have historically been more closely
correlated with changes in interest rates than other stocks. Generally, when
interest rates go up, stock prices of these companies go down. This
relationship may not continue in the future.
The Fund may invest most of its assets in non-U.S. securities. Foreign
investing involves special risks, including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic and
other developments. Foreign securities may also be less actively traded than
U.S. securities. Therefore, foreign securities may be harder to value and
harder to buy or sell than U.S. securities. The Fund may make some investments
in emerging markets, for which the foreign investing risks are generally
greater than in developed markets.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
4
<PAGE>
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Who should invest?
The Fund may be an appropriate investment for you if you:
. Are investing with long term
goals, such as retirement or
funding a child's education.
. Want a professionally managed
portfolio.
. Want to invest in the financial
services sector and are willing
to accept increased risk of
single sector investing.
. Can tolerate the increased price
volatility and currency
fluctuations associated with
investments in non-U.S.
securities.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
5
<PAGE>
[GRAPHIC] KEY FACTS
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
As of the date of this prospectus, the Fund had not begun operations.
Therefore, a bar chart and table illustrating the Fund's performance are not
included in this prospectus.
The following table shows the different fees and expenses that you may pay if
you buy and hold the different classes of shares of the Fund. Future expenses
may be greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees
paid
directly from your
investment): Class A Class B(a) Class C Class D
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) imposed on
purchases (as a
percentage of offering
price)(b) 5.25%(c) None None 5.25%(b)
- -----------------------------------------------------------------
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- -----------------------------------------------------------------
Maximum Sales Charge
(Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
- -----------------------------------------------------------------
Annual fund Operating Expenses
(expenses
that are deducted from Fund
assets): (e)
- -----------------------------------------------------------------
Management Fee(f) 0.40% 0.40% 0.40% 0.40%
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Distribution and/or
Service (12b-1) Fees(g) None 1.00% 1.00% 0.25%
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Other Expenses (including
transfer agency fees)(h) 1.33% 1.33% 1.33% 1.33%
- -----------------------------------------------------------------
Total Annual Fund
Operating Expenses 1.73% 2.73% 2.73% 1.98%
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</TABLE>
(a) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(b) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) The fees and expenses include the expenses of both the Fund and the
Portfolio in which it invests.
(f) Paid by the Portfolio. The Investment Adviser or its affiliate provides
accounting services to the Portfolio at its cost.
(g) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or C shares for a long time, it
may cost you more in distribution (12b-1) fees than the maximum sales
charge that you would have paid if you had bought one of the other classes.
(h) Information under "Other Expenses" is estimated for the Fund's first fiscal
year ending May 31, 2000. The Fund pays the Transfer Agent $11.00 for each
Class A and D shareholder account and $14.00 for each Class B and C
shareholder account and reimburses the Transfer Agent's out-of-pocket
expenses. The Fund pays a 0.10% fee for certain accounts that participate
in the Merrill Lynch Mutual Fund Advisor program. The Fund also pays a
$0.20 monthly closed account charge, which is assessed upon all accounts
that close during the year. This fee begins the month following the month
the account is closed and ends at the end of the calendar year. The Fund
pays an administrative fee of 0.35%. The Administrator provides accounting
services to the Fund at its cost.
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges that you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder (these costs are deducted from the
Fund's total assets):
Annual fund operating expenses -- expenses that cover the costs of operating
the Fund.
Management fee -- a fee paid to the Investment Adviser for managing the Fund.
Distribution fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
Service (Account Maintenance) fees -- fees used to compensate securities
dealers for account maintenance activities.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
6
<PAGE>
[GRAPHIC] KEY FACTS
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years
- -------------------------------------------
<S> <C> <C>
Class A $692 $1,041
- -------------------------------------------
Class B $676 $1,047
- -------------------------------------------
Class C $376 $ 847
- -------------------------------------------
Class D $715 $1,114
- -------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<CAPTION>
1 Year 3 Years
- -------------------------------------------
<S> <C> <C>
Class A $692 $1,041
- -------------------------------------------
Class B $276 $ 847
- -------------------------------------------
Class C $276 $ 847
- -------------------------------------------
Class D $715 $1,114
- -------------------------------------------
</TABLE>
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
7
<PAGE>
DETAILS ABOUT THE FUND [GRAPHIC]
ABOUT THE PORTFOLIO MANAGER
James Ellman is a Senior Vice President and the Portfolio Manager of the Fund.
Mr. Ellman has been a First Vice President of Fund Asset Management since 1999
and was previously a portfolio manager with AIM Advisors, Inc. and its
predecessors from 1995 to 1999.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
HOW THE FUND INVESTS
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The Fund's main goal is capital appreciation. The Fund tries to achieve its
goal by investing at least 65% of its assets in equity securities of U.S. and
foreign financial services companies. The Fund considers a "financial services"
company to be one that, in the most recent fiscal year derived at least 50% of
its revenues or earnings or devoted at least 50% of its assets to financial
services. Financial services include banking, mortgage lending and servicing,
securities and commodities trading, investment management, insurance, providing
financial guarantees, leasing, credit card servicing and lending.
The Fund will invest primarily in equity securities. Equity securities consist
of:
. Common Stock
. Preferred Stock
. Securities convertible into
Common Stock
. Derivatives, such as futures,
forwards and options, the value
of which is based on a common
stock or group of common stocks
The Fund will focus on investing in common stocks.
In choosing portfolio securities, Fund management emphasizes industries within
the financial services sector that Fund management believes may outperform the
market generally. An industry within the financial services sector may
outperform that sector as a whole due to superior growth prospects, industry
consolidation, ability to capitalize on or lesser vulnerability to stages of
the business cycle, or changes in regulation. Fund management chooses
individual investments within a financial services industry based on
fundamental financial analysis, and seeks to identify financial services
companies that are undervalued relative to the Fund's assessment of their
future earnings potential. The Fund looks for companies with strong management,
above-average per share earnings growth, high returns on capital, pricing
flexibility, promising new products or leading market positions that the Fund
believes have better prospects for earnings than is anticipated by other
investors. The Fund also looks for companies in consolidating financial
services industries that Fund management believes may benefit from
consolidation.
The Fund may also look for financial services companies that have the potential
to prosper from deregulation or technological innovation. Historically,
financial services and the companies that provide them have been highly
regulated in many countries. Currently, many countries are
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
8
<PAGE>
Futures -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in the level of an index) at a specified time.
Forwards -- private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets at a specified time.
Options -- exchange-traded or private contracts involving the right of a holder
to deliver ("put") or receive ("call") certain assets (or a money payment based
on the change in the level of an index) from another party at a specified price
within a specified time period.
moving to deregulate certain financial services industries, particularly
securities dealing and brokerage, and permit greater competition. At the same
time, technological innovations, such as the development of the internet, are
changing the way services are provided in certain financial services
industries. Deregulation and technological innovations may allow certain
financial services companies to increase earnings at a faster rate.
Deregulation and technological innovations, however, present both risks and
opportunities for investors in financial services companies. Deregulation and
technological innovation may result in certain financial services companies
being able to expand and grow earnings, while others may be forced to defend
their core businesses from increased competition and may therefore be less
profitable.
The Fund may invest in companies of any size, but Fund management anticipates
that it will focus mainly on large and medium-sized companies. As a global
financial services fund, the Fund will make investments throughout the world,
and there are no limits on the Fund's ability to invest in any country or
geographic region. The Fund can invest primarily in U.S. securities, primarily
in foreign securities, or partly in U.S. securities and partly in foreign
securities. The Fund may invest in companies in emerging markets, but the
Fund's management anticipates that a substantially greater portion of the
Fund's investments will be in companies in developed countries. Currently, Fund
management anticipates that the Fund will invest more of its assets in U.S.
securities than in securities of any other single country.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar. The Fund's return on investments denominated in foreign currencies will
be affected by changes in currency exchange rates. The Fund may engage in
currency transactions to seek to hedge against the risk of loss from changes in
currency exchange rates, but Fund management cannot guarantee that it will be
able to enter into such transactions or that such transactions will be
effective. The Fund is not required to hedge and may choose not to do so.
The Fund may invest up to 35% of its assets in nonconvertible debt securities
under normal circumstances, and may invest a greater percentage of its assets
in nonconvertible debt securities on occasion as a temporary defensive measure.
The Fund will normally invest a portion of its assets in short-term debt
securities, such as commercial paper. Short-term debt securities can be sold
easily and have limited risk of loss, but earn only limited returns. The Fund
invests in short-term debt securities in order to achieve short-term earnings
when the Fund is unable to find enough attractive long-term
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
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<PAGE>
[GRAPHIC] DETAILS ABOUT THE FUND
investments; to reduce exposure to equities when Fund management believes it is
advisable to do so; and to be able to meet redemptions, if necessary. During
periods when the Fund is heavily invested in short-term debt securities, the
Fund's investments in stocks will be limited and the Fund may be unable to meet
its investment objective of growth of capital. The Fund may also invest in
longer-term nonconvertible debt securities, including low rated "junk" bonds,
when it finds these investments to have capital appreciation opportunities
equal to or greater than equities. The Fund will limit its investments in junk
bonds to no more than 5% of its total assets.
The Fund may invest in securities the potential return of which is based on the
change in a specified interest rate or equity index (e.g., an "indexed note").
For example, the Fund may invest in a security that pays a variable amount of
interest or principal based on the current level of a securities index, such as
the Dow Jones Financial Industry Index. Certain indexed notes have greater
sensitivity to changes in interest rates or equity index levels than other
securities, and the Fund's investments in such instruments may decline in value
significantly if interest rate or equity index levels move in a manner not
anticipated by Fund management.
The Fund may also use other derivatives, such as futures, forwards and options.
Derivatives are financial instruments whose value is derived from another
security or an index. The Fund may use derivatives for hedging purposes,
including anticipatory hedges, and may also use indexed notes and options on
securities to seek increased return.
The Fund has no stated minimum holding period for investments and will buy or
sell securities whenever Fund management sees an appropriate opportunity. The
Fund does not consider potential tax consequences to Fund shareholders when it
sells securities. Because the Fund has the flexibility to take advantage of
short term investment opportunities, it may experience relatively high
portfolio turnover during certain periods. High turnover increases the Fund's
brokerage expenses and may affect shareholders' taxes by possibly increasing
short-term capital gains or losses.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
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<PAGE>
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive over any period
of time.
Sector Risk -- Sector risk is the risk that the Fund's concentration in the
securities of financial services companies will expose the Fund to the price
movements of companies in one industry more than a more broadly diversified
mutual fund. Because the Fund invests primarily in one sector, there is the
risk that the Fund will perform poorly during a downturn in that sector. The
Fund should be considered a vehicle for diversification and should not be
considered a balanced investment program by itself.
When interest rates go up, the value of securities issued by many types of
financial services companies generally goes down. In some countries, financial
services and the companies that provide them are regulated by government
entities, which can increase costs for new services or products and make it
difficult to pass increased costs on to consumers. In certain areas,
deregulation of financial services companies has resulted in increased
competition and reduced profitability for certain companies.
Stock Market and Selection Risk -- Stock market risk is the risk that the stock
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Because the Fund invests in a single economic
sector, the Fund's stock market risk is increased. Selection risk is the risk
that the investments that Fund management selects will underperform the market
sector or other funds with similar investment objectives and investment
strategies.
Small Company Risk -- Small companies may have limited product lines or
markets. They may be less financially secure than larger, more established
companies. They may depend on a smaller number of key personnel. If a product
fails, or if management changes, or there are other adverse developments, the
Fund's investment in a small company may lose substantial value. Small company
securities generally trade in lower volumes and are subject to greater and more
unpredictable price changes than large company securities or the stock market
as a whole.
Interest Rate/Economic Cycle Risk -- The profitability of many types of
financial services companies may be adversely affected by rising interest
rates, which may restrict the availability and increase the cost of capital,
and
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
11
<PAGE>
[GRAPHIC] DETAILS ABOUT THE FUND APPEARS HERE
declining economic conditions, which may cause credit losses due to financial
difficulties of borrowers. Because many types of financial services companies
are vulnerable to these economic circumstances, a large portion of the Fund's
investments may lose value during such periods.
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,
investment in foreign securities involves the following risks, which are
generally greater for investments in emerging markets.
. The economies of some foreign
markets often do not compare
favorably with that of the United
States in areas such as growth of
gross domestic product,
reinvestment of capital,
resources and balance of
payments. Some of these economies
may rely heavily on particular
industries or foreign capital.
They may be more vulnerable to
adverse 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 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.
. 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. They could also impair
the Fund's ability to purchase or
sell foreign securities or
transfer its 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 some
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
12
<PAGE>
Liquidity -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, consequently, greater price
volatility.
foreign countries may be less
extensive than those available to
investors in the United States.
. Because there are generally fewer
investors on foreign exchanges
and a smaller number of shares
traded each day, it may be
difficult for the Fund to buy and
sell securities on those
exchanges. In addition, prices of
foreign securities may go up and
down more than prices of
securities traded in the United
States.
. Foreign markets may have
different clearance and
settlement procedures. In certain
markets, settlements may be
unable to keep pace with the
volume of securities
transactions. If this occurs,
settlement may be delayed and the
Fund's assets may be uninvested
and not earning returns. The Fund
may miss investment opportunities
or be unable to sell an
investment because of these
delays.
Emerging Market Risks -- The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Because these
markets are less liquid, they may be more likely to suffer sharp and frequent
price changes or long-term price depression because of adverse publicity,
investor perceptions, or the actions of a few large investors. In addition,
traditional measures of investment value used in the United States, such as
price to earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
13
<PAGE>
[GRAPHIC] DETAILS ABOUT THE FUND
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
European Economic and Monetary Union ("EMU") -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU establishes 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:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned.
. If a participating country
withdraws from EMU.
. If the computing, accounting and
trading systems used by the
Fund's service providers, or by
other entities with which the
Fund or its service providers do
business, are not capable of
recognizing the euro as a
distinct currency.
Currency Risk and Exchange 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. Similarly, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in the currency gains value because
the currency is worth more U.S. dollars. This risk,
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
14
<PAGE>
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 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 the 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.
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, when issued securities, forward commitments
and options.
Derivatives -- The Fund may use derivative instruments including futures,
forwards and options. 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:
Leverage Risk -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
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.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
15
<PAGE>
[GRAPHIC] DETAILS ABOUT THE FUNDS
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.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the Fund would like or at the
price that the Fund believes the security is currently worth.
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.
Convertible Securities -- Convertibles are generally debt securities or
preferred stocks that may be converted into common stock. Convertibles
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.
Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
ABOUT THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
James Ellman, a first Vice President of the Manager since 1999, as well as a
Senior Vice President and Senior Portfolio Manager of the Fund, is primarily
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
16
<PAGE>
responsible for the day-to-day management of the Fund's portfolio. Mr. Ellman
was the portfolio manager for the AIM Global Financial Services Fund series of
AIM Investment Funds, Inc. ("AIM GFS Funds"),/1/ from May 31, 1995 to June 10,
1999. The investment objective, policies and strategies of the AIM Global
Financial Services Fund are substantially similar in all material respects to
those of the Fund. (During the same period, Mr. Ellman was the portfolio
manager for two other mutual funds whose investment objectives and policies
were not substantially similar to those of the Fund.)
The average annualized total return for Class A shares of the AIM GFS Fund from
May 31, 1995, through June 10, 1999, was 20.63%. At May 31, 1999, the AIM
Global Financial Services Fund had $80.9 million in net assets. As portfolio
manager of the AIM GFS Fund, Mr. Ellman had fully discretionary authority over
the selection of investments for that Fund. The average annual returns of the
Class A shares of the AIM GFS Fund, of the Morgan Stanley Capital International
All Country World Index ("MSCI All Country World Index") and of the Morgan
Stanley Capital International World Banking Index ("MSCI World Banking Index")
for the periods indicated were:
<TABLE>
<CAPTION>
Year-To-Date One Year Three Years Period
1/1/99- ended ended 5/31/95-
6/10/99 3/31/99 3/31/99 6/10/99
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM GFS Fund
Class A/2/,/4/
(with sales
charge) 7.24% 4.55% 19.78% 20.63%
- --------------------------------------------------------------
AIM GFS Fund
Class A/3/,/4/
(without sales
charge) N/A 9.76% 21.73% 22.10%
- --------------------------------------------------------------
MSCI All Country
World
Index/5/,/7/ N/A 12.64% 17.58% N/A
- --------------------------------------------------------------
MSCI World
Banking
Index/6/,/7/ N/A -4.51% 8.81% N/A
- --------------------------------------------------------------
</TABLE>
1. Prior to June, 1998, AIM Global Financial Services Fund was a series of GT
Investment Funds, Inc. and was known as GT Global Financial Services Fund.
2. These total return figures for the AIM GFS Fund reflect changes in Class A
shares prices and reinvestment of dividends and distributions, are net of
fund expenses, and reflect a deduction for the maximum front-end sales
charge of 4.75%.
3. These total return figures for the AIM GFS Fund reflect changes in Class A
share prices and reinvestment of dividends and distributions and are net of
fund expenses, but do not reflect a deduction for the maximum front-end
sales charge of 4.75%.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
17
<PAGE>
[GRAPHIC] DETAILS ABOUT THE FUND APPEARS HERE
4. The expenses of the AIM Fund and the estimated expenses of the Fund,
although similar, are not exactly the same. Therefore, the use of the
estimated Fund's expenses would have caused the performance results of the
AIM Fund to be lower for some of the periods shown.
5. The Morgan Stanley Capital International All Country World Index measures
the performance of securities listed on the major exchanges of 47 markets,
including both developed and emerging markets.
6. The MSCI World Banking Index is a group of unmanaged banking industry
securities from the world's developed markets tracked by Morgan Stanley
Capital International.
7. Performance data for the MSCI All Country World Index and MSCI World Banking
Index is available only on a month-end basis and is therefore not available
for periods ended 6/10/99. For the MSCI All Country World Index, the year-
to-date average annualized return for the period 1/1/99-5/31/99 was 3.69%
and the average annualized return for the period 5/31/95-5/31/99 was 16.96%.
For the MSCI World Banking Index, the year-to-date average annualized return
for the period 1/1/99-5/31/99 was 4.44% and the average annualized return
for the period 5/31/95-5/31/99 was 8.21%.
For the fiscal year ended October, 31, 1998, the Advisor and its predecessor
agreed to waive a portion of the annual management fee payable by the AIM GFS
Fund and its predecessor to limit the AIM GFS Fund's expenses (exclusive of
brokerage commissions, taxes, interest and expenses) to 2.00% of the average
daily net asset of the Class A shares. For the fiscal years ended October 31,
1997 and October 31, 1996, expenses were similarly limited to 2.40%. Without
such waivers and reimbursements, returns would have been lower.
Historical performance is not indicative of future performance. The aim global
financial services fund is a separate fund and its historical performance is
not indicative of the potential performance of the fund. Share prices and
investment returns will fluctuate reflective market conditions as well as
changes in company-specific fundamentals of portfolio securities.
Mr. Ellman holds a Bachelor of Arts degree from Tufts University and a Master
of Business Administration degree from Harvard University. Prior to joining the
AIM Global Financial Services Fund in 1994, Mr. Ellman was a bank examiner for
the Federal Reserve Bank of New York in the International Examinations
Department.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
18
<PAGE>
YOUR ACCOUNT [GRAPHIC]
MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
A subscription period for the shares will end on November 23, 1999, unless
extended. Subscriptions will be payable, shares will be issued and the Fund
will commence operations on the third business day after the end of the
subscription period. The Fund or the Distributor can terminate the subscription
offering at any time, in which case the Fund will not commence operations or
will commence operations with a limited number of shares.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
19
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill Lynch.
.Current Class A Lynch. Limited Lynch. Limited Limited availability
shareholders availability availability through other
.Certain Retirement through other through other securities dealers.
Plans securities dealers. securities dealers.
.Participants in
certain Merrill Lynch
sponsored programs
.Certain affiliates of
Merrill Lynch.
- ---------------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time of No. Entire purchase No. Entire purchase Yes. Payable at time of
purchase. Lower sales price is invested price is invested purchase. Lower sales
charges available in shares of the in shares of the charges available
for larger investments. Fund. Fund. for larger investments.
- ---------------------------------------------------------------------------------------------------------------------
Deferred Sales Charge? No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
purchases over redeem within four redeem within one purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ---------------------------------------------------------------------------------------------------------------------
Account Maintenance and No. 0.25% Account 0.25% Account 0.25% Account
Distribution Fees? Maintenance Fee. Maintenance Fee. Maintenance Fee.
0.75% Distribution 0.75% Distribution No Distribution Fee.
Fee. Fee.
- ---------------------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically No. No.
Shares? after approximately
eight years.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
20
<PAGE>
[GRAPHIC] YOUR ACCOUNT
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase. The public offering price of Class A and Class D shares
during the subscription period is $10.00 per share. If you select Class A or D
shares, you will pay a sales charge at the time of purchase (whether during or
after the subscription period) as shown in the following table. During the
subscription period, securities dealers will receive compensation equal to the
entire sales charge (and therefore, may be deemed to be underwriters). After
the subscription period, the dealer compensation will be as shown in the last
column.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of As a % of
Your Investment Offering Price Your Investment* Offering Price
- ------------------------------------------------------------------
<S> <C> <C> <C>
Less than
$25,000 5.25% 5.54% 5.00%
- ------------------------------------------------------------------
$25,000 but less
than $50,000 4.75% 4.99% 4.50%
- ------------------------------------------------------------------
$50,000 but less
than $100,000 4.00% 4.17% 3.75%
- ------------------------------------------------------------------
$100,000 but
less than
$250,000 3.00% 3.09% 2.75%
- ------------------------------------------------------------------
$250,000 but
less than
$1,000,000 2.00% 2.04% 1.80%
- ------------------------------------------------------------------
$1,000,000 and
over** 0.00% 0.00% 0.00%
- ------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A and Class D shares by certain
employer sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
. Purchases under a Right of
Accumulation or Letter of Intent.
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
21
<PAGE>
. Merrill Lynch Blueprint SM
Program participants.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment
or central asset accounts.
. Certain employer-sponsored
retirement or savings plans.
. Purchases using proceeds from the
sale of certain Merrill Lynch
closed-end funds under certain
circumstances.
. Certain investors, including
directors of Merrill Lynch mutual
funds and Merrill Lynch
employees.
. Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or D shares and within 30 days buy new shares of the same
class, you will not pay a sales charge on the new purchase amount. The amount
eligible for this "Reinstatement Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that the Fund has adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the cost of your investment and
may cost you more than paying an initial sales charge. The Distributor uses the
money that it receives from the deferred sales charges and the distribution
fees to cover the costs of marketing, advertising and compensating the Merrill
Lynch Financial Consultant or
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
22
<PAGE>
[GRAPHIC] YOUR ACCOUNT
other securities dealer who assists you in purchasing Fund shares. The public
offering price of Class B and Class C shares during the subscription period
will be $10.00 per share.
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
<TABLE>
<CAPTION>
Years Since
Purchase Sales Charge*
---------------------------------
<S> <C>
0 - 1 4.00%
---------------------------------
1 - 2 3.00%
---------------------------------
2 - 3 2.00%
---------------------------------
3 - 4 1.00%
---------------------------------
4 and thereafter 0.00%
---------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
. Certain post-retirement
withdrawals from an IRA or other
retirement plan if you are over
59 1/2 years old.
. Redemption by certain eligible
401(a) and 401(k) plans, certain
related accounts, group plans
participating in the Merrill
Lynch Blueprint Program and
certain retirement plan
rollovers.
. Redemption in connection with
participation in certain Merrill
Lynch fee-based programs.
. Withdrawals resulting from
shareholder death or disability
as long as the waiver request is
made within one year of death or
disability or, if later,
reasonably promptly following
completion of probate, or in
connection with involuntary
termination of an account in
which Fund shares are held.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
23
<PAGE>
. Withdrawal through the Merrill
Lynch Systematic Withdrawal Plan
of up to 10% per year of your
Class B account value at the time
the plan is established.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange your Class B shares in the Fund
for Class B shares of a fund with a longer conversion schedule, the other
fund's conversion schedule will apply. The length of time that you hold both
the original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with participation in certain Merrill Lynch fee-based programs, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
24
<PAGE>
[GRAPHIC] YOUR ACCOUNT
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
25
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select Pricing table on page
class appropriate for . Be sure to read this prospectus carefully.
you
----------------------------------------------------------------------------------------
Next, determine the The minimum initial investment for the Fund is $1,000
amount of your for all accounts except:
investment
.$250 for certain Merrill Lynch fee-based programs
.$100 for retirement plans
(The minimums for initial investments may be waived
under certain circumstances.)
----------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next
Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. Any purchase orders placed within fifteen
your purchase order minutes after the close of business on the New York
Stock Exchange will be priced at the net asset value
determined that day.
Purchase orders placed after that time will be priced at
the net asset value determined on the next business day.
The Fund may reject any order to buy shares and may
suspend the sale of shares at any time. Merrill Lynch
may charge a processing fee to confirm a purchase. This
fee is currently $5.35.
----------------------------------------------------------------------------------------
Or contact the Transfer You can purchase shares by calling the Transfer Agent to
Agent request an application and making a purchase order
directly to the Transfer Agent at the address on the
inside back cover of this Prospectus.
- ---------------------------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for additional purchases is $50
Investment shares for all accounts except that retirement plans have a
minimum additional purchase of $1.
(The minimums for additional purchases may be waived
under certain circumstances.)
----------------------------------------------------------------------------------------
Acquire additional All dividends and capital gains distributions are
shares through the automatically reinvested without a sales charge.
automatic dividend
reinvestment plan
----------------------------------------------------------------------------------------
Participate in the You may invest a specific amount on a periodic basis
automatic investment through certain Merrill Lynch investment or central
plan asset accounts.
- ---------------------------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares only to another
to Another participating securities securities dealer that has entered into an agreement
Securities dealer with Merrill Lynch. All shareholder services will be
Dealer available for the transferred shares. You may purchase
additional shares only of funds previously owned before
the transfer. All future trading of these assets must be
coordinated by the receiving firm.
----------------------------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account with the Transfer
dealer Agent; or
.Sell your shares, paying any applicable CDSC.
- ---------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
26
<PAGE>
[GRAPHIC] YOUR ACCOUNT
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch The price of your shares is based on the next
Shares Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. For your redemption request to be priced at the
your sales order net asset value on the day of your request, you must
submit your request to your dealer within fifteen
minutes after that day's close of business on the New
York Stock Exchange (the New York Stock Exchange
generally closes at 4:00 p.m. Eastern time). Any
redemption request placed after that time will be priced
at the net asset value at the close of business on the
next business day. Dealers must submit redemption
requests to the Fund not more than thirty minutes after
the close of business on the New York Stock Exchange on
the day the request was received.
Securities dealers, including Merrill Lynch, may charge
a fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell shares under
certain circumstances.
----------------------------------------------------------------------------------------
Sell through the You may sell shares held at the Transfer Agent by
Transfer Agent 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 and signatures must
be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent
will normally mail redemption proceeds within seven days
following receipt of a properly completed request. If
you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund
or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered
to the Transfer Agent before they can be converted.
Check with the Transfer Agent or your Merrill Lynch
Financial Consultant for details.
- ---------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
27
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Sell Shares Participate in the You can choose to receive systematic payments from your
Systematically Fund's Systematic Fund account either by check or through direct deposit
Withdrawal Plan to your bank account on a monthly or quarterly basis. If
you have a Merrill Lynch CMA(R), CBA(R) or Retirement
Account you can arrange for systematic redemptions of a
fixed dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain
conditions. Under either method you must have dividends
and other distributions automatically reinvested. For
Class B and C shares your total annual withdrawals
cannot be more than 10% per year of the value of your
shares at the time your plan is established. The
deferred sales charge is waived for systematic
redemptions. Ask your Merrill Lynch Financial Consultant
for details.
- ---------------------------------------------------------------------------------------------------
Exchange Your Select the fund into You can exchange your shares of the Fund for shares of
Shares which you want to many other Merrill Lynch mutual funds. You must have
exchange. Be sure to held the shares used in the exchange for at least 15
read that fund's calendar days before you can exchange to another fund.
prospectus.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own
Class A shares and wish to exchange into a fund in which
you have no Class A shares, you will exchange into Class
D shares.
Some of the Merrill Lynch mutual funds impose a
different initial or deferred sales charge schedule. If
you exchange Class A or D shares for shares of a fund
with a higher initial sales charge than you originally
paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a
fund with a different deferred sales charge schedule,
the higher schedule will apply. The time you hold Class
B or C shares in both funds will count when determining
your holding period for calculating a deferred sales
charge at redemption. If you exchange Class A or D
shares for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund. Class B or
C shares of the Fund will be exchanged for Class B
shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may
be modified or terminated at any time in the future.
- ---------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
28
<PAGE>
[GRAPHIC] YOUR ACCOUNT
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
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, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed. Foreign securities owned by the Fund may trade
on weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares. If an event occurs after the close of a
foreign exchange that is likely to significantly affect the Fund's net asset
value, "Fair Value" pricing may be used. This means that the Fund may value its
foreign holdings at prices other than their last closing prices, and the Fund's
net asset value will reflect this.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money Net
Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
29
<PAGE>
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income semi-annually and any net
realized long- or short-term capital gains at least annually. 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 or exchange them for shares of
another fund, 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 derived by individuals are generally
taxed at different rates than ordinary income dividends. Shareholders should
expect that the Fund's distributions will consist primarily of capital gains.
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. withholding tax, unless a lower treaty rate applies.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
30
<PAGE>
[GRAPHIC] 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 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.
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.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
31
<PAGE>
MANAGEMENT OF THE FUND [GRAPHIC]
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, L.P. as the "investment adviser" for the Portfolio,
manages the underlying Portfolio's investments under the overall supervision of
the Board of Trustees of the Global Financial Services Master Trust. The
investment adviser and its affiliates have the responsibility for making all
investment decisions for the Fund.
Fund Asset Management and its affiliates manage portfolios with over $518
billion in assets (as of July 1999) for individuals and institutions seeking
investments worldwide. This amount includes assets managed for its affiliates.
The advisory agreement between the Trust and the investment adviser gives the
investment adviser the responsibility for making all investment decisions.
The investment adviser is paid at the rate of 0.40% of the Portfolio's average
daily net assets.
The Fund does not have an investment adviser, since the Fund's assets will be
invested in its corresponding Portfolio. Fund Asset Management, L.P. provides
administrative services to the Fund.
Master/Feeder Structure
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Fund seeks to achieve its investment objectives by
investing all its assets in the corresponding Portfolio of the Global Financial
Services Master Trust. Investors in the Fund will acquire an indirect interest
in the underlying Portfolio. Whenever the Fund is requested to vote on any
matter relating to the Portfolio, the Fund will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
Other "feeder" funds may also invest in the "master" Portfolio. This structure
may enable the Fund to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders
may offset each other and produce a lower net cash flow.
The Fund may withdraw from the Portfolio at any time and may invest all of its
assets in another pooled investment vehicle or retain an investment adviser to
manage the Fund's assets directly.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
32
<PAGE>
[GRAPHIC] MANAGEMENT OF THE FUND
be adversely affected if the computer systems used by the Fund's management or
other Fund service providers do not properly address this problem before
January 1, 2000. The Fund's management expects to have addressed this problem
before then and does not anticipate that the services it provides will be
adversely affected. The Fund's other service providers have told the Fund
management that they also expect to resolve the Year 2000 Problem, and the Fund
management will continue to monitor the situation as the Year 2000 approaches.
However, if the problem has not been fully addressed, the Fund could be
negatively affected. The Year 2000 Problem could also have a negative impact on
the issuers of securities in which the Fund invests, and this could hurt the
Fund's investment returns. This negative impact may be greater for companies in
foreign markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Fund invests have
Year 2000 Problems, the Fund's returns could be adversely affected.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
33
<PAGE>
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MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
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MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
[This page intentionally left blank]
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
[GRAPHIC]
-----------------------------
POTENTIAL
------ INVESTORS ------
1 Open an account (two options) 2
| ----------------------------- |
| |
- -------------------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services Inc.
OR SECURITIES DEALER P.O. Box 45289
Advises shareholders on their Jacksonville, Florida 32232-5289
Fund investments. Performs recordkeeping and
reporting services.
- -------------------------------- --------------------------------
| |
| |
| |
| ----------------------------------------------- |
| DISTRIBUTOR |
| Merrill Lynch Funds Distributor, |
--- a division of Princeton Funds Distributor, Inc.---
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
------------------------------------------------
|
|
----------------------
THE FUND
--------- The Board of Directors ----------
| oversees the Fund. |
| ---------------------- |
| | |
| | |
- ------------------------------------ | -----------------------------------
COUNSEL | CUSTODIAN
Swidler Berlin Shereff Friedman, LLP |
919 Third Avenue | Holds the Fund's assets for
New York, New York 10022 | safekeeping.
Provides legal advice to the Fund. |
|
- ------------------------------------ | -----------------------------------
|
|
|
-------------------------|---------------------
| |
| |
| |
| |
- -------------------------------- -----------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial statements Plainsboro, New Jersey 08536
of the Fund on behalf of MAILING ADDRESS
the shareholders. P.O. Box 9011
- -------------------------------- Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day
activities.
-----------------------------------
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
[LOGO] FOR MORE INFORMATION
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive sepa-
rate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at Finan-
cial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public refer-
ence room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this prospectus.
Investment Company Act file # 811-09375
Code #19065-0699
(C)Fund Asset Management, L.P.
[LOGO] Prospectus October 18, 1999
[LOGO] Merrill Lynch
Merrill Lynch Global Financial
Services Fund, Inc.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Global Financial Services Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
The investment objective of the Fund is capital appreciation. The Fund tries
to achieve its goal by investing at least 65% of its assets in equity
securities of U.S. and foreign financial services companies. The Fund
considers a "financial services" company to be one that, in the most recent
fiscal year, derived at least 50% of its revenues or earnings or devoted at
least 50% of its assets to financial services. Financial services include
banking, mortgage lending and servicing, securities and commodities trading,
investment management, insurance, providing financial guarantees, leasing,
credit card servicing and lending. The Fund seeks to achieve its investment
objective by investing all of its assets in Global Financial Services
Portfolio (the "Portfolio"), which is the portfolio of Global Financial
Services Master Trust (the "Trust") that has the same investment objective as
the Fund. The Fund's investment experience will correspond directly to the
investment experience of the Portfolio. There can be no assurance that the
investment objective of the Fund will be achieved.
The portfolio of the Fund generally will be managed without regard to tax
considerations applicable to distributions to shareholders and therefore its
shares may appeal particularly to investors for whom current tax liability is
not a major consideration, such as employee benefit plans and individual
retirement accounts ("IRAs").
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
----------------
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 October
18, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus.
----------------
Fund Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is October 18, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objective and Policies.......................................... 2
Other Investment Policies, Practices, and Risk Factors................... 3
Convertible Securities................................................... 3
Foreign Investment Risks................................................. 4
Small Cap Companies...................................................... 6
Derivatives.............................................................. 6
Options on Securities and Securities Indices............................. 6
Futures.................................................................. 8
Foreign Exchange Transactions............................................ 9
Risk Factors in Options, Futures and Currency Instruments................ 9
Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Derivatives......................................................... 10
Additional Limitations on the Use of Derivatives......................... 11
When Issued Securities, Delayed Delivery Securities and Forward
Commitments............................................................. 11
Borrowing and Leverage................................................... 11
Standby Commitment Agreements............................................ 11
Junk Bonds............................................................... 12
Other Risks.............................................................. 13
Investment Restrictions.................................................. 14
Portfolio Turnover....................................................... 16
Management of the Fund..................................................... 16
Directors and Officers................................................... 16
Compensation of Directors................................................ 18
Administration Arrangements.............................................. 18
Management and Advisory Arrangements..................................... 19
Code of Ethics........................................................... 20
Purchase of Shares......................................................... 20
Initial Sales Charge Alternatives -- Class A and Class D Shares.......... 21
Deferred Sales Charge Alternatives -- Class B and Class C Shares......... 25
Distribution Plans....................................................... 28
Limitations on the Payment of Deferred Sales Charges..................... 29
Redemption of Shares....................................................... 30
Redemption............................................................... 30
Repurchase............................................................... 30
Reinstatement Privilege -- Class A and Class D Shares.................... 31
Pricing of Shares.......................................................... 31
Determination of Net Asset Value......................................... 31
Portfolio Transactions and Brokerage....................................... 32
Shareholder Services....................................................... 33
Investment Account....................................................... 33
Exchange Privilege....................................................... 34
Fee-Based Programs....................................................... 36
Retirement Plans......................................................... 36
Automatic Investment Plans............................................... 36
Automatic Dividend Reinvestment Plan..................................... 37
Systematic Withdrawal Plan............................................... 37
Dividends and Taxes........................................................ 38
Dividends................................................................ 38
Taxes.................................................................... 38
Tax Treatment of Options and Futures Transactions........................ 40
Special Rules for Certain Foreign Currency Transactions.................. 41
Performance Data........................................................... 41
General Information........................................................ 42
Description of Shares.................................................... 42
Independent Auditors..................................................... 43
Custodian................................................................ 43
Transfer Agent........................................................... 43
Legal Counsel............................................................ 43
Reports to Shareholders.................................................. 43
Shareholder Inquiries.................................................... 43
Additional Information................................................... 44
Balance Sheet.............................................................. 45
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is capital appreciation. The Fund tries
to achieve its goal by investing at least 65% of its assets in equity
securities of U.S. and foreign financial services companies. The Fund
considers a "financial services" company to be one that, in the most recent
fiscal year, derived at least 50% of its revenues or earnings or devoted at
least 50% of its assets to financial services. Financial services include
banking, mortgage lending and servicing, securities and commodities trading,
investment management, insurance, providing financial guarantees, leasing,
credit card servicing and lending. We cannot guarantee that the Fund will
achieve its goal.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Portfolio, which is a portfolio of the Trust that has the same
investment objective as the Fund. The Fund's investment experience and results
will correspond directly to the investment experience of the Portfolio. Thus,
all investments are made at the level of the Portfolio. For simplicity,
however, with respect to investment objective, policies and restrictions, this
Statement of Additional Information, like the Prospectus, uses the term "Fund"
to include the underlying Portfolio in which the Fund invests. Reference is
made to the discussion under "How the Fund Invests" and "Investment Risks" in
the Prospectus for information with respect to the Fund's and the Portfolio's
investment objective and policies. There can be no guarantee that the Fund's
investment objective will be achieved.
The investment objective of the Fund is a fundamental policy of the Fund,
which may not be changed without a vote of a majority of its outstanding
shares as defined below. Reference is made to "How the Fund Invests" and
"Investment Risks" in the Prospectus.
The Fund is classified as a diversified fund under the Investment Company
Act of 1940, as amended (the "Investment Company Act") and, accordingly, is
subject to the diversification requirements of the Investment Company Act.
This policy is fundamental and may be changed only by shareholder vote.
Accordingly, with respect to 75% of the Fund's assets, the Fund may not invest
more than 5% of the value of its assets in the obligations of a single issuer
and may not acquire more than 10% of the voting securities of a single issuer.
The Fund also is subject to Section 12(d)(3) of the Investment Company Act and
Rule 12d3-1 thereunder, which restrict the Fund, with limited exceptions, from
acquiring any security issued by any person that derived more than 15% of its
gross revenues in its most recent fiscal year from securities related
activities (i.e., a broker, dealer, underwriter or investment adviser), unless
the issuer is not the investment company's own investment adviser, promoter or
principal underwriter or an affiliated person of one of these and: (1)
immediately after the acquisition of any equity security, the acquiring
company owns not more than 5% of the outstanding securities of that class of
the issuer's equity securities; (2) immediately after the acquisition of any
debt security, the acquiring company owns not more than 10% of the outstanding
principal amount of the issuer's debt securities; and (3) immediately after
any such acquisition, the acquiring company has invested not more than 5% of
the value of its total assets in the securities of the issuer. The Fund also
is subject to the diversification requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), in order to qualify as a
regulated investment company (a "RIC") for U.S. federal income tax purposes.
In order to qualify as a RIC under the Code, the Fund must comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Funds's total assets are invested in the securities of a single issuer, or any
two or more issuers which are controlled by the Fund and engaged in the same,
similar or related businesses, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets are invested in the securities of a single issuer, and the Fund does
not own more than 10% of the outstanding voting securities of a single issuer.
Investment in the securities of the U.S. Government, its agencies and
instrumentalities are not included within the definition of "issuer" for
purposes of the diversification requirements of the Code, while foreign
government securities are included within such definition.
Because Fund Asset Management ("FAM" or the "Investment Adviser") manages
the Fund's assets by investing in a specific economic sector, the Fund may be
more susceptible than would be a more widely diversified fund to any single
economic, political or regulatory occurrence or to changes in the financial
condition of issuers in a single industry within that sector.
2
<PAGE>
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. These securities 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, which are issued in registered form,
are designed for use in the United States securities markets and EDRs, which
are issued 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.
The Fund generally will invest without regard to tax considerations
applicable to distributions to shareholders and therefore its shares may
appeal particularly to investors for whom current tax liability is not a major
consideration such as employee benefit plans and individuals retirement
accounts ("IRAs"). Because the Fund is designed for investors for whom current
tax liability is not a consideration, the Fund has the flexibility to take
advantage of short term investment opportunities when determined appropriate
by the Investment Adviser.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks, preferred stock and
other instruments the return on which is linked to the performance of a common
stock or a basket or index of common stocks ("equity securities"). The Fund
also may invest in convertible and non-convertible debt securities, including
up to 5% of its assets in debt securities rated below investment grade by a
nationally recognized rating agency (e.g., rated below Baa by Moody's
Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P")) or in unrated debt securities that, in the judgment of FAM, possess
similar credit characteristics as debt securities rated investment grade or
debt securities rated below investment grade (commonly known as "junk bonds").
For a description of ratings of debt securities, see the Appendix.
The Fund will at all times, except during temporary defensive periods, or
during extraordinary periods to meet redemptions, maintain at least 65% of its
total assets invested in equity securities. The Fund may also invest up to 20%
of its total assets under normal circumstances and in excess of 20% of its
total assets during temporary defensive periods, or during extraordinary
periods to meet redemptions, in other types of securities, including, debt
securities, short term U.S. Government securities, money market securities,
and repurchase agreements, and cash or cash equivalents, in such proportions
as, in the opinion of the Investment Adviser, prevailing market or economic
conditions warrant.
Inasmuch as the Fund is authorized to invest in bonds and other fixed-income
securities, it is important to note that the portion of the Fund's net asset
value attributable to such securities may fall when interest rates rise and
may rise when interest rates fall. In general, fixed-income securities with
longer maturities will be subject to greater volatility resulting from
interest rate fluctuations than will fixed-income securities with shorter
maturities.
Other Investment Policies, Practices, and Risk Factors
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.
3
<PAGE>
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 is denominated in United States dollars, the
underlying equity securities may be quoted in the currency of the country
where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in
the exchange rate between the currency in which the debt security is
denominated and the currency in which the share price is quoted will affect
the value of the convertible security.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable
issuers and by the value of the underlying common stock. The value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However, at the same
time, the value of the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock. If,
because of a low price of the common stock the conversion value is
substantially below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer
at a premium over the stated principal amount of the debt security under
certain circumstances.
Foreign Investment Risks
Foreign Market Risk. Because the Fund may invest a substantial portion of
its total assets in foreign securities, the Fund offers you more
diversification than an investment only in the United States since prices of
securities traded on foreign markets have often, though not always, moved
independently of prices in the United States. Foreign security investment,
however, involves special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers, and other protectionist or retaliatory measures. Investments in
foreign markets may also be adversely affected by governmental actions such as
the imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition of punitive taxes. In
addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security
prices, impair the Fund's ability to purchase or sell foreign securities or
transfer the Fund's assets or income back into the United States, or otherwise
adversely affect the Fund's operations. Other foreign market
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risks include foreign exchange controls, difficulties in pricing securities,
defaults on foreign government securities, difficulties in enforcing favorable
legal judgments in foreign courts, and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk. Securities in which the Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that currency loses
value because the currency is worth fewer U.S. dollars. Similarly when the
U.S. dollar decreases in value against a foreign currency, your investment in
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk is generally known as "currency risk,"
which is the possibility that a stronger U.S. dollar will reduce returns for
U.S. investors investing overseas and a weak U.S. dollar will increase returns
for U.S. investors investing overseas.
European Economic and Monetary Union ("EMU"). For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants
by July 1, 2002. EMU took effect for the initial EMU participants as of
January 1, 1999, and was implemented over the weekend January 1, 1999 through
January 3, 1999 ("conversion weekend"). Upon implementation of EMU, certain
securities issued in participating EU countries (beginning with government and
corporate bonds) were redenominated in the euro, and thereafter, were listed,
traded, and made dividend and other payments only in euros.
Because any participating country may opt out of EMU within the first three
years, it is possible that a significant participant could choose to abandon
EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating
and non-participating countries, including sharp appreciation or depreciation
of the participants' national currencies and a significant increase in
exchange rate volatility, a resurgence in economic protectionism, an
undermining of confidence in the European markets, an undermining of European
economic stability, the collapse or slowdown of the drive toward European
economic unity, and/or reversion of the attempts to lower government debt and
inflation rates that were introduced in anticipation of EMU. Also, withdrawal
from EMU at any time after the conversion weekend by an initial participant
could cause disruption of the financial markets as securities redenominated in
euros are transferred back into that country's national currency, particularly
if the withdrawing country is a major economic power. Such developments could
have an adverse impact on the Fund's investments in Europe generally or in
specific countries participating in EMU. Gains or losses resulting from the
euro conversion may be taxable to Fund shareholders under foreign or, in
certain limited circumstances, U.S. tax laws.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the United States securities laws do.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require
as much detail as U.S. accounting standards, it may be harder for the Fund's
portfolio manager to completely and accurately determine a company's financial
condition. 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 the foreign securities and cash in which it invests outside
the United States in foreign banks and securities depositories. Certain of
such foreign banks and securities depositories may be recently organized or
new to the foreign custody business. They may also have operations subject to
limited or no regulatory oversight. Also, the laws of certain countries may
put limits on the Fund's ability to recover its assets if a foreign bank or
depository or issuer of a
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security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to buy, sell and hold securities
in certain foreign markets than it is in the U.S. market due to higher
brokerage, transaction, custody and/or other costs. The increased expense of
investing in foreign markets reduces the amount the Fund can earn on its
investments.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and
clearance procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically
involved with the settlement of U.S. investments. Communications between the
United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates. Settlements in
certain foreign countries at times have not kept pace with the number of
securities transactions; these problems may make it difficult for the Fund to
carry out transactions. If the Fund cannot settle or is delayed in settling a
purchase of securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned thereon for some
period. If the Fund cannot settle or is delayed in settling a sale of
securities, it may lose money if the value of the security then declines or,
if it has contracted to sell the security to another party, the Fund could be
liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
Small Cap Companies
The Fund may invest in securities of smaller capitalization issuers. The
securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies or the market average
in general. These companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
While smaller companies may offer greater opportunities for capital
appreciation than large cap issuers, investments in smaller companies may
involve greater risks and thus may be considered speculative.
Small companies are generally little known to most individual investors,
although some may be dominant in their respective industries. The Fund may
invest in securities of small issuers in the relatively early stages of
business development that have a new technology, a unique or proprietary
product or service, or a favorable market position. Such companies may not
develop into major industrial companies, but eventual recognition of their
special value characteristics by the investment community may provide above-
average long-term growth.
Derivatives
The Fund is authorized to use certain derivative instruments
("Derivatives"), including options and futures, and to purchase and sell
foreign exchange, as described below. Although certain risks are involved in
options and futures transactions (as discussed below in "Risk Factors in
Options, Futures and Currency Instruments"), the Investment Adviser believes
that, because the Fund will engage in these transactions only for hedging
purposes (other than options on securities that may be used to seek increased
return), the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of Fund
shares, the Fund's net asset value will fluctuate. There can be no assurance
that the Fund's hedging transactions will be effective. Furthermore, the Fund
will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in the equity
markets, interest rates or currency exchange rates occur.
Options on Securities and Securities Indices
Purchasing Options. For hedging purposes, the Fund is authorized to purchase
put options on equity securities held in its portfolio or 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
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(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.
The Fund is also authorized to purchase call options on securities held in
its portfolio on which it has written call options, securities it intends to
purchase or 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, in consideration for the
option premium the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before 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 increases beyond a
specified level on or before the expiration date, in the case of an option on
a securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund will not purchase put options on securities or securities indices
if, as a result of such purchase, the aggregate cost of all outstanding
options on securities and securities indices held by the Fund would exceed 5%
of the market value of the Fund's total assets. 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 equity securities held in its portfolio or 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
indices 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 not write covered call options in underlying securities in an
amount exceeding 15% of the market value of its total assets.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay 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 case of an option on a securities index. The Fund may write put
options on securities to earn income, through the receipt of option premiums;
the Fund may write put options on securities indices 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
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated
to purchase the underlying security at a price that may be higher than the
market value of the security at the time of exercise as long as the put option
is outstanding, in the case of an option on a security, or make a cash payment
reflecting any
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decline in the index, in the case of an option on an 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 securities 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
security or a securities index only if the Fund would be willing to purchase
the security at the exercise price for investment purposes (in the case of an
option on a security) or 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 security or
index but different exercise prices (a technique called a "spread").
The Fund is also authorized to sell put or call options in connection with
closing out call options it has previously purchased.
Other than with respect to closing transactions, the Fund will write only
call or put options that are "covered." A put option will be considered
covered if the Fund has segregated costs with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will be considered covered if the Fund owns
the securities it would be required to deliver upon exercise of the option
(or, in the case of an option on a securities index, securities that
substantially 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 the options on
securities or securities indices described above 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 seller, but generally do not require the parties to post
margins and are subject to greater risk of counterparty default. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity
at a specified future date at a specified price. No price is paid upon
entering a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day
thereafter until the futures position is closed, the Fund will pay additional
margin representing any loss experienced as a result of the futures position
the prior day or be entitled to a payment representing any profit experienced
as a result of the futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying
commodity is a currency or securities or interest rate index) purchased or
sold for hedging purposes (including anticipatory hedges). The Fund will
further limit transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a "commodity pool operator"
under regulations of the Commodity Futures Trading Commission.
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Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for
purposes of hedging against possible variations in foreign exchange rates.
Such transactions may be effected 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 (up to one year) set at the time of the contract. Spot
foreign exchange transactions are similar but require current, rather than
future, settlement. The Fund will enter into foreign exchange transactions
only for purposes of hedging either a specific transaction or a portfolio
position. The Fund may enter into a foreign exchange transaction for purposes
of hedging a specific transaction by, for example, purchasing a currency
needed to settle a security transaction or selling a currency in which the
Fund has received or anticipates receiving a dividend or distribution. The
Fund may enter into a foreign exchange transaction for purposes of hedging a
portfolio position by selling forward a currency in which a portfolio position
of the Fund is denominated or by purchasing a currency in which the Fund
anticipates acquiring a portfolio position in the near future.
The Fund may also hedge against in 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 put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated
in such currency.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund's
hedging strategies will be ineffective. To the extent that the Fund hedges
against anticipated currency movements that do not occur, the Fund may realize
losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the 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 Derivatives moves more or less
than the value of the hedged instruments the Fund will experience a gain or
loss that will not be completely offset by movements in the value of the
hedged instruments.
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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; Limitations on the Use of OTC Derivatives." 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 (e.g., forward foreign exchange
transactions, futures transactions, sales of put options) may expose the Fund
to potential losses that exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives.
Certain Derivatives traded in OTC markets, including 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 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 exceeds 15% of the total assets of the Fund, taken at market value,
together with all other assets of the Fund that are deemed to be illiquid or
are otherwise not readily marketable. However, if an OTC option is sold by the
Fund to a dealer in U.S. government securities recognized as a "primary
dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's exercise 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 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 that have
substantial capital or have provided the Fund with a third-party guaranty or
other credit enhancement.
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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.
When Issued Securities, Delayed Delivery Securities and Forward Commitments
The Fund may purchase or sell securities that it is entitled to receive on a
when issued basis. The Fund may also purchase or sell securities on a delayed
delivery basis. The Fund may also purchase or sell securities through a
forward commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and delivery
taking place in the future. The Fund enters into these transactions to obtain
what is considered an advantageous price to the Fund at the time of entering
into the transaction. The Fund has not established any limit on the percentage
of its assets that may be committed in connection with these transactions.
When the Fund purchases securities in these transactions, the Fund segregates
liquid securities in an amount equal to the amount of its purchase
commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a forward
commitment will be delivered. The value of securities in these transactions on
the delivery date may be more or less than the Fund's purchase price. The Fund
may bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the value of the
security during the commitment period.
Borrowing and Leverage
The use of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, 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 of the Fund that can
exceed the income from the assets purchased with the borrowings. To the extent
the income or capital appreciation derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay on the
borrowings, the Fund's return will be greater than if leverage had not been
used. Conversely, if the income or capital appreciation from the securities
purchased with such borrowed funds is not sufficient to cover the cost of
borrowing, the return to the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may determine to maintain
the Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by the Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require the Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
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.
Standby Commitment Agreements
The Fund may enter into standby commitment agreements. These agreements
commit the Fund, for a stated period of time, to purchase a stated amount of
securities which may be issued and sold to the Fund at the option of the
issuer. The price of the security is fixed at the time of the commitment. At
the time of entering into the agreement the Fund is paid a commitment fee,
regardless of whether or not the security is ultimately issued. The
11
<PAGE>
Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous
to the Fund. The Fund will not enter into a standby commitment with a
remaining term in excess of 90 days and will limit its investment in such
commitments so that the aggregate purchase price of securities subject to such
commitments, together with the value of portfolio securities subject to legal
restrictions on resale that affect their marketability, will not exceed 15% of
its net assets taken at the time of the commitment. The Fund will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security thereafter
will be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
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 results in a
fixed rate of return insulated from market fluctuations during such period.
Repurchase agreements usually cover short periods, such as under one week. The
Fund may not invest more than 15% of its total assets in repurchase agreements
maturing in more than seven days. 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 a 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.
Junk Bonds
The Fund may invest in junk bonds. Junk bonds are debt securities that are
rated below investment grade by the major rating agencies (e.g., rated below
Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by Standard &
Poor's Ratings Group ("S&P")) or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high-risk investments
that may cause income and principal losses for the Fund. The major risks in
junk bond investments include:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their
interest or principal payment obligations because of an economic downturn,
specific issuer development or the unavailability of additional financing.
12
<PAGE>
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations.
The issuer's ability to pay its debt obligations also may be lessened by
specific issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior in claims by other creditors. If the
issuer cannot meet its obligations, the senior obligations are generally paid
off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer redeems
the junk bonds the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds
than on other higher rated fixed-income securities.
Junk bonds may be less liquid than higher rated fixed-income securities even
under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgment may play a
greater role in valuing certain of the Fund's portfolio securities than in the
case with securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Other Risks
Securities Lending. The Fund may lend securities with a value not exceeding
33 1/3% of its total assets (subject to investment restriction (5) below) to
banks, brokers and other financial institutions. In return, the Fund receives
collateral in an amount equal to at least 100% of the current market value of
the loaned securities in cash or securities issued or guaranteed by the United
States Government. The Fund receives securities as collateral for the loaned
securities, and the Fund and the borrower negotiate a rate for the loan
premium to be received by the Fund for the loaned securities, which increases
the Fund's yield. The Fund may receive a flat fee for its loans. The loans are
terminable at any time and the borrower, after notice, is required to return
borrowed securities within five business days. The Fund may pay reasonable
finder's, administrative and custodial fees in connection with its loans. In
the event that the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
total assets in securities that lack an established secondary trading market
or otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities)" under the Securities Act of 1933, as amended ("Securities Act").
Restricted securities may be sold in private placement transactions between
the issuers and their purchasers and may be neither listed on an exchange nor
traded in other established markets. In many cases, privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities may be less
liquid and more difficult to value than publicly traded securities. To the
13
<PAGE>
extent that privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales, due to illiquidity, could be
less than those originally paid by the Fund or less than their fair market
value. In addition, issuers whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If any privately
placed securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve
greater risks. These issuers may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
In making investments in such securities, the Fund may obtain access to
material nonpublic information which may restrict the Fund's ability to
conduct portfolio transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities that the Fund's
management determines are as liquid as publicly-registered non-investment
grade debt securities. The Board of Directors has adopted guidelines and
delegated to the Fund's management the daily function of determining and
monitoring liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance exactly
how this market for restricted securities sold and offered under Rule 144A
will continue to 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.
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 equity securities in a particular
economic sector, 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 such 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). Provided that none of the
following restrictions shall prevent the Fund from investing all of its assets
in shares of another registered investment company with the same investment
objective and fundamental policies (in a master/feeder structure), the Fund
may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
(2) Invest more than 25% of its total assets, taken at market value, in
the securities of issues in any particular industry or group of industries
(excluding the U.S. Government and its agencies and instrumentalities),
except that the Fund will, during normal market conditions, invest at least
25% of its total assets in the financial services sector, a group of
industries that includes banking, mortgage lending and servicing,
securities and commodities trading, investment management, insurance,
providing financial guarantees, leasing, credit card servicing and lending.
(3) Make investments for the purpose of exercising control or management.
14
<PAGE>
(4) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
(5) Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Prospectus and this
Statement of Additional Information, as they may be amended from time to
time.
(6) Issue senior securities to the extent such issuance would violate
applicable law.
(7) Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such short
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in the Prospectus and this
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when issued and
forward commitment transactions and similar investment strategies.
(8) Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
(9) Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Prospectus and this Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Directors without a vote of the Fund's
shareholders. Like the fundamental restrictions, none of the non-fundamental
restrictions, including but not limited to restriction (a) below, shall
prevent the Fund from investing all of its assets in shares of another
registered investment company with the same investment objective and
fundamental policies (in a master/feeder structure). Under the non-fundamental
investment restrictions, the Fund may not:
(a) Purchase securities of other investment companies, except to the
extent permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provisions) of the Investment Company Act at any
time the Fund's shares are owned by another investment company that is part
of the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Directors of the Fund have otherwise determined to be
liquid pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act and determined to be liquid by the
Fund's Board of Directors are not subject to the limitations set forth in
this investment restriction.
15
<PAGE>
(d) Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes such as the redemption of
Fund shares.
(e) Invest more than 5% of its assets in debt securities rated below
investment grade by a nationally recognized rating agency (e.g., rated
below Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Group ("S&P")) or in unrated debt securities
that, in the judgment of FAM, possess similar credit characteristics as
debt securities rated investment grade or debt securities rated below
investment grade (commonly known as "junk bonds").
In addition, the Fund will not purchase securities while borrowings are
outstanding except to honor prior commitments and to exercise subscription
rights.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Investment Adviser or its affiliates or any of their
directors, general partners, officers or employees, acting as principal,
unless pursuant to a rule or exemptive order under the Investment Company Act.
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 Directors 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 will effect portfolio transactions without regard to holding period
only if, in its management's judgment, such transactions are advisable in
light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions. As
a result of the Fund's investment policies, under certain market conditions,
the Fund's portfolio turnover may be higher than that of other investment
companies. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of all securities with maturities at the time of
acquisition of one year or less) by the monthly average value of the
securities in the portfolio during the year.
MANAGEMENT OF THE FUND
Directors and Officers
The Board of Directors of the Fund consists of 7 individuals, 5 of whom are
not "interested persons" of the Fund as defined in the Investment Company Act
(the "non-interested Directors"). The Directors are responsible for the
overall supervision of the operations of the Fund and perform the various
duties imposed on the directors or trustees of investment companies by the
Investment Company Act.
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<PAGE>
Information about the Directors, executive officers and portfolio manager of
the Fund, their ages and their principal occupations for at least the last
five years are set forth below. Unless otherwise noted, the address of the
portfolio manager and of each executive officer and Director is P.O. Box 9011,
Princeton, New Jersey.
Terry K. Glenn (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
since 1983; Executive Vice President and Director of Princeton Services since
1993; President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991.
Ronald W. Forbes (58) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989; Consultant Urban Institute, Washington, D.C. since
1995.
Cynthia A. Montgomery (46) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from
1979 to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co.
since 1995.
Charles C. Reilly (67) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania, from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
Kevin A. Ryan (66) -- Director(2) -- 127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (61) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently
Dean Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding corporation), and Alexander's Inc.
(real estate company).
Arthur Zeikel (66) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090 -- Chairman of MLAM and FAM from 1997 to 1999; President of MLAM
and FAM from 1977 to 1997; Chairman of Princeton Services since 1997 and
Director thereof since 1993; President of Princeton Services from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
Robert Doll (45) -- Senior Vice President (1)(2) -- Senior Vice President of
the Investment Adviser and MLAM 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.
James Ellman (31) -- Senior Vice President and Portfolio Manager(1)(2) --
First Vice President of the Investment Adviser since 1999; Portfolio Manager
with AIM Advisors, Inc. and its predecessors from 1995 to 1999.
Donald C. Burke (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Vice President of the Investment Adviser from 1990 to 1997.
Ira P. Shapiro (36) -- Secretary(1)(2) -- First Vice President of the
Investment Adviser since 1998. Director (Legal Advisory) of the Investment
Adviser from 1997 to 1998; Vice President of the Investment Adviser from 1996
to 1997; Attorney with the Investment Adviser from 1993 to 1996.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or its affiliate,
FAM, acts as investment adviser.
As of September 30, 1999, the officers and Directors of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
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<PAGE>
Compensation of Directors
Pursuant to the terms of the management agreement with the Fund, the
Investment Adviser pays all compensation of officers and employees of the Fund
as well as the fees of all Directors who are affiliated persons of ML & Co. or
its subsidiaries. The Fund pays each Director/Trustee not affiliated with the
Investment Adviser (each a "non-affiliated Director/Trustee") a fee of $2,000
per year plus $400 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all the non-affiliated Directors/Trustees with a fee of $900
per year; the Chairman of the Committee receives an additional annual fee of
$1,000 per year. For the fiscal year ended May 31, 1999, and through September
30, 1999, no fees or expenses were paid to non-affiliated Directors/Trustees
that were allocated to the Fund.
The following table sets forth the compensation earned by non-affiliated
Directors/Trustees from the Fund for the fiscal year ended May 31 and the
aggregate compensation paid to non-affiliated Directors/Trustees from all
registered investment companies advised by FAM and its affiliate, MLAM
("FAM/MLAM Advised Funds") for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
Total Compensation
From Fund and
Aggregate Pension or Retirement FAM/MLAM Advised
Compensation Benefits Accrued as Funds Paid to
Name of Director/Trustee From Fund Part of Fund Expenses Director/Trustee (1)
- ------------------------ ------------ --------------------- --------------------
<S> <C> <C> <C>
Ronald W. Forbes........ $ 0 0 $192,567
Cynthia A. Montgomery... $ 0 0 $192,567
Charles C. Reilly....... $ 0 0 $362,858
Kevin A. Ryan........... $ 0 0 $192,567
Richard R. West......... $ 0 0 $346,125
</TABLE>
- ----------
(1) The Directors serve on the boards of FAM/MLAM Advised Funds as follows:
Mr. Forbes (42 registered investment companies consisting of 55
portfolios); Ms. Montgomery (42 registered investment companies consisting
of 55 portfolios); Mr. Reilly (60 registered investment companies
consisting of 73 portfolios); Mr. Ryan (42 registered investment companies
consisting of 55 portfolios); and Mr. West (62 registered investment
companies consisting of 86 portfolios).
Administration Arrangements
The Fund has entered into an administration agreement with FAM as
Administrator (the "Administration Agreement"). The Administrator receives for
its services to the Fund monthly compensation at the annual rate of 0.35% of
the average daily net assets of the Fund. The Administration Agreement
obligates the Administrator to provide certain administrative services to the
Fund and to pay, or cause its affiliate to pay, for maintaining its staff and
personnel and to provide office space, facilities and necessary personnel for
the Fund. The Administrator is also obligated to pay, or cause its affiliates
to pay, the fees of those Officers, Directors, and Trustees who are affiliated
persons of the Administrator or any of its affiliates. The Fund pays, or
causes to be paid, all other expenses incurred in the operation of the Fund
(except to the extent paid by Merrill Lynch Funds Distributor, a division of
Princeton Funds Distributor, Inc. ("MLFD" or the "Distributor")), including,
among other things, taxes, expenses for legal and auditing services, costs of
printing proxies, shareholder reports and prospectuses and statements of
additional information, charges of the Custodian, any Sub-custodian and
Financial Data Services, Inc. (the "Transfer Agent"), expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under federal, state or non-U.S. laws, fees and actual
out-of-pocket expenses of Directors who are not affiliated persons of the
Administrator, or of an affiliate of the Administrator, accounting and pricing
costs (including the daily calculation of net asset value), insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Fund. The Distributor
will pay certain of the expenses of the Fund incurred in connection with the
continuous offering of its shares. Accounting services are provided to the
Fund by the Administrator, and the Fund reimburses the Administrator for its
costs in connection with such services.
Duration and Termination. Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years from its
effective date. Thereafter, it will remain in effect from year to year with
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<PAGE>
respect to the Fund if approved annually (a) by the Board of Directors and (b)
by a majority of the Directors who are not parties to such contract or
interested persons (as defined in the Investment Company Act) of any such
party. Such contract is not assignable and may be terminated with respect to
the Fund without penalty on 60 days' written notice at the option of either
party thereto or by the vote of shareholders of the Fund.
Management and Advisory Arrangements
The Fund invests all of its assets in shares of the Portfolio. Accordingly,
the Fund does not invest directly in portfolio securities and does not require
investment advisory services. All portfolio management occurs at the level of
the Trust. The Trust on behalf of the Portfolio has entered into an investment
advisory agreement with FAM as investment adviser (the "Advisory Agreement" or
"Management Agreement"). As discussed in "Management of the Fund -- Fund Asset
Management" in the Prospectus, the investment adviser receives for its
services to the Portfolio monthly compensation at the annual rate of 0.40% of
the average daily net assets of the Portfolio.
The Advisory Agreement obligates the investment adviser to provide
investment advisory services and to pay, or cause its affiliate to pay, for
maintaining its staff and personnel and to provide office space, facilities
and necessary personnel for the Trust. The investment adviser is also
obligated to pay, or cause its affiliate to pay, the fees of all Officers,
Trustees and Directors who are affiliated persons of the investment adviser or
any sub-adviser or of an affiliate of the investment adviser or any sub-
adviser. The Trust pays, or causes to be paid, all other expenses incurred in
the operation of the Portfolio and the Trust (except to the extent paid by the
Distributor), including, among other things, taxes, expenses for legal and
auditing services, costs of printing proxies, shareholder reports, copies of
the Registration Statement, charges of the Custodian, any Sub-custodian and
Transfer Agent, expenses of portfolio transactions, expenses of redemption of
shares, Commission fees, expenses of registering the shares under federal,
state or non-U.S. laws, fees and actual out-of-pocket expenses of Trustees who
are not affiliated persons of the investment adviser or any sub-adviser, or of
an affiliate of the investment adviser or of any sub-adviser, accounting and
pricing costs (including the daily calculation of net asset value), insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Trust or the Portfolio.
The Distributor will pay certain of the expenses of the Fund incurred in
connection with the continuous offering of its shares. Accounting services are
provided to the Trust by the investment adviser or an affiliate of the
investment adviser, and the Trust reimburses the investment adviser or an
affiliate of the investment adviser for its costs in connection with such
services.
Securities held by the Portfolio, or other portfolios of the Trust, may also
be held by, or be appropriate investments for, other funds or investment
advisory clients for which the investment adviser or its affiliates act as an
adviser. Because of different objectives or other factors, a particular
security may be bought for one or more clients of the investment adviser or an
affiliate when one or more clients of the investment adviser or an affiliate
are selling the same security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the Fund or other
clients or funds for which the investment adviser or an affiliate act as
manager, transactions in such securities will be made, insofar as feasible,
for the respective funds and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
investment adviser or an affiliate during the same period may increase the
demand for securities being purchased or the supply of securities being
purchased or the supply of securities being sold, there may be adverse effect
on price.
FAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. FAM
is a wholly owned subsidiary of ML & Co., a financial services holding company
and the parent of Merrill Lynch. ML & Co. and Princeton Services, Inc., the
partners of FAM, are "controlling persons" of FAM as defined under the
Investment Company Act because of their power to exercise a controlling
influence over its management or policies.
FAM, on behalf of the Trust, has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K. with respect to the Portfolio,
pursuant to which MLAM U.K. provides investment advisory services with respect
to all or a portion of the Portfolio's net assets. The Sub-Advisory Agreement
provides that for services rendered, the facilities furnished and expenses
assumed by MLAM U.K., FAM has agreed to pay to MLAM U.K. a fee in an amount to
be determined from time to time by FAM and MLAM U.K. but in no event in excess
of the amount that FAM actually receives for providing services to the Trust
pursuant to the Advisory Agreement.
19
<PAGE>
Duration and Termination. Unless earlier terminated as described below, the
Advisory Agreement and Sub-Advisory Agreement will each remain in effect for
two years from its effective date. Thereafter, they will remain in effect from
year to year if approved annually (a) by the Board of Trustees or by a
majority of the outstanding shares of the Portfolio 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. Such contract is not
assignable and may be terminated with respect to the Portfolio without penalty
on 60 days' written notice at the option of either party or by the vote of the
shareholders of the Portfolio.
Code of Ethics
The Board of Trustees of the Trust, the Board of Directors of the Fund, the
Investment Adviser, and MLAM U.K. have each adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act (together the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and MLAM U.K. and, as described below, impose
additional, more onerous, restrictions on fund investment personnel. Among
other substantive restrictions, the Codes contain reporting and preclearance
requirements for employees of the Investment Adviser and MLAM U.K. and provide
for trading "blackout periods" that prohibit trading by decision making access
persons (those who recommend or determine which securities transactions the
Trust undertakes) of the Trust within periods of trading by the Trust in the
same (or equivalent) security.
PURCHASE OF SHARES
Reference is made to "Your Account -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase
of Fund shares.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C or Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees (also known as service fees) and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The contingent deferred sales charges ("CDSCs"),
distribution fees and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that
class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
MLFD, an affiliate of the Investment Adviser and of Merrill Lynch, with
offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: P.O. Box 9081, Princeton, New Jersey 08543-9081) acts as Distributor
for the Fund.
The Fund has entered into a distribution agreement with the Distributor in
connection with the offering of shares of the Fund (the "Distribution
Agreement"). The Distribution Agreement obligates the Distributor to pay
certain expenses in connection with the offering of the shares of the Fund.
After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also
pays for other supplementary sales literature and advertising costs. The
Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Advisory Agreement described above.
20
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by FAM or MLAM. Funds advised by FAM
or MLAM that utilize the Merrill Lynch Select Pricing SM System are referred
to herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a sale
of shares to such customers. Purchases made directly through the Transfer
Agent are not subject to the processing fee.
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased
Class A shares may no longer be eligible to purchase Class A shares of other
Select Pricing Funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares, including participants in
21
<PAGE>
the Merrill Lynch Blueprint SM Program, are entitled to purchase additional
Class A shares of the Fund in that account. Certain Employer Sponsored
Retirement or Savings Plans, including eligible 401(k) plans, may purchase
Class A shares at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
FAM or any of its affiliates. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in Select Pricing Funds.
Also eligible to purchase Class A shares at net asset value are participants
in certain investment programs including TMA SM Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML &
Co. and its subsidiaries and their directors and employees and to members of
the Boards of FAM/MLAM Advised Funds. Certain persons who acquired shares of
certain FAM-advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions are met. In addition, Class A shares of the Fund
and certain other Select Pricing Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer conducted by such funds in shares of the Fund
and certain other Select Pricing Funds.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of any other Select Pricing Funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit
plans for which Merrill Lynch provides plan participant recordkeeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of
other Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will
be applied only to new purchases. If the total amount of shares does not equal
the amount stated in the Letter
22
<PAGE>
of Intent (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Class A or Class D shares equal to at least 5.0% of the intended
amount will be held in escrow during the 13-month period (while remaining
registered in the name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.0% of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to
the further reduced percentage sales charge that would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D
shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charge on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. The
Blueprint program is directed to small investors, group IRAs and participants
in certain affinity groups such as credit unions, trade associations and
benefit plans. Investors placing orders to purchase Class A or Class D shares
of the Fund through Blueprint will acquire the Class A or Class D shares at
net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 to
$5,000 at 3.25% plus $3.00, and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class A or Class D shares of
the Fund are being offered at net asset value plus a sales charge of 0.50% for
corporate or group IRA programs placing orders to purchase their Class A or
Class D shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D investors through Blueprint, however, may
differ from those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
(as defined below) whose trustee and/or plan sponsor has entered into the IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA SM Managed Trusts. Class A shares are offered at net asset value to
TMA SM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. The
initial minimum investment for such accounts is $500, except that the initial
minimum investment for shares purchased for such accounts pursuant to the
Automatic Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in
specified investments and/or the services provided by Merrill Lynch to
23
<PAGE>
the plan. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other funds advised by FAM or affiliates of FAM, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes FAM, MLAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees,
and any trust, pension, profit-sharing or other benefit plan for such persons,
may purchase Class A shares of the Fund at net asset value. Under such
programs, the Fund realizes economies of scale and reduction of sales-related
expenses by virtue of familiarity with the Fund. Employees and directors or
trustees wishing to purchase shares of the Fund must satisfy the Fund's
suitability standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and, second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months; and, second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select Pricing SM System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other Select Pricing
Funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option.
Shareholders of certain FAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise
24
<PAGE>
of this investment option, shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. will receive Class A shares of the Fund and shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund, Inc. will receive Class D shares of the Fund, except that
shareholders already owning Class A shares of the Fund will be eligible to
purchase additional Class A shares pursuant to this option, if such additional
Class A shares will be held in the same account as the existing Class A shares
and the other requirements pertaining to the reinvestment privilege are met.
In order to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund")
must sell his or her shares of common stock of the eligible fund (the
"eligible shares") back to the eligible fund in connection with a tender offer
conducted by the eligible fund and reinvest the proceeds immediately in the
designated class of shares of the Fund. This investment option is available
only with respect to eligible shares as to which no Early Withdrawal Charge or
CDSC (each as defined in the eligible fund's prospectus) is applicable.
Purchase orders from eligible fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or
merger or consolidation with a personal holding company or a public or private
investment company.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Deferred Sales Charge Alternatives -- Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made. The deferred
sales charge alternatives may be particularly appealing to investors that do
not qualify for the reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution fees
potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will
be subject to lower ongoing fees.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. It will be assumed that the redemption is first of shares held
for over four years or shares acquired pursuant to reinvestment of dividends
or distributions and then of shares held longest during the four-year period.
A transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
25
<PAGE>
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------- --------------------
<S> <C>
0-1................................................. 4.0%
1-2................................................. 3.0%
2-3................................................. 2.0%
3-4................................................. 1.0%
4 and thereafter.................................... None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
As discussed in the Prospectus under "Account Choices -- Pricing of
Shares -- Class B and C Shares --Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge is reduced or waived in certain instances. These
include certain post-retirement withdrawals from an IRA or other retirement
plan or redemption of Class B shares in certain circumstances following the
death of a Class B shareholder. In the case of such withdrawal, reduction or
waiver applies to: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part
of a series of equal periodic payments (not less frequently than annually)
made for life (or life expectancy) or any redemption resulting from the tax-
free return of an excess contribution to an IRA (certain legal documentation
may be required at the time of liquidation establishing eligibility for
qualified distribution); or (b) any partial or complete redemption following
the death or disability (as defined in the Internal Revenue Code of 1986, as
amended (the "Code")) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination
of disability (certain legal documentation may be required at the time of
liquidation establishing eligibility for qualified distribution).
The charge may also be reduced or waived in other instances, such as: (c)
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans placing orders through Blueprint; (d)
any Class B shares that are purchased by eligible 401(k) or eligible 401(a)
plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption and for any
Class B shares that were acquired and held at the time of the redemption in an
Employee Access SM Account available through employers providing eligible
401(k) plans; (e) any Class B shares that are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption; (f) any Class B shares purchased within qualifying
Employee Access SM Accounts; (g) redemptions in connection with participation
in certain fee-based programs (see "Shareholder Services -- Fee-Based
Programs"); or (h) withdrawals through the Merrill Lynch Systematic Withdrawal
Plan up to 10% per year of the shareholder's Class B account value at the time
the plan is established.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.
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Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations,
credit unions and benefit plans. Class B shares of the Fund are offered
through Blueprint only to members of certain affinity groups. The CDSC is
waived in connection with purchase orders placed through Blueprint. Services,
including the exchange privilege, available to Class B investors through
Blueprint, however, may differ from those available to other Class B
investors. Orders for purchases and redemptions of Class B shares of the Fund
may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum
initial or subsequent purchase requirement for investors who are part of a
Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of average daily net assets but
are not subject to the distribution fee that is borne by Class B shares.
Automatic conversion of Class B shares into Class D shares will occur at least
once each month (on the "Conversion Date") on the basis of the relative net
asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the shares
for federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to
Class D shares of the Fund in a single account will result in less than $50
worth of Class B shares being left in the account, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired. The conversion period also may
be modified for investors that participate in certain fee-based programs. See
"Shareholder Services --Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege described
under "Shareholder Services --Exchange Privilege" will continue to be subject
to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the
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<PAGE>
initial purchase price. In addition, no Class C CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
It will be assumed that the redemption is first of shares held for over one
year or shares acquired pursuant to reinvestment of dividends or distributions
and then of shares held longest during the one-year period. The charge will
not be applied to dollar amounts representing an increase in the net asset
value since the time of purchase. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with certain fee-
based programs, involuntary termination of an account in which Fund shares are
held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs."
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services
to the Fund in connection with the sale of the Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the dealer's own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the
time of purchase. See "Distribution Plans" below. Imposition of the CDSC and
the distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred
Sales Charges" below.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class
C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities with respect to Class B, Class C and Class D shares.
Each of those classes has exclusive voting rights with respect to the
Distribution Plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that the
Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of
0.75% of the average daily net assets of the Fund attributable to the shares
of the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that,
so long as the Distribution Plan remains in effect, the selection and
nomination of Independent Directors shall be committed to the discretion of
the Independent Directors then in office. In approving each Distribution Plan
in accordance with Rule 12b-1, the Independent Directors concluded that there
is reasonable likelihood that each Distribution Plan will benefit the Fund and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the Independent
Directors or by the vote of the holders of a majority of the outstanding
related class of voting
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<PAGE>
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors 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, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues
from the Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues and
expenses is presented to the Directors for their consideration in connection
with their deliberations as to the continuance of the Class B and Class C
Distribution Plans 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, the CDSCs and certain other related
revenues, 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 CDSCs
and the expenses consist of financial consultant compensation.
Limitations on the Payment of Deferred Sales Charges
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
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payment in excess of the amount payable under the NASD
formula will not be made.
The following table sets forth comparative information as of October 31,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum.
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<PAGE>
REDEMPTION OF SHARES
Reference is made to "Your Account -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the
redemption and purchase of Fund shares.
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. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by the Commission
or the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the net asset value of such shares at
such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signature(s) on the redemption requests must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received, provided that
the request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on
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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 (other than any
applicable CDSC). 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. 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.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus concerning
the determination of net asset value.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business
on the NYSE on each day the NYSE is open for trading. The NYSE generally
closes at 4:00 p.m., Eastern time. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The NYSE is not open for trading on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by
the Portfolio plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time, rounded to
the nearest cent. Expenses, including the fees payable to the Investment
Adviser and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
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Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Directors as the primary
market. 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. Long positions in securities traded in the over-the-counter ("OTC")
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Directors of the Fund. Such valuations and
procedures will be reviewed periodically by the Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
as determined in good faith by the Directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because the Fund will invest exclusively in shares of the Portfolio, it is
expected that all transactions in portfolio securities will be entered into by
the Portfolio. The Investment Adviser is responsible for making the
Portfolio's portfolio decisions, placing the Portfolio's brokerage business,
evaluating the reasonableness of brokerage commissions and negotiating the
amount of any commissions paid subject to a policy established by the Trust's
Trustees and officers. The Trust has no obligation to deal with any broker or
group of brokers in the execution of transactions in portfolio securities.
Orders for transactions in portfolio securities are placed for the Trust with
a number of brokers and dealers, including affiliates of the Investment
Adviser. In placing orders, it is the policy of the Trust to obtain the most
favorable net results, taking into account various factors, including price,
commissions, if any, size of the transaction and difficulty of execution.
Where applicable, the Investment Adviser surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer that offers the Trust the best price and execution or other
services that are of benefit to the Trust. Securities firms also may receive
brokerage commissions on transactions including covered call options written
by the Trust and the sale of underlying securities upon the exercise of such
options. In addition, consistent with the NASD Conduct Rules and policies
established by the Trustees, 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 Trust.
Brokers who provide supplemental investment research to the Investment
Adviser may receive orders for transactions by the Trust. 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 Advisory Agreement. If in the
judgment of the Investment Adviser the Trust will be benefitted by
supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services in excess of
commissions that another broker may have charged for effecting the same
transactions. The expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information, and the
Investment Adviser may use such information in servicing its other accounts.
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<PAGE>
The Trust invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act,
persons affiliated with the Trust are prohibited from dealing with the Trust
as principal in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Trust, including
Merrill Lynch, will not serve as the Trust's dealer in such transactions.
However, affiliated persons of the Trust may serve as its broker in over-the-
counter transactions conducted on an agency basis.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Trust on the floor of
any U.S. national securities exchange provided that prior authorization of
such transactions is obtained from the Trust and Merrill Lynch furnishes a
statement to the Trust at least annually setting forth the compensation it has
received in connection with such transactions.
The Trustees of the Trust have considered the possibility of recapturing for
the benefit of the Trust brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the management fee paid by the Trust to
the Investment Adviser. After considering all factors deemed relevant, the
Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
The portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the securities in the
portfolio during the year. The portfolio turnover rate is generally
anticipated to be under 100% for the equity portion of the portfolio and under
200% for the bond portion of the portfolio. A high rate of portfolio turnover
results in correspondingly higher brokerage commission expenses and may result
in negative tax consequences, such as an increase in capital gains dividends
or in ordinary income dividends.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
and instructions as to how to participate in the various services or plans, or
how to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
also receive separate confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and capital gains distributions. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent. A
shareholder may also maintain an account through 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.
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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.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or
continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares and then must turn the certificates over to the new firm for
re-registration in the new brokerage firm's name.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves
Fund ("Summit"), a series of Financial Institutions Series Trust, which is,
among others, a Merrill Lynch-sponsored money market fund specifically
designated for exchange by holders of Class A, Class B, Class C and Class D
shares of Select Pricing Funds. Shares with a net asset value of at least $100
are required to qualify for the exchange privilege and any shares utilized in
an exchange must have been held by the shareholder for at least 15 days.
Before effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or
her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second Select Pricing Fund at any
time as long as, at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares"), are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or
Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such
Class A or Class D shares in the initial purchase and any subsequent exchange.
Class A or Class D shares issued pursuant to dividend reinvestment are sold on
a no-load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A or Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D shares
generally may be exchanged into the Class A or Class D shares, respectively,
of the other funds with a reduced sales charge or without a sales charge.
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Exchanges of Class B and Class C Shares. Each Select Pricing Fund with Class
B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C
shares, respectively, of another Select Pricing Fund or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to
the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
shares of the fund from which the exchange has been made. For purposes of
computing the CDSC that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% CDSC
that generally would apply to a redemption would not apply to the exchange.
Three years later the investor may decide to redeem the Class B shares of
Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the three-year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the Special Value
Fund Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing
Funds; Class B shares of Summit have an exchange privilege back into Class B
or Class C shares of Select Pricing Funds and, in the event of such an
exchange, the period of time that Class B shares of Summit are held will count
toward satisfaction of the holding period requirement for purposes of reducing
any CDSC and toward satisfaction of any Conversion Period with respect to
Class B shares. Class B shares of Summit will be subject to a distribution fee
at an annual rate of 0.75% of average daily net assets of such Class B shares.
This exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-
sponsored money market funds other than Summit. Shareholders who have
exchanged Select Pricing Fund shares for shares of such other money market
funds and subsequently wish to exchange those money market fund shares for
shares of the Fund will be subject to the CDSC schedule applicable to such
Fund shares, if any. The holding period for the money market fund shares will
not count toward satisfaction of the holding period requirement for reduction
of the CDSC imposed on such shares, if any, and, with respect to Class B
shares, toward satisfaction of the Conversion Period. However, the holding
period for Class B or Class C shares received in exchange for such money
market fund shares will be aggregated with the holding period for the original
shares for purposes of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans that participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, or the Conversion Period for Class B shares
so reacquired, the holding period for the Class A shares will be "tacked" to
the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class
A and Class D shares by non-retirement plan investors under the MFA Program.
First, the initial allocation of assets is made under the MFA Program. Then,
any subsequent exchange under the MFA Program of Class A or Class D shares of
a Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the
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shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
Select Pricing Fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at 1-800-MER-FUND or 1-800-637-3863.
Retirement Plans
Individual retirement accounts and other retirement plans are available from
Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in
other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
Shareholders considering transferring a tax-deferred retirement account such
as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that if the firm to which the
retirement account is being transferred will not take delivery of shares of
the Fund, the shareholder must either redeem the shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the new
firm, or continue to maintain a retirement account at Merrill Lynch for those
shares.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a
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service known as the Fund's Automatic Investment Plan. The Fund would be
authorized, on a regular basis, to provide systematic additions to the
Investment Account of such shareholder through charges of $50 or more to the
regular bank account of the shareholder by either pre-authorized checks or
automated clearing house debits. For investors who buy shares of the Fund
through Blueprint, no minimum charge to the investor's bank account is
required. Alternatively, an investor that maintains a CMA(R) or CBA(R) account
may arrange to have periodic investments, of amounts of $100 ($1 for
retirement accounts) or more, made in the Fund through the CMA(R) or CBA(R)
Automatic Investment Program from his or her CMA(R) or CBA(R) account or from
certain related accounts.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in
additional full and fractional shares of the Fund. Such reinvestment will be
at the net asset value of shares of the Fund as of the close of business on
the NYSE on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at any time, 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.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering
price, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A, Class B, Class C
or Class D shares are redeemed from those on deposit in the shareholder's
account to provide the withdrawal payment specified by the shareholder. The
shareholder may specify the dollar amount and the class of shares to be
redeemed. Redemptions will be made at net asset value as determined 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined 15 minutes after the close of business on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the
direct deposit of the withdrawal payment will be made, on the next business
day following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives --Class B and Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion
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of the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will be applied thereafter to Class D shares if the
shareholder so elects. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or
her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for shares
of the Fund from investors that maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R),
Account or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the Monday selected
is not a business day, the redemption will be processed at net asset value on
the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the Automatic Investment Program. For more information on the CMA(R) or
CBA(R) Systematic Redemption Program, eligible shareholders should contact
their Merrill Lynch Financial Consultant.
Capital gains and ordinary income received in each of the retirement plans
referred to above are exempt from Federal taxation until distributed from the
plan. Investors considering participation in any such plan should review
specific tax laws relating thereto and should consult their attorneys or tax
advisers with respect to the establishment and maintenance of any such plan.
DIVIDENDS AND TAXES
Dividends
The Fund intends 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. From time to time, the Fund may declare a
special dividend at or about the end of the calendar year in order to comply
with a Federal income tax requirement that certain percentages of its ordinary
income and capital gains be distributed during the calendar year. See
"Shareholder Services -- Automatic Dividend Reinvestment Plan" for information
concerning the manner in which dividends may be reinvested automatically in
shares of the Fund. Shareholders may elect in writing to receive any dividends
in cash. Dividends are taxable to shareholders, as discussed below, whether
they are reinvested in shares of the Fund or received in cash. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
on Class D shares will be lower than the per share dividends on Class A shares
as a result of the account maintenance fees applicable with respect to the
Class D shares. See "Determination of Net Asset Value."
Taxes
The Fund intends to qualify for the special tax treatment afforded regulated
investment companies ("RICs") under the Code. As long as it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax on
the part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B,
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Class C and Class D shareholders ("shareholders"). The Fund intends to
distribute substantially all of such income.
In order to qualify, the Fund must among other things, (i) derive at least
90% of its gross income from dividends, interest, payments with respect to
certain securities loans, gains from the sale of securities, certain gains
from foreign currencies, or other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (ii) distribute
at least 90% of its dividend, interest and certain other taxable income each
year; (iii) at the end of each fiscal quarter maintain at least 50% of the
value of its total assets in cash, government securities, securities of other
RICs, and other securities of issuers which represent, with respect to each
issuer, no more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer; and (iv) at the end of each
fiscal quarter have no more than 25% of its assets invested in the securities
(other than those of the government or other RICs) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses.
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.
Any net capital gains (i.e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
("capital gains dividends") distributed to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 20%. The maximum capital gains rate for
corporate shareholders currently is the same as the maximum tax rate for
ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gains dividends. A portion of the Fund's
ordinary income dividends may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements are met. For
this purpose, the Fund will allocate dividends eligible for the dividends
received deduction between the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission exemptive order permitting the issuance and sale of multiple
classes of stock) that is based on the gross income allocable to the Class A,
Class B, Class C and Class D shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend or distribution will be treated for tax purposes as being
paid by the RIC and received by its shareholders on December 31 of the year in
which such dividend was declared.
Pursuant to the Fund's investment objectives, the Fund may invest in foreign
securities. Foreign taxes may be paid by the Fund as a result of tax laws of
countries in which the Fund may invest. Income tax treaties between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on
income from investments of foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on 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 shareholder is not otherwise
subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable
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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.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its 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 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 such capital loss will be treated as long term capital loss if
such shares were held for more than 12 months.
Any loss from sale or exchange of shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any long-
term capital gains dividends with respect to such shares. 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).
Generally, any loss realized on a sale or exchange 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.
If a shareholder exercises the exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge paid to the Fund reduces any charge the shareholder would have owed
upon the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell options and futures and foreign currency
options and futures, and related options on such futures. Options and futures
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
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a forward foreign
exchange contract, or is a non-equity option or a regulated futures contract
for a non-U.S. currency for which the Fund elects to have gain or loss treated
as ordinary gain or loss under Code Section 988 (as described below), gain or
loss from transactions in such option and futures 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 and 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 options, futures and forward foreign exchange. Similarly, Code
Section 1091, which deals with "wash sales," may cause the Fund to postpone
recognition of certain losses for tax purposes; and Code Section 1258, which
deals with "conversion transactions," may apply to recharacterize certain
capital gains as ordinary income for tax purposes, and Code
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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 Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and 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 foreign currency options, futures or
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 U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not "regulated futures contracts" and from unlisted
options will be treated as ordinary income or loss under Code Section 988. In
certain circumstances, the Fund may elect capital gain or loss treatment for
such transactions. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income
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 the Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and the Treasury regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
Dividends and gains on the sale or exchange of shares in 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 is determined separately for Class A, Class B,
Class C and Class D shares in accordance with formulas specified by the
Commission.
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, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
41
<PAGE>
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than
those noted below. Such data will be computed as described above, except that
(1) as required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual
or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of
return reflect compounding over a longer period of time. In order to reflect
the reduced sales charges in the case of Class A or Class D shares or the
waiver of the CDSC in the case of Class B or Class C shares applicable to
certain investors, as described under "Purchase of Shares" the total return
data quoted by the Fund in advertisements directed to such investors may take
into account the reduced, and not the maximum, sales charge or may take into
account the waiver of the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a
lower amount of expenses is deducted. 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.
On occasion, the Fund may compare its performance to that of the S&P 500
Composite Stock Price Index, the Value Line Composite Index, the Dow Jones
Industrial Average, the Dow Jones Financial Industry Average or performance
data published by Lipper Analytical Services, Inc., Morningstar Publications,
Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine and Fortune Magazine or other industry
publications. When comparing its performance to a market index, the Fund may
refer to various statistical measures derived from the historic performance of
the Fund and the index, such as standard deviation and beta. As with other
performance data, performance comparisons should not be considered indicative
of the Fund's relative performance for any future period. In addition, from
time to time the Fund may include its risk-adjusted performance ratings
assigned by Morningstar Publications, Inc. in advertising or supplemental
sales literature.
The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on June 1, 1999. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, each of which consists of 100,000,000 shares. Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures, (except that Class B shares have certain voting
rights with respect to Class B share expenditures). The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. The Fund does not intend
to hold annual meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-
laws of the Fund require that a special meeting of stockholders be held upon
the written request of at least 10% of the outstanding shares of the Fund
entitled to vote at such meeting, if they comply with applicable Maryland law.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed
42
<PAGE>
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, except that expenses related to the distribution of
the shares within a class will be borne solely by such class. Stock
certificates are issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any case.
The Trust is organized as a Delaware Business Trust and currently consists
of one portfolio. Whenever the Fund is requested to vote on any matter
relating to the Portfolio, the Fund will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of common stock of the Fund for $100,000. Such shares
were acquired for investment and can only be disposed of by redemption. As of
the date of this Statement of Additional Information, the Investment Adviser
owned 100% of the outstanding common stock of the Fund. The Investment Adviser
may be deemed to control the Fund until such time as it owns less than 25% of
the outstanding shares of the Fund.
Prior to the offering of the Fund's shares, FAM will be the Fund's sole
shareholder and deemed to a controlling person of the Fund.
Independent Auditors
Deloitte & Touche LLP, has been selected as the independent auditors of the
Fund. The selection of independent auditors is subject to approval by the non-
interested Directors of the Fund. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
Custodian
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as custodian of the Fund's assets. 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, Transfer and Exchange Shares" in the Prospectus.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022-9998, is counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on May 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.
43
<PAGE>
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 Merrill Lynch 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 Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
Merrill Lynch Global Financial Services Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Merrill Lynch Global Financial Services Fund, Inc. of Global Financial
Services Master Trust as of October 15, 1999. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of the Merrill Lynch Global Financial
Services Fund, Inc. of Global Financial Services Master Trust as of October
15, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 15, 1999
45
<PAGE>
Merrill Lynch Global Financial Services Fund, Inc.
Statement of Assets and Liabilities
October 15, 1999
<TABLE>
<S> <C>
ASSETS:
Investment in Global Financial Services Portfolio................... $100,000
Prepaid registration fees and offering costs (Note 3)............... 343,000
--------
Total assets...................................................... 443,000
--------
LIABILITIES:
Liabilities and accrued expenses.................................... 343,000
--------
NET ASSETS............................................................ $100,000
========
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized......................................................... $ 250
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized......................................................... 250
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized......................................................... 250
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized......................................................... 250
Paid-in Capital in excess of par.................................... 99,000
--------
NET ASSETS............................................................ $100,000
========
NET ASSET VALUE:
Class A--Based on net assets of $25,000 and 2,500 shares outstanding.. $ 10.00
========
Class B--Based on net assets of $25,000 and 2,500 shares outstanding.. $ 10.00
========
Class C--Based on net assets of $25,000 and 2,500 shares outstanding.. $ 10.00
========
Class D--Based on net assets of $25,000 and 2,500 shares outstanding.. $ 10.00
========
</TABLE>
- ----------
Notes to Financial Statements.
(1) Merrill Lynch Global Financial Services Fund, Inc. (the "Fund") was
organized as a Maryland corporation on June 1, 1999 and is registered
under the Investment Company Act of 1940 as an open-end diversified
management investment company. To date, the Fund has not had any
transactions other than those relating to organizational matters and the
sale of 2,500 Class A shares, 2,500 Class B shares, 2,500 Class C shares
and 2,500 Class D shares of Common Stock to Fund Asset Management, L.P.
("FAM" or the "Investment Adviser".)
(2) The Fund has entered into an administration agreement with FAM (the
"Administrator"), and a distribution agreement with Merrill Lynch Funds
Distributor, Inc. a division of Princeton Funds Distributor, Inc. (the
"Distributor"). (See "Management of the Fund--Administration Arrangements"
in the Statement of Additional Information.) Certain officers and/or
directors of the Fund are officers and/or directors of the Administrator
and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued. Prepaid offering costs consist of legal and printing fees related
to preparing the initial registration statement, and will be amortized
over a 12 month period beginning with the commencement of operations of
the Fund. The Investment Advisor, on behalf of the Fund, will incur
organization costs estimated at $40,375.
46
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Services, Inc.'s ("Moody's") Corporate
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic
category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
A-1
<PAGE>
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and higher
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternative liquidity is maintained. Issuers
rated Not Prime do not fall within any of the Prime rating categories.
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath
the name of the issuer, or there is a footnote referring the reader to another
page for the name or names of the supporting entity or entities. In assigning
ratings to such issuers, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue rated "aaa" is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
aa An issue rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A-2
<PAGE>
a An issue rated "a" is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and
"a" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa An issue rated "baa" is considered to be medium grade, neither highly
protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba An issue rated "ba" is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms
of the issue over any long period of time may be small.
caa An issue rated "caa" is likely to be in arrears on dividend payments. This
rating designation does not purport to indicate the future status of
payments.
ca An issue rated "ca" is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's Ratings Group's ("Standard & Poor's")
Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A-3
<PAGE>
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
Debt rated BB, B, CCC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest or repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
A-4
<PAGE>
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an expected copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issuers assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
A-5
<PAGE>
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB,Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B, predominantly speculative with respect to the issuer's capacity to pay
CCCpreferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
will likely have some quality and protection characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue in default on debt
instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard & Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A-6
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
Code #19066-0699
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(a) --Articles of Incorporation of the Registrant, dated May 28, 1999.(a)
2 --By-Laws of the Registrant.(a)
3(a) --Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.(b)
4(a) --Form of Management Agreement, between the Registrant and MLAM.(c)
(b) --Form of Sub-Advisory Agreement between MLAM and Merrill Lynch Asset
Management U.K. Limited.(c)
4(c) --Form of Administration Agreement between Registrant and Fund Asset
Management, L.P.
5(a) --Form of Class A Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, a division of Princeton Funds
Distributor, Inc. (the "Distributor") (including Form of Selected
Dealers Agreement).(d)
(b) --Form of Class B Distribution Agreement between the Registrant and
the Distributor.(d)
(c) --Form of Class C Distribution Agreement between the Registrant and
the Distributor.(d)
(d) --Form of Class D Distribution Agreement between the Registrant and
the Distributor.(d)
6 --None.
7 --Custody Agreement between the Registrant and Brown Brothers Harriman
& Co.
8(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial Data
Services, Inc.(d)
(b) --Agreement between Merrill Lynch & Co., Inc. and Registrant relating
to Registrant's use of Merrill Lynch name.(d)
9 --Opinion and Consent of counsel for Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --Certificate of Fund Asset Management, L.P.
13(b) --Form of Class B Distribution Plan of the Registrant and Class B
Distribution Plan Sub-Agreement.(d)
(c) --Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(d)
(d) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(d)
14 --None
15 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(e)
16 --Powers of Attorney.
</TABLE>
- ----------
(a) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form N-1A (File Nos. 333-80061 and
811-09375) filed on June 4, 1999.
(b) Reference is made to Article II, Article IV, Article V (sections 2, 3, 4
and 6), Article VI, Article VII and Article IX of the Registrant's
Articles of Incorporation, filed as Exhibit (1), to the Registration
Statement, and to Article II, Article III (sections 1, 3, 5, 6 and 17),
Article VI, Article VII, Article XII, Article XIII and Article XIV of the
Registrant's By-Laws filed as Exhibit (2) to the Registration Statement.
(c) Withdrawn. Reference is made to the Exhibits to the Registration Statement
on Form N-1A filed by the Registrant's Master Trust, Global Financial
Master Trust (File No. 811-09633).
(d) Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form N-1A (File Nos. 333-80061 and
811-09375) filed on June 17, 1999.
(e) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed on
January 25, 1996 (Exhibit 18).
C-1
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
The Registrant is not controlled by or under common control with any other
person.
Item 25. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class
C and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may
be concerned, Article VI of the Registrant's By-Laws provides that such
payments will be made only on the following conditions: (i) advances may be
made only on receipt of a written affirmation of such person's good faith
belief that the standard of conduct necessary for indemnification has been met
and a written undertaking to repay any such advance if it is ultimately
determined that the standard of conduct has not been met; and (ii) (a) such
promise must be secured by a security for the undertaking in form and amount
acceptable to the Registrant, (b) the Registrant is insured against losses
arising by receipt by the advance, or (c) a majority of a quorum of the
Registrant's disinterested non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that at the time the advance is proposed to be made, there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising
in connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, 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 1933 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 Director, 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
Director, 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 1933
Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), 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 Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High
C-2
<PAGE>
Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
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,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan Insured Fund,
II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings
New York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
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 DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, 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 Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., 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 Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley funds (advised by Hotchkis
and Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Senior Floating Rate Fund, Inc. and 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 Advisors Trust.
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-
2665. The address of MLAM, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor
("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10281-1201. The address of the Fund's
transfer agent, Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
C-3
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since November 1, 1996 for his, 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 all or
substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano and Monagle are officers of
one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
---- ----------------------------- ----------------------------------
<C> <C> <S>
ML & Co.................. Limited Partner Financial Services Holding
Company; Limited Partner of
FAM
Princeton Services....... General Partner General Partner of FAM
Arthur Zeikel............ None Chairman of FAM; President
of MLAM and FAM from 1977
to 1997.
Jeffrey M. Peek.......... President President of FAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.;
Managing Director and Co-
Head of the Investment
Banking Division of Merrill
Lynch in 1997; Senior Vice
President and Director of
the Global Securities and
Economics division of
Merrill Lynch from 1995 to
1997.
Terry K. Glenn........... Executive Vice President Executive Vice President of
FAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
PFD; Director of FDS;
President of Princeton
Administrators
Donald C. Burke.......... Senior Vice President, Senior Vice President and
Treasurer and Director Treasurer of FAM; Senior
of Taxation 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
FAM; 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
Linda L. Federici........ Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Vincent R. Giordano...... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel... Senior Vice President, Senior Vice President,
Secretary and General Counsel Secretary and General
Counsel of FAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein....... Senior Vice President Senior Vice President of
FAM; Senior Vice President,
Director and Secretary of
Princeton Services
Ronald M. Kloss.......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Debra W. Landsman-Yaros.. Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services; Vice
President of PFD
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
---- --------------------- ------------------------------------
<C> <C> <S>
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 FAM; Senior
Vice President of Princeton Services
Brian A. Murdock........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
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, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch 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 Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., 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 Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, 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 Senior
Floating Rate Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc. and Worldwide DollarVest
Fund, Inc. The address of each of these registered investment companies is
P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is
33 King William Street, London, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee.
<TABLE>
<CAPTION>
Positions Other Substantial Business,
Name with MLAM U.K. Profession, Vocation or Employment
---- --------------------------- ----------------------------------
<C> <C> <S>
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
Donald C. Burke..... Treasurer Senior Vice President and
Treasurer of FAM and MLAM since
1999; Senior Vice President and
Treasurer of Princeton Services
since 1999; Vice President of PFD
since 1999; First Vice President
of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to
1997; Director of Taxation of MLAM
since 1990
Nicholas C.D. Hall.. Director Director of Merrill Lynch Europe
PLC; General Counsel of Mercury
Asset Management Group PLC
Carol Ann Langham... Company Secretary Employee of Merrill Lynch
International
Debra Anne Searle... Assistant Company Secretary Employee of Merrill Lynch
International
</TABLE>
C-5
<PAGE>
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 registered investment companies
referred to in the first two paragraphs 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. and The Municipal Fund Accumulation Program, Inc.; MLFD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position(s) and Office(s)
Name with PFD with Registrant
- ---- ------------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director President
Michael G. Clark........ Director and Treasurer None
Thomas J. Verage........ Director None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Donald C. Burke......... Vice President Vice President and Treasurer
James T. 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
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices
of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and
its transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund--Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Fund--Management and Advisory
Arrangements" in the Statement of Additional Information constituting Part B
of the Registration Statement, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
C-6
<PAGE>
SIGNATURES
Global Financial Services Master Trust has caused this Pre-Effective
Amendment to the Registration Statement of Merrill Global Financial Services
Fund, Inc. to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and the State of New Jersey, on the
15th day of October, 1999.
Global Financial Services Master Trust
/s/ Terry K. Glenn
By: _______________________________
Terry K. Glenn, President
Merrill Lynch Global Financial Services
This Pre-Effective Amendment to the Registration Statement of Merrill Global
Financial Services Fund, Inc. has been signed below by the following persons
in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director October 15, 1999
______________________________________ (Principal Executive
Terry K. Glenn Officer)
/s/ Donald C. Burke* Treasurer (Principal October 15, 1999
______________________________________ Financial and Accounting
Donald C. Burke Officer)
/s/ Ronald W. Forbes* Director October 15, 1999
______________________________________
Ronald W. Forbes
/s/ Cynthia A. Montgomery* Director October 15, 1999
______________________________________
Cynthia A. Montgomery
/s/ Charles C. Reilly* Director October 15, 1999
______________________________________
Charles C. Reilly
/s/ Kevin A. Ryan* Director October 15, 1999
______________________________________
Kevin A. Ryan
/s/ Richard R. West* Director October 15, 1999
______________________________________
Richard R. West
/s/ Arthur Zeikel* Director October 15, 1999
______________________________________
Arthur Zeikel
</TABLE>
- ----------
* Terry K. Glenn, by signing his name hereto, signs this document on behalf of
the persons so indicated above pursuant to powers of attorney duly executed
by such persons and filed with the Securities and Exchange Commission.
C-7
<PAGE>
EXHIBIT INDEX
(Exhibits submitted herewith)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4(c) --Administration Agreement between the Registrant and Fund Asset
Management, L.P.
7 --Custody Agreement between the Registrant and Brown Brothers
Harriman & Co.
9 --Opinion and consent of Counsel for Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --Certificate of Fund Asset Management, L.P.
16 --Powers of Attorney.
</TABLE>
<PAGE>
EXHIBIT (4)(C)
ADMINISTRATION AGREEMENT
AGREEMENT made as of ________________________________, 1999, by and between
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC., a Maryland corporation
(hereinafter referred to as the "Fund"), and FUND ASSET MANAGEMENT, L.P., a
Delaware limited partnership, doing business as FUND ASSET MANAGEMENT
(hereinafter referred to as the "Administrator").
W I T N E S S E T H:
--------------------
WHEREAS, the Fund is engaged in business as an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Directors of the Fund (the "Directors") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Fund desires to retain the Administrator to provide management
and administrative services to the Funds in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Administrator is willing to provide management and
administrative services to the Funds on the terms and conditions hereafter set
forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Administrator hereby agree as follows:
ARTICLE I
---------
Duties of the Administrator
---------------------------
The Fund hereby employs the Administrator to act as a manager and
administrator of the Funds, and to furnish, or arrange for affiliates to
furnish, the management and administrative services described below, subject to
review by and the overall control of the Board of Directors of the Fund
(hereinafter referred to as the "Directors"), for the period and on the terms
and conditions set forth in this Agreement. The Administrator hereby accepts
such employment and agrees during such period, at its own expense, to render, or
arrange for the rendering of, such services and to assume the obligations herein
set forth for the compensation provided for herein. The Administrator and its
affiliates shall for all purposes herein be deemed to be independent contractors
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 agents of the
Fund.
Management Services. The Administrator shall perform (or arrange for
-------------------
the performance by affiliates of) the management and administrative services
necessary for the operation of the Fund including administering shareholder
accounts and handling shareholder relations. The Administrator shall
<PAGE>
provide the Fund with office space, facilities, equipment and necessary
personnel and such other services as the Administrator, subject to review by the
Directors, shall from time to time determine to be necessary or useful to
perform its obligations under this Agreement. The Administrator shall also, on
behalf of the Fund, conduct relations with custodians, depositories, transfer
agents, dividend disbursing agents, other shareholder servicing agents,
accountants, attorneys, underwriters, brokers and dealers, corporate
fiduciaries, insurers, banks and such other persons in any such other capacity
deemed to be necessary or desirable. The Administrator shall make reports to the
Directors of its performance of obligations hereunder and furnish advice and
recommendations with respect to such other aspects of the business and affairs
of the Funds as it shall determine to be desirable.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Administrator. The Administrator assumes and shall pay for
-----------------
maintaining the staff and personnel necessary to perform its obligations under
this Agreement, and shall, at its own expense, provide the office space,
facilities and necessary personnel which it is obligated to provided under
Article I hereof, and shall pay compensation of all Officers of the Fund and all
Directors of the Fund who are affiliated persons of the Administrator.
(b) The Fund. The Fund assumes and shall pay or cause to be paid all
--------
other expenses of the Fund (except for the expenses paid by the Distributor),
including, without limitation: taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder reports, prospectuses
and statements of additional information, charges of the custodian, any sub-
custodian and transfer agent, expenses of portfolio transactions, expenses of
redemption of shares, Securities and Exchange Commission fees, expenses of
registering the shares under Federal, state and foreign laws, fees and actual
out-of-pocket expenses of Directors who are not affiliated persons of the
Administrator, accounting and pricing costs (including the daily calculation of
the net asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Funds. It is also understood that the Fund shall reimburse the
Administrator for its costs in providing accounting services to the Fund. The
Distributor will pay certain of the expenses of the Funds incurred in connection
with the continuous offering of shares of common stock in the Funds.
2
<PAGE>
ARTICLE III
-----------
Compensation of the Administrator
---------------------------------
Administrative Fees. For the services rendered, the facilities furnished
-------------------
and expenses assumed by the Administrator, each Fund shall pay to the
Administrator at the end of each calendar month a fee based upon the average
daily value of the net assets of the Fund, as determined and computed in
accordance with the description of the determination of net asset value
contained in the prospectus and statement of additional information, at the
annual rate set forth for such Fund in Appendix A hereto, as the same shall from
time to time be amended pursuant hereto, commencing on the day following
effectiveness hereof. If this Agreement becomes effective subsequent to the
first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fee as set forth
above. Payment of the Administrator's compensation for the preceding month
shall be made as promptly as possible after completion of the computations
contemplated above. During any period when the determination of net asset value
is suspended by the Directors, the net asset value of a share as of the last
business day prior to such suspension shall for this purpose be deemed to be the
net asset value at the close of each succeeding business day until it is again
determined.
ARTICLE IV
----------
Limitation of Liability of the Administrator
--------------------------------------------
The Administrator shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any act or omission in the management and
administration of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, the term
"Administrator" shall include any affiliates of the Administrator performing
services for the Fund contemplated hereby and partners, shareholders, directors,
officers and employees of the Administrator and such affiliates.
ARTICLE V
---------
Activities of the Administrator
-------------------------------
The services of the Administrator to the Fund are not to be deemed to be
exclusive, and the Administrator and each affiliate is free to render services
to others. It is understood that Directors, officers, employees and
shareholders of the Fund are or may become interested in the Administrator and
its affiliates, as directors, officers, employees, partners and shareholders or
otherwise, and that the Administrator and directors, officers, employees,
partners and shareholders of the Administrator and its affiliates are or may
become similarly interested in the Fund as shareholders or otherwise.
3
<PAGE>
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until April 30, 1998, and thereafter, but only so long
as such continuance is specifically approved at least annually by (i) the
Directors, and (ii) a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by the vote of a majority of the outstanding voting
securities of the Fund, or by the Administrator, on sixty days' written notice
to the other party. This Agreement shall automatically terminate in the event
of its assignment.
ARTICLE VII
-----------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by a majority of those Directors who are not parties to
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUNDS, INC.
By:__________________________________________
(Signature)
Name:________________________________________
Title:_______________________________________
FUND ASSET MANAGEMENT, L.P.
By:__________________________________________
(Signature)
Name:________________________________________
Title:_______________________________________
5
<PAGE>
APPENDIX A
Name of Fund Administrative Fee
------------ ------------------
Merrill Lynch Global Financial Services Fund, Inc. .35%
6
<PAGE>
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this ____ day of _______________ 1999, between Merrill
Lynch Global Financial Services Fund, Inc. (a "Fund") and Brown Brothers
Harriman & Co. (the "Custodian");
WITNESSETH: That in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
1. The Fund hereby employs and appoints the Custodian as a custodian
for the term and subject to the provisions of this Agreement. The Custodian
shall not be under any duty or obligation to require the Fund to deliver to it
any securities or funds owned by the Fund and shall have no responsibility or
liability for or on account of securities or funds not so delivered. The Fund
will deposit with the Custodian copies of the Certificate of Incorporation and
By-Laws (or comparable documents) of the Fund and all amendments thereto, and
copies of such votes and other proceedings of the Fund as may be necessary for
or convenient to the Custodian in the performance of its duties.
2. Except for securities and funds held by subcustodians appointed
pursuant to the provisions of Section 3 hereof, the Custodian shall have and
perform the following powers and duties:
A. Safekeeping To keep safely the securities of the Fund that have been
-----------
delivered to the Custodian and from time to time
<PAGE>
to receive delivery of securities for safekeeping.
B. Manner of Holding Securities - To hold securities of the Fund (1) by
----------------------------
physical possession of the share certificates or other instruments representing
such securities in registered or bearer form, or (2) in book-entry form by a
Securities System (as said term is defined in Section 2S).
C. Registered Name; Nominee - To hold registered securities of the Fund (1)
------------------------
in the name of any nominee name of the Custodian or the Fund, or in the name or
any nominee name of any agent appointed pursuant to Section 5E, or (2) in street
certificate form, so-called, and in any case with or without any indication of
fiduciary capacity.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section V
---------
on Page 14, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities (1) by the Custodian, or (2) by a clearing
corporation of a national securities exchange of which the Custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Fund, the Custodian may release funds to a
Securities System or to a Subcustodian prior to the receipt of advice from the
Securities System or Subcustodian that the securities underlying such repurchase
agreement have been transferred by book entry into the Account (as defined in
Section 2S) of the Custodian maintained with such Securities System or
Subcustodian, so long as such payment instructions to Securities System or
Subcustodian
2
<PAGE>
include a requirement that delivery is only against payment of securities, and
(ii) in the case of time deposits, call account, deposits, currency deposits,
and other deposits, contracts or options pursuant to Sections 2K, 2L and 2M, the
Custodian may make payment therefor without receiving an instrument evidencing
said deposit so longs as such payment instructions detail specific securities to
be acquired.
E. Exchanges - Upon receipt of proper instructions, to exchange
---------
securities held by it for the account of the Fund for other securities in
connection with any reorganization, recapitalization, split-up of shares, change
of par value, conversion or other event, and to deposit any such securities in
accordance with the terms of any reorganization or protective plan. Without such
instructions, the Custodian may surrender securities in temporary form for
definitive securities, may surrender securities for transfer into a name or
nominee name as permitted in Section 2C, and may surrender securities for a
different number of certificates or instruments representing the same number of
shares or same principal amount of indebtedness, provided the securities to be
issued are to be delivered to the Custodian and further provided custodian shall
at the time of surrendering securities or instruments receive a receipt or
other evidence of ownership thereof.
F. Sales of Securities - Upon receipt of proper
-------------------
3
<PAGE>
instructions, to make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor (1) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer; or
(2) by credit to the account of the Custodian with a clearing corporation of a
national securities exchange of which the Custodian is a member, or (3) by
credit to the account of the Custodian or an Agent of the Custodian with a
Securities System.
G. Depositary Receipts - Upon receipt of proper instructions, to instruct a
-------------------
subcustodian appointed pursuant to Section 3 hereof (a "Subcustodian") or an
agent of the Custodian appointed pursuant to Section 5E hereof (an "Agent") to
surrender securities to the depositary used by an issuer of American Depositary
Receipts or International Depositary Receipts (hereinafter collectively referred
to as "ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the Subcustodian
or Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Custodian, or a nominee
of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at
such other place as the Custodian may from time to time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer thereof
against a written receipt therefor adequately describing the ADRs surrendered
and written evidence satisfactory to the Custodian that the issuer of the
4
<PAGE>
ADRs has acknowledged receipt of instructions to cause its depositary to deliver
the securities underlying such ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose or
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Borrowings - Upon receipt of proper instructions, to deliver securities
of the Fund to lenders or their agents as collateral for borrowings effected by
the Fund, provided that such borrowed money is payable to or upon the
Custodian's order as Custodian for the Fund.
K. Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of the Fund on the Custodian's books subject only to draft
or order by the Custodian. All funds received by the Custodian from or for the
account of the Fund shall be deposited in said account(s). The responsibilities
of
5
<PAGE>
the Custodian to the Fund for deposits accepted on the Custodian's books shall
be that of a U. S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open
and operate an additional account(s) in such other banks or trust companies as
may be designated by the Fund in such instructions (any such bank or trust
company so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) shall be in the name of the
Custodian for account of the Fund and subject only to the Custodian's draft or
order. Such accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U. S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed
to be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefore shall be the same as and neither lesser nor greater than the
Custodian's responsibility in respect of other portfolio securities of the Fund.
L. Interest Bearing Call or Time Deposits - To place interest bearing
--------------------------------------
fixed term and call deposits with such banks and in such amounts as the Fund may
authorize pursuant to proper instructions. Such deposits may be placed with the
Custodian or with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U. S. Dollars or other currencies and
need not be evidenced by the issuance or delivery of a certificate to the
Custodian, provided that the Custodian
6
<PAGE>
shall include in its records with respect to the assets of the Fund, appropriate
notation as to the amount and currency of each such deposit, the accepting
Banking Institution, and other appropriate details. Such deposits, other than
those placed with the Custodian, shall be deemed portfolio securities of the
Fund and the responsibilities of the Custodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks, as described in
Section K of this agreement. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
M. Foreign Exchange Transactions and Futures Contracts - Pursuant to proper
---------------------------------------------------
instructions, to enter into foreign exchange contracts or options to purchase
and sell foreign currencies for spot and future delivery on behalf and for the
account of the Fund. Such transactions may be undertaken by the Custodian with
such Banking Institutions, including the Custodian and Subcustodian(s) as
principals, as approved and authorized by the Fund. Foreign exchange contracts
and options other than those executed with the custodian, shall be deemed to be
portfolio securities of the Fund and the responsibilities of the Custodian
therefor shall be the same as those for demand deposit bank accounts placed with
other banks as described in Section 2-K of this agreement. Upon receipt of
proper instructions, to receive and retain confirmations evidencing the purchase
or sale of a futures contract or an option on a futures contract by the Fund; to
deposit and maintain in a segregated account, for the benefit
7
<PAGE>
of any future commission merchant or to pay to such futures commission merchant,
assets designated by the fund as initial, maintenance or variation "margin"
deposits intended to secure the Fund's performance of its obligations under any
futures contracts purchased or sold or any options on futures contracts written
by the Fund, in accordance with the provisions of any agreement or agreements
among any of the Fund, the Custodian and such futures commission merchant,
designated to comply with the rules of the Commodity Futures Trading Commission
and/or any contract market, or any similar organization or organizations,
regarding such margin deposits; and to release and/or transfer assets in such
margin accounts only in accordance with any such agreements or rules.
N. Stock Loans - Upon receipt of proper instructions to deliver securities
-----------
of the Fund, in connection with loans of securities by the Fund, to the borrower
thereof upon the receipt of the cash collateral, if any, for such borrowing. In
the event U.S. Government securities are to be used as collateral, the Custodian
will not release the securities to be loaned until it has received confirmation
that such collateral has been delivered to the Custodian. The Custodian and Fund
understand that the timing of receipt of such confirmation will normally require
that the delivery of securities to be loaned will be made one day after receipt
of the U.S. Government collateral.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other
8
<PAGE>
certificates and affidavits for all federal and state tax purposes in connection
with receipt of income or other payments with respect to securities of the Fund
or in connection with transfer of securities, and pursuant to proper
instructions to take such other actions with respect to collection or receipt of
funds or transfer of securities which involve an investment decision.
P. Dividends, Distributions and Redemptions - Upon receipt of proper
----------------------------------------
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or securities, insofar as available, for the payment of
dividends or other distributions to Fund shareholders. Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Shareholder
Servicing Agent (given by such person or persons and in such manner on behalf of
the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities, insofar as available, to the
Shareholder Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who have delivered to such Agent a request for
repurchase or redemption of their shares of capital stock of the Fund.
Q. Proxies, Notices, Etc. - Promptly to deliver or mail to
----------------------
9
<PAGE>
the Fund all forms of proxies and all notices of meetings and any other notices
or announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
R. Bills - Upon receipt of proper instructions from the Administrator,
-----
to pay or cause to be paid, insofar as funds are available for the purpose,
bills, statements, or other obligations of the Fund.
S. Deposit of Fund Assets in Securities Systems - The Custodian may
--------------------------------------------
deposit and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities and Exchange Act of 1934 which
acts as a securities depository and whose use the Fund has previously approved
in writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve
10
<PAGE>
Board and Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of
the Fund upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the Securities
System of transfers of securities for the account of
11
<PAGE>
the Fund shall identify the Fund, be maintained for the Fund by the Custodian or
an Agent as referred to above, and be provided to the Fund at its request. The
Custodian shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and shall furnish
to the Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund on the next
business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Fund as promptly as
practicable.
T. Other Transfers - Upon receipt of Proper Instructions, to deliver
--------------- -----------------------------------
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such
12
<PAGE>
disposition shall include a statement of the purpose for which the delivery is
to be made, the amount of securities to be delivered and the name of the person
or persons to whom delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
----------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Fund, the Custodian may assume unless and until notified in
writing to the contrary that proper instructions received by it are not in
conflict with or in any way contrary to any provisions of the Fund's Certificate
of Incorporation or By-Laws (or comparable documents) or votes or proceedings of
the shareholders or Directors of the Fund. The Custodian shall in no event be
liable to the Fund and shall be indemnified by the Fund for any violation which
occurs in the course of carrying out instructions given by the Fund of any
investment limitations to which the Fund is subject or other limitations with
respect to the Fund's powers to make expenditures, encumber securities, borrow
or take similar actions affecting its portfolio.
V. Proper Instructions - Proper instructions shall mean a tested telex
-------------------
from the Fund or a written request, direction, instruction or certification
signed or initialled on behalf of the Fund by two or more persons as the Board
of Directors of the Fund shall have from time to time authorized, provided,
however, that no such instructions directing the delivery of securities or the
payment of funds to an authorized signatory of the Fund shall be signed by such
person. Those persons authorized to give
<PAGE>
proper instructions may be identified by the Board of Directors by name, title
or position and will include at least one officer empowered by the Board to name
other individuals who are authorized to give proper instructions on behalf of
the Fund. Telephonic or other oral instructions given by any one of the above
persons will be considered proper instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. Oral instructions will be
confirmed by tested telex or in writing in the manner set forth above but the
lack of such confirmation shall in no way affect any action taken by the
Custodian in reliance upon such oral instructions. The Fund authorizes the
Custodian to tape record any and all telephonic or other oral instructions given
to the Custodian by or on behalf of the Fund (including any of its officers,
Directors, employees or agents) and will deliver to the Custodian a similar
authorization from any investment manager or adviser or person or entity with
similar responsibilities which is authorized to give proper instructions on
behalf of the Fund to the Custodian. Proper instructions may relate to specific
transactions or to types or classes of transactions, and may be in the form of
standing instructions.
Proper instructions may include communications effected directly between
electro-mechancal or electronic devices or systems, in addition to tested telex,
provided that the Fund and the Custodian agree to the use of such device or
system.
3. Securities, funds and other property of the Fund may be
14
<PAGE>
held by subcustodians appointed pursuant to the provisions of this Section 3 (a
"Subcustodian"). The Custodian may, at any time and from time to time, appoint
any bank or trust company (meeting the requirements of a custodian or a foreign
custodian under the Investment Company Act of 1940 and the rules and regulations
thereunder) to act as a Subcustodian for the Fund, provided that the Fund shall
have approved in writing (1) any such bank or trust company and the subcustodian
agreement to be entered into between such bank or trust company and the
Custodian, and (2) if the subcustodian is a bank organized under the laws of a
country other than the United States, the holding of securities, cash and other
property of the Fund in the country in which it is proposed to utilize the
services of such subcustodian. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Fund to notify each Subcustodian of its appointment
as such. The Custodian may, at any time in its discretion, remove any bank or
trust company that has been appointed as a Subcustodian but will promptly notify
the Fund of any such action.
Those Subcustodians, their offices or branches which the Fund has
approved to date are set forth on Appendix A hereto. Such Appendix shall be
amended from time to time as Subcustodians, branches or offices are changed,
added or deleted. The Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be held at a
location not listed on Appendix A, in order that there shall be sufficient time
for the fund to give the approval
15
<PAGE>
required by the preceding paragraph and for the Custodian to put the appropriate
arrangements in place with such Subcustodian pursuant to such subcustodian
agreement.
Although the Fund does not intend to invest in a country before the
foregoing procedures have been completed, the event that an investment is
made prior to approval, if practical, such security shall be removed to an
approved location or if not practical such security shall be held by such agent
as the Custodian may appoint. In such event, the Custodian shall be liable to
the Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent and provided that the Custodian shall pursue its rights against such
agent.
In the event that any Subcustodian appointed pursuant to the provisions
of this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian and, if necessary or desirable, appoint
another subcustodian in accordance with the provisions of this Section 3. At the
election of the Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Custodian's
rights against any such Subcustodian for loss or damage caused the Fund by such
Subcustodian.
16
<PAGE>
At the written request of the Fund, the Custodian will terminate any
subcustodian Appointed pursuant to the provisions of this Section 3 in
accordance with the termination provisions under the applicable
subcustodian agreement. The Custodian will not amend any subcustodian
agreement or agree to change or permit any changes thereunder except
upon the prior written approval of the Fund.
In the event the Custodian receives a claim from a Subcustodian under
the indemnification provisions of any subcustodian agreement, the Custodian
shall promptly give written notice to the Fund of such claim. No more than
thirty days after written notice to the Fund of the Custodian's intention to
make such payment, the Fund will reimburse the Custodian the amount of such
payment except in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature.
5. A. The Custodian shall not be liable for any action taken or
omitted in reliance upon proper instructions believed by it to be genuine or
upon any other written notice, request, direction, instruction, certificate or
other instrument believed by it to be genuine and signed by the proper party or
parties. The Chairman of the Board of the Fund shall certify to the Custodian
the names, signatures and scope of authority of all persons authorized to give
proper instructions or any other such
17
<PAGE>
notice, request, direction instruction, certificate or instrument on behalf of
the Fund, the names and signatures of the officers of the Fund, the name and
address of the Shareholder Servicing Agent, and any resolutions, votes,
instructions or directions of the Fund's Board of Directors or shareholders.
Such certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and may be considered in full force and
effect until receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Fund, (but only
to the extent such expenses are reasonable) to receive and act upon advice of
counsel (who may be counsel for the Fund) on all matters, and the Custodian
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
B. With respect to the portfolio securities, cash and other property of
the Fund held by a Securities System, the Custodian shall be liable to the Fund
only for any loss or damage to the Fund resulting from use of the Securities
System if caused by any negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their employees or from any
18
<PAGE>
failure of the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System.
C. The Custodian shall be liable to the Fund for any loss or damage to the
Fund caused by or resulting from the acts or omissions of any Subcustodian if
such acts or omissions would be deemed to be negligence, gross negligence or
willful misconduct hereunder if such acts or omissions were those of the
Custodian taken or omitted by the Custodian in the country in which the
Subcustodian is operating. The Custodian shall also be liable to the Fund for
its own negligence in transmitting any instructions received by it from the Fund
and for its own negligence in connection with the delivery of any securities or
funds held by it to any Subcustodian.
D. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. However, nothing herein shall
exempt the Custodian from liability due to its own negligence or willful
misconduct. The Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all claims and liabilities (including reasonable counsel fees)
incurred or assessed against it or its nominees in connection with the
performance of this Agreement, except such as may arise from its
19
<PAGE>
or its nominee's breach of the relevant standard of conduct set forth in
this Agreement. Without limiting the foregoing indemnification obligation of
the Fund, the Fund agrees to indemnify the Custodian and its nominees against
any liability the Custodian or such nominee may incur by reason of taxes
assessed to the Custodian or such nominee or other costs, liability or expense
incurred by the Custodian or such nominee resulting directly or indirectly from
the fact that portfolio securities or other property of the Fund is registered
in the name of the Custodian or such nominee.
In order that the indemnification provisions contained in this Paragraph
5-C shall apply, however, it is understood that if in any case the Fund may be
asked to indemnify or hold the Custodian harmless, the Fund shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Fund. The Fund shall have the option to defend the Custodian against
any claim which may be the subject of this indemnification, and in the event
that the Fund so elects it will so notify the Custodian, and thereupon the Fund
shall take over complete defense of the claim, and the Custodian shall in such
situation initiate no further legal or other expenses for which
20
<PAGE>
it shall seek indemnification under this paragraph 5-C. The Custodian shall
in no case confess any claim or make any compromise in any case in which the
Fund will be asked to indemnify the Custodian except with the Fund's prior
written consent.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the Fund,
whether maintained by it, a Subcustodian, an agent of the Custodian or a
Subcustodian, a Securities System, or a Banking Institution, or a loss arising
from a foreign currency transaction or contract, resulting from a Sovereign
Risk. A "Sovereign Risk" shall mean nationalization, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other similar act or event beyond the Custodian's control.
E. The Custodian shall be entitled to receive reimbursement from the Fund on
demand, in the manner provided in Section 6, for its cash disbursements,
expenses and charges (including the fees and expenses of any Subcustodian or any
Agent) in connection with this Agreement, but excluding salaries and usual
overhead expenses.
21
<PAGE>
F. The Custodian may at any time or times in its discretion appoint (and may
at any time remove) any other bank or trust company as its agent (an "Agent") to
carry out such of the provisions of this Agreement as the Custodian may from
time to time direct, provided, however, that the appointment of such Agent
(other than an Agent appointed pursuant to the third paragraph of Section 3)
shall not relieve the Custodian of any of its responsibilities under this
agreement.
G. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
6. The Fund shall pay the Custodian a custody fee based on such fee schedule
as may from time to time be agreed upon in writing by the Custodian and the
Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section SD, shall be billed to the Fund in such a
manner as to permit payment by a direct cash payment to the Custodian.
7. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy five (75) days
22
<PAGE>
after the date of such delivery or mailing. In the event of termination the
Custodian shall be entitled to receive prior to delivery of the securities,
funds and other property held by it all accrued fees and unreimbursed expenses
the payment of which is contemplated by Sections 5D and 6, upon receipt by the
Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed
that the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
8. This Agreement constitutes the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof. No provision of
this Agreement may be amended or terminated except by a statement in writing
signed by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and
the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the
<PAGE>
preceding sentence shall be deemed to be an amendment of this Agreement.
9. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
10. Notices and other writings delivered or mailed postage prepaid to
the Fund addressed to the Fund in care of Merrill Lynch Global Financial
Services Fund, Inc., 800 Scudders Mill Road, Plainsboro, New Jersey 08536 or to
such other address as the Fund may have designated to the Custodian in writing,
or to the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention:
Manager, Securities Department, or to such other address as the Custodian may
have designated to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressee.
11. This Agreement shall be binding on and shall inure to the benefit
of the Fund and the Custodian and their respective successors and assigns,
provided that neither party hereto may assign this Agreement or any of its
rights or obligations hereunder without the prior written consent of the other
party.
12. This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original. This Agreement shall become effective
when one or more counterparts have been signed and delivered by each of the
parties.
24
<PAGE>
IN WITNESS WHEREOF, eac of the parties has caused this Agreement to be executed
in its name and behalf on the day and year first above written.
MERRILL LYNCH GLOBAL BROWN BROTHERS HARRIMAN & CO.
FINANCIAL SERVICES FUND, INC.
By:____________________________ By:__________________________
Name: Name: W. Casey Gildea
Title: Title: Manager
<PAGE>
EXHIBIT 99.9
October 15, 1999
VIA FACSIMILE AND FIRST CLASS MAIL
- -------------------------------------------------
Merrill Lynch Global Financial Services Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
Merrill Lynch Global Financial Services Fund, Inc. (the "Fund"), is
authorized to issue and sell 400,000,000 shares of common stock (the "Shares"),
par value $.10 per share, in the manner and on the terms set forth in the Fund's
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File Nos. 333-80061 and 811-09375) (the "Registration Statement").
We have, as counsel, participated in various proceedings relating to
the Fund and to the Shares. We have examined copies, either certified or
otherwise proved to our satisfaction to be genuine, of its Articles of
Incorporation, as amended to date, and By-Laws, as currently in effect, and
other documents relating to its organization and operation. In addition, we
have received a certificate dated October 13, 1999 of the Maryland State
Department of Assessments and Taxation that the Fund is in good standing under
the laws of the State of Maryland. We have also reviewed the Registration
Statement filed as of the date of this opinion and the documents filed as
exhibits thereto. We are generally familiar with the business affairs of the
Fund.
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly incorporated and is validly existing under
the laws of the State of Maryland.
2. The Fund is authorized to issue up to four hundred million
(400,000,000) Shares. Under Maryland law, (a) the number of
Shares may be increased or decreased by action of the Board of
Directors, and (b) Shares which are
<PAGE>
Merrill Lynch Global Financial Services Fund, Inc.
October 15, 1999
Page 2
issued and subsequently redeemed by the Fund are, by virtue of
such redemption, restored to the status of authorized and
unissued Shares.
3. Subject to the effectiveness of the Registration Statement and in
compliance with applicable state securities laws, upon the
issuance of the Shares for a consideration not less than the par
value thereof as required by Maryland law, and for the net asset
value thereof as required by the Investment Company Act of 1940,
as amended, and in accordance with the terms of the Registration
Statement, such Shares will be legally issued and outstanding and
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as a part of the Registration Statement and with any
state securities commission where such filing is required. We also consent to
the reference to our firm as counsel in the prospectus and statement of
additional information filed as a part thereof. In giving this consent we do
not admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended.
We are members of the Bar of the States of New York and Maryland and
do not hold ourselves out as being conversant with the laws of any jurisdiction
other than those of the United States of America and the States of New York and
Maryland.
Very truly yours,
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP
SBSF:JLS:MKN:SPM:AAV:EJG:djs
<PAGE>
Exhibit 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Financial Services Fund, Inc.:
We consent to the use in Pre-Effective Amendment No. 2 to Registration
Statement No. 333-80061 of our report dated October 15, 1999 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 15, 1999
<PAGE>
EXHIBIT 99.12
CERTIFICATE OF THE SOLE STOCKHOLDER OF
MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND, INC.
Fund Asset Management, L.P. ("FAM"), the holder of 2,500 Class A shares of
common stock, par value $.10 per share, 2,500 Class B shares of common stock,
par value $.10 per share, 2,500 Class C shares of common stock, par value $.10
per share, and 2,500 Class D shares of common stock, par value $.10 per share,
of Merrill Lynch Global Financial Services Fund, Inc. (the "Fund"), a Maryland
corporation, does hereby confirm to the Fund its representation that it
purchased such shares for investment purposes, with no present intention of
redeeming or reselling any portion thereof, and does further agree that if it
redeems any portion of such shares prior to the amortization of the Fund's
prepaid registration fees and offering costs, the proceeds thereof will be
reduced by the proportionate amount of unamortized prepaid registration fees and
offering costs which the number of shares being redeemed bears to the number of
shares initially purchased and outstanding at the time of redemption. FAM
further agrees that in the event such shares are sold or otherwise transferred
to any other party, that prior to such sale or transfer FAM will obtain on
behalf of the Fund an agreement from such other party to comply with the
foregoing as to the reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
FUND ASSET MANAGEMENT, L.P.
By: /s/ Donald C. Burke
---------------------------------------
Donald C. Burke
Authorized Officer
Dated: October 15, 1999
<PAGE>
EXHIBIT 16
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name
appears below hereby nominates, constitutes and appoints Terry K. Glenn, Michael
J. Hennewinkel and Donald C. Burke (with full power to each of them to act
alone) his or her true and lawful attorney-in-fact and agent, for him or her and
on his or her behalf and in his or her place and stead in any and all
capacities, to make, execute and sign all amendments and supplements to the
Registration Statement on Form N-1A under the Securities Act of 1933 and the
Investment Company Act of 1940 of MERRILL LYNCH GLOBAL FINANCIAL SERVICES FUND,
INC. (the "Fund"), and to file the same with the Securities and Exchange
Commission, and any other regulatory authority having jurisdiction over the
offer and sale of shares of common stock, par value $.10 per share, of the Fund,
and any and all exhibits and other documents requisite in connection therewith,
granting unto said attorneys and each of them, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as each of the
undersigned himself or herself might or could do.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
10th day of June, 1999.
/s/ TERRY K. GLENN /s/ RICHARD R. WEST
- ---------------------------------- ----------------------------------
Terry K. Glenn, Director Richard R. West, Director
/s/ RONALD W. FORBES /s/ ARTHUR ZEIKEL
- ---------------------------------- ----------------------------------
Ronald W. Forbes, Director Arthur Zeikel, Director
/s/ CHALRES C. REILLY /s/ DONALD C. BURKE
- ---------------------------------- ----------------------------------
Charles C. Reilly, Director Donald C. Burke, Treasurer
/s/ KEVIN A. RYAN /s/ CYNTHIA A. MONTGOMERY
- ---------------------------------- ----------------------------------
Kevin A. Ryan, Director Cynthia A. Montgomery, Director
