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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1999
FILE NO. 811-09049
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 2
(CHECK APPROPRIATE BOX OR BOXES)
MERCURY ASSET MANAGEMENT MASTER TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(888) 763-2260
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
JEFFREY M. PEEK
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
Counsel for the Trust:
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JOEL H. GOLDBERG, Esq. and ROBERT E. PUTNEY, III, Esq.
Swidler Berlin Shereff Friedman, LLP P.O. Box 9011
919 Third Avenue Princeton, New Jersey 08543-9011
New York, New York 10022
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended (the
"Investment Company Act"). However, beneficial interests in the Registrant are
not being registered under the Securities Act of 1933, as amended (the "1933
Act") because such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Registrant may be made only
by a limited number of institutional investors, including investment companies,
common or commingled trust funds, group trusts and certain other "accredited
investors" within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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Parts A and B of Amendment No. 1 to the Registrant's Registration Statement,
dated January 29, 1999, which relate to the Mercury Master International
Portfolio, Mercury Master Pan-European Growth Portfolio, Mercury Master U.S.
Large Cap Portfolio and Mercury Master Gold and Mining Portfolio, are
incorporated by reference into this Amendment No. 2 to the Registrant's
Registration Statement.
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Mercury Master Global Balanced Portfolio
PART A
Responses to Items 1 through 3, 5 and 9 have been omitted pursuant to
paragraph 2(b) of Instruction B of the General Instructions to Form N-1A.
ITEM 4. - INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED
RISKS.
Mercury Asset Management Master Trust (the "Trust") is a no-load,
open-end management investment company which was organized as a Delaware
business trust on April 23, 1998. Mercury Master Global Balanced Portfolio
(the "Portfolio") is a series of the Trust. The Portfolio is a diversified
investment company. There can, of course, be no assurance that the investment
objectives of the Portfolio can be achieved.
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES.
The Portfolio's main objective is a combination of long-term capital
growth and current income. The Portfolio invests in a mix of stocks and high
quality bonds of issuers located in the U.S. and other developed countries.
The Portfolio's neutral position consists of approximately 60% of its portfolio
in stocks and 40% in bonds, although the Portfolio may vary each of these
percentages up to 15% in either direction based on its view of current economic
and market conditions.
In selecting equity securities, the Portfolio emphasizes those
securities that Portfolio management believes to be undervalued or have good
prospects for earnings growth. Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities Convertible into Common Stock
- Derivative securities, such as options (including warrants)
and futures, the value of which is based on a common stock or
group of common stocks.
A company's stock is considered undervalued when the stock's current
price is less than what Portfolio management believes a share of the company is
worth. Portfolio management feels a company's worth can be assessed by several
factors such as:
- financial resources
- value of assets
- sales and earnings growth
- product development
- quality of management
- overall business prospects
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A company's stock may become undervalued when most investors fail to
perceive the company's strengths in one or more of these areas. A company
whose earnings per share grow faster than inflation and the economy in general
usually has a higher stock price over time than a company with slower earnings
growth. The Portfolio's evaluation of the prospects for a company's industry
or market sector is an important factor in evaluating a particular company's
earnings prospects. The Portfolio also allocates investments to developed
countries that Portfolio management believes, based on an evaluation of
economic, political and social factors, present good prospects for overall
economic growth. Current income from dividends and interest will not be an
important consideration in selecting equity securities. The Portfolio may
invest in companies of any size, but tends to focus on medium and large
companies.
In selecting bonds, Portfolio management considers, among other
things, the yield a bond provides and whether the issuer of the bond has the
ability to pay the interest and repay the principal. Portfolio management will
evaluate the financial strengths and the creditworthiness of bond issuers in
determining the potential risks and benefits of an investment. The Portfolio
will choose bonds of various types, maturities and issuers based on its
assessment of general market and economic conditions. The Portfolio limits its
investments to bonds rated at least A by Moody's Investors Services, Inc.,
Standard & Poor's, and/or Fitch IBCA, Inc. or if unrated, considered by
Portfolio management to be of comparable quality. Of these, at least 80% will
be rated AA/Aa or higher, or if unrated, considered by Portfolio management to
be of comparable quality. The Portfolio's bond investments can have any
maturity, and there are no limits on the average maturity of the bond portion
of the Portfolio's portfolio.
Bonds will include debt issued by the following types of entities:
- U.S. government and its agencies
- Governments (including foreign states, provinces and
municipalities) in other developed countries and their
agencies
- Supranational organizations (e.g., World Bank)
- Corporations located in the U.S. and other developed
countries.
The Portfolio may also invest in asset-backed securities, including
mortgage-backed securities, and in stripped securities. That portion of the
Portfolio's bond portfolio that is not denominated in U.S. dollars normally
will be hedged into U.S. dollars in an effort to reduce the effect of
currency fluctuations on the bond portion's performance. The Portfolio is not
required to hedge and may choose not to do so.
The Portfolio will invest only in securities of governmental or
private issuers located in countries that are included in either the MCSI World
Index or the Salomon Smith Barney World Government Bond Index. The Portfolio
will invest in part based on the Portfolio's evaluation of a country's
economic, political and social factors.
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The Portfolio may invest in derivatives for a variety of portfolio
management purposes, including to hedge (protect against price movements) or to
enable it to reallocate its investments more quickly than it could by buying
and selling the underlying securities.
The Portfolio considers an issuer to be "located" in the country
where:
- It is legally organized, or
- The primary trading market for its securities is located, or
- At least 50% of the company's (and its subsidiaries')
non-current assets, capitalization, gross revenues or profits
have been located during one of the last two fiscal years.
The Portfolio has no stated minimum holding period for investments,
and will buy or sell securities and other assets whenever Portfolio management
sees an appropriate opportunity. The Portfolio does not consider potential tax
consequences to investors when it sells securities.
The Portfolio will normally invest almost all of its assets as
described above. The Portfolio may, however, invest in short-term instruments,
such as money market securities and repurchase agreements, to meet redemptions.
The Portfolio may also reduce its exposure to equity securities and longer term
bonds by investing without limit in short-term investments, high quality bonds
or derivatives, when the Portfolio believes it is advisable to do so (on a
temporary defensive basis). Short-term investments and temporary defensive
positions may limit the potential for growth in the value of an interest in the
Portfolio and may reduce the level of current income. Therefore, the Portfolio
may not achieve its investment objective.
The Portfolio may use many different strategies in seeking its
investment objectives and it has certain investment restrictions. These
strategies and certain of the restrictions and policies governing the
Portfolio's investments are explained in Part B of this Registration Statement.
INVESTMENT RISKS.
This section contains a summary discussion of the general risks of
investing in the Portfolio. As with any mutual fund, there can be no guarantee
that the Portfolio will meet its goals, or that the Portfolio's performance
will be positive over any period of time.
Stock Market 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.
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Selection Risk.
Selection risk is the risk that the investments that Portfolio
management selects will underperform the stock or bond market or other
funds with similar investment objectives and investment strategies.
Credit Risk.
Credit risk is the risk that the issuer will be unable to pay interest
or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
Interest Rate Risk.
Interest rate risk is the risk that prices of bonds generally increase
when interest rates decline and decrease when interest rates increase.
Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities. The
Portfolio can hold bonds of any maturity. As a result, if the
Portfolio invests a large amount in long-term bonds, the Portfolio's
value could change significantly in response to a relatively small
change in interest rates. Stripped securities may be highly sensitive
to changes in interest rates.
Liquidity, Information and Valuation Risks.
Certain securities, including securities of small companies, and
"restricted securities" may be illiquid or volatile, making it
difficult or impossible to sell them at the time and at the price that
the Portfolio would like. Restricted securities have contractual or
legal restrictions on their resale and include "private placement"
securities that the Portfolio may buy directly from the issuer. Also,
important information about these companies, securities or the markets
in which they trade, may be inaccurate or unavailable. It may be
difficult to value accurately these types of securities. Certain
derivatives may be subject to these risks as well.
Foreign Government Debt.
The Portfolio may invest in debt securities issued or guaranteed by
foreign governments (including foreign states, provinces and
municipalities) or their agencies. Investments in these securities
subject the Portfolio to the risk that a government entity may delay
or refuse to pay interest or repay principal on its debt for various
reasons, including cash flow problems, insufficient foreign currency
reserves, political considerations, or the relative size of its debt
position to its economy. If a government entity defaults, it may ask
for more time in which to pay or for further loans. There may be no
bankruptcy
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proceeding that the Portfolio can use to collect payments on debt
securities that a government entity has not repaid.
Asset-Backed Securities.
Like traditional fixed-income securities, the value of asset-backed
securities typically increases when interest rates fall and decreases
when interest rates rise. Certain asset-backed securities may also be
subject to the risk of prepayment. In a period of declining interest
rates, borrowers may pay what they owe on the underlying assets more
quickly than anticipated. Prepayment reduces the yield to maturity
and the average life of the asset-backed securities. In addition,
when the Portfolio reinvests the proceeds of a prepayment it may
receive a lower interest rate than the interest rate on the security
that was prepaid. In a period of rising interest rates, prepayments
may occur at a slower rate than expected. As a result, the average
maturity of the Portfolio's portfolio will increase. The value of
long-term securities generally changes more widely in response to
changes in interest rates than shorter-term securities. Stripped
asset-backed securities may be highly sensitive to changes in interest
rates and rates of prepayment.
Mortgage-Backed Securities.
Mortgage-backed securities represent the right to receive a portion of
principal and/or interest payments made on a pool of residential or
commercial mortgage loans. When interest rates fall, borrowers may
refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed
securities will be paid off more quickly than originally anticipated
and the Portfolio has to invest the proceeds in securities with lower
yields. This risk is known as "prepayment risk." When interest rates
rise, certain types of mortgage-backed securities will be paid off
more slowly than originally anticipated and the value of these
securities will fall. This risk is known as "extension risk."
Because of prepayment risk and extension risk, mortgage-backed
securities react differently to changes in interest rates than other
debt securities. Small movements in interest rates (both increases
and decreases) may quickly and significantly reduce the value of
certain mortgage-backed securities. Stripped mortgage-backed
securities may be highly sensitive to changes in interest rates and
rates of prepayment.
Currency Hedging Risk.
Portfolio management may use currency hedges in an effort to reduce
the effect of currency fluctuations on the performance of the bond
portion of the Portfolio's portfolio. The Portfolio's currency hedges
may not be effective or cost efficient and can limit the potential for
growth in the value of the Portfolio's interests. There is also a
risk that the desired currency hedges will not be available due to
market or regulatory factors. They
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are also subject to the risk that the counterparty will be unable to
honor its financial obligations to the Portfolio. The Portfolio is
not required to hedge any part of its portfolio and may choose not to
do so.
European Economic and Monetary Union (EMU).
Certain European countries have agreed to enter into EMU in an effort
to, among other things, reduce barriers between countries and
eliminate fluctuations in their currencies. EMU has established a
single European currency (the "euro"), which was introduced on January
1, 1999 and has replaced the existing national currencies of all
initial EMU participants. The use of notes and coins of the relevant
national currencies will be phased out by July 1, 2002. Upon
introduction of the euro, 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 Portfolio invests, the Portfolio 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 Portfolio's service providers, or by other
entities with which the Portfolio or its service
providers do business, do not recognize the euro as a
distinct currency.
Other Foreign Security Risks.
- The value of the Portfolio's non-U.S. holdings (and
hedging transactions in foreign currencies) will be
affected by changes in currency exchange rates.
- The costs of non-U.S. securities transactions tend to
be higher than those of U.S. transactions.
- The Portfolio's non-U.S. securities holdings may be
adversely affected by U.S. or foreign government
action.
- International trade barriers or economic sanctions
against certain non-U.S. countries may adversely
affect the Portfolio's non-U.S. holdings.
- The Portfolio may be able to invest in certain small
non-U.S. markets only by investing in another fund
that in turn invests in those markets. It may
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cost the Portfolio more to buy shares of these funds
than it would to buy the non-U.S. securities
directly.
- Non-U.S. markets have different clearance and
settlement procedures, and in certain markets
settlements may be unable to keep pace with the
volume of securities transactions which may cause
delays. This means that the Portfolio's assets may
be uninvested and not earning returns. The Portfolio
may miss investment opportunities or be unable to
dispose of a security because of these delays.
Derivatives.
The Portfolio may also use instruments referred to as "Derivatives."
Derivatives are financial instruments whose value is derived from
another security, a commodity (such as gold or oil) or an index (a
measure of value or rates, such as the S&P 500 or the prime lending
rate). Derivatives can allow the Portfolio to increase or decrease
its level of risk exposure more quickly and efficiently than
transactions in other types of instruments. Derivatives, however, are
volatile and involve significant risks, including many of the risks
described above. Derivatives may not always be available or cost
efficient. If the Portfolio invests in derivatives, the investments
may not be effective as a hedge against price movements and can limit
potential for growth in the value of an interest in the Portfolio.
Other risks include:
- Credit risk -- the risk that the counterparty on a
derivative transaction will be unable to honor its
financial obligation to the Portfolio.
- Currency risk -- the risk that changes in the
exchange rate between two currencies will adversely
affect the value (in U.S. dollar terms) of an
investment.
- Leverage risk -- the risk associated with certain
types of investments or trading strategies 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.
- Liquidity risk -- the risk that certain securities
may be difficult or impossible to sell at the time
that the seller would like or at the price that the
seller believes the security is currently worth.
- Index risk -- If the derivative is linked to the
performance of an index, it will be subject to the
risks associated with changes in that index. If the
index changes, the Portfolio could receive lower
interest payments or
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experience a reduction in the value of the derivative
to below what the Portfolio paid. Certain indexed
securities, including inverse securities (which move
in an opposite direction to the index), may create
leverage, to the extent that they increase or
decrease in value at a rate that is a multiple of the
changes in the applicable index.
The Portfolio may use the following types of derivative instruments:
futures, forwards, options, asset-backed securities, stripped
securities, indexed and inverse securities and swaps.
Borrowing and Leverage.
The Portfolio may borrow for temporary emergency purposes, including
to meet redemptions. Borrowing may exaggerate changes in the net
asset value of the Portfolio's interests and the yield on the
Portfolio's investments. Borrowing will cost the Portfolio interest
expense and other fees. These costs may reduce the Portfolio's
return.
Certain securities that the Portfolio buys may create leverage,
including, for example, derivative securities. Like borrowing, these
investments may increase the Portfolio's exposure to risk.
Convertible Securities.
Convertible securities, including bonds and preferred stock, are
convertible into common stock. As a result of the conversion feature,
the interest or dividend rate on a convertible security is generally
less than would be the case if the security were not convertible. The
value of a convertible security will be affected both by its stated
interest or dividend rate and the value of the underlying common
stock. Therefore, its value will be affected by the factors that
affect both debt securities (such as interest rates) and equity
securities (such as stock market movements generally). Some
convertible securities might require the Portfolio to sell the
securities back to the issuer or a third party at a time that is
disadvantageous to the Portfolio.
ITEM 6. - MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE.
INVESTMENT ADVISER.
Mercury Asset Management International Ltd. manages the Portfolio's
investments under the overall supervision of the Board of Trustees of the
Mercury Asset Management Master Trust. The investment adviser and its
affiliates have the responsibility for making all investment decisions for the
Portfolio.
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Mercury and its affiliates manage portfolios with over $515 billion in
assets (as of March 1999) for individuals and institutions seeking investments
worldwide. This amount includes assets managed for its affiliates. The
advisory agreement between the Trust on behalf of the Portfolio and the
investment adviser gives the investment adviser the responsibility for making
all investment decisions.
The investment adviser is paid at the rate of 0.60% of the Portfolio's
average daily net assets.
Fund Asset Management, L.P., an affiliate of Mercury, may manage all
or a portion of the Portfolio's daily cash assets, to the extent not managed by
Mercury. The Portfolio does not pay any incremental fee for this service,
although Mercury may make payments to Fund Asset Management, L.P.
The equity portion of the Portfolio's portfolio is managed by
Mercury's Global Equity Team, all of whose members participate in the team's
research process and stock selection. The senior investment professionals in
this group, which has managed the equity portion of the Portfolio's portfolio
since the Portfolio started operations, include:
Gary Lowe, Director of Mercury Asset Management, has been employed as
an investment professional by the investment adviser or its Mercury
affiliates since 1992. Mr. Lowe, head of the Global Equity Team, is
primarily responsible for the day-to-day management of the equity
portion of the Portfolio's portfolio. With guidance from Mercury's
Central Strategy Group (of which he is also a member), Mr. Lowe is also
responsible for determining the allocation of the Portfolio's assets
between equity securities and bonds.
Claus Anthon, Director of Mercury Asset Management, has been employed
as an investment professional by the investment adviser or its Mercury
affiliates since 1982.
Charles Prideaux, Director of Mercury Asset Management, has been
employed as an investment professional by the investment adviser or its
Mercury affiliates since 1988.
Manraj Sekhon has been employed as an investment professional by the
investment adviser or its Mercury affiliates since 1994.
Archie Struthers has been employed as an investment professional by
the investment adviser or its Mercury affiliates since 1995. Mr.
Struthers attended Edinburgh University from 1991 until 1995.
The bond portion of the Portfolio's portfolio is managed by Mercury's
Global Fixed-Income Team, all of whose members participate in the
team's research process and bond selection. The senior investment
professionals in this group, which has managed the bond portion of the
Portfolio's portfolio since the Portfolio started operations, include:
Sarah Jane Cawthray, Director of Mercury Asset Management, has been
employed as an investment professional by the investment adviser or
its Mercury affiliates since 1985.
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Ms. Cawthray is primarily responsible for the day-to-day management of
the bond portion of the Portfolio's portfolio.
Peter Geikie-Cobb, Director of Mercury Asset Management, has been
employed as an investment professional by the investment adviser or
its Mercury affiliates since 1992.
Neil Lupton, Director of Mercury Asset Management, has been employed
as an investment professional by the investment adviser or its Mercury
affiliates since 1990.
Roderick Paris, Director of Mercury Asset Management, has been
employed as an investment professional by the investment adviser or
its Mercury affiliates since 1984.
Stephen Yardley, Director of Mercury Asset Management, has been
employed as an investment professional by the investment adviser or
its affiliates since 1992.
CAPITAL STOCK.
Investors in the Trust have no preemptive or conversion rights and
beneficial interests in the Trust are fully paid and non-assessable. The Trust
has no current intention to hold annual meetings of investors, except to the
extent required by the Investment Company Act, but will hold special meetings
of investors, when in the judgment of the Trustees, it is necessary or
desirable to submit matters for an investor vote. Upon liquidation of the
Trust or the Portfolio, investors would be entitled to share, in proportion to
their investment in the Trust or the Portfolio (as the case may be), in the
assets of the Trust or the Portfolio available for distribution to investors.
The Trust is organized as a Delaware business trust and currently
consists of seven Portfolios. Each investor is entitled to a vote in proportion
to its investment in the Trust or the Portfolio (as the case may be).
Investors in the Portfolio will participate equally in accordance with their
pro rata interests in the earnings, dividends and assets of the Portfolio. The
Trust reserves the right to create and issue interests in additional
Portfolios.
Investments in the Trust may not be transferred, but an investor may
withdraw all or any portion of its investment in the Portfolio at net asset
value on any day on which the New York Stock Exchange is open.
ITEM 7. - SHAREHOLDER INFORMATION.
PRICING.
The Portfolio calculates its net asset value (generally by using
market quotations) each day the New York Stock Exchange is open ("Pricing
Day"), fifteen minutes after the close of business on the Exchange (the New
York Stock Exchange generally closes at 4:00 p.m. Eastern
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time). The net asset value used in determining the price of an interest in the
Portfolio is the one calculated after the purchase or redemption order is
received. The net asset value is determined by deducting the amount of the
Portfolio's total liabilities from the value of its total assets. Net asset
value is generally calculated by valuing each security at its closing price for
the day. Many of the Portfolio's investments are traded on non-U.S. securities
exchanges that close many hours before the New York Stock Exchange. Events
that could affect securities prices that occur between these times normally are
not reflected in the Portfolio's net asset value. Non-U.S. securities
sometimes trade on days that the New York Stock Exchange is closed. As a
result, the Portfolio's net asset value may change on days when an investor
will not be able to purchase or redeem the Portfolio's interests. Securities
and assets for which market quotations are not readily available are generally
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees.
Each investor in the Trust may add to or reduce its investment in the
Portfolio on each Pricing Day. The value of each investor's beneficial
interest in the Portfolio will be determined by multiplying the net asset value
of the Portfolio by the percentage, effective for that day, that represents
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or withdrawals, which are to be effected on that day, will then
be effected. The investor's percentage of the aggregate beneficial interests in
the Portfolio will then be re-computed as the percentage equal to the fraction
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of the time of determination on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of such time on such
day plus or minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in the Portfolio by all investors in
the Portfolio. The percentage so determined will then be applied to determine
the value of the investor's interest in the Portfolio as of 15 minutes after
the close of business of the New York Stock Exchange on the next Pricing Day of
the Portfolio.
PURCHASE OF SECURITIES.
Beneficial interests in the Trust are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio of the
Trust may only be made by a limited number of institutional investors including
investment companies, common or commingled trust funds, group trusts, and
certain other "accredited investors" within the meaning of Regulation D under
the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably consistent with its investment objectives and policies in order
to enhance the yield on its assets, investments must
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be made in federal funds (i.e., monies credited to the account of the
Portfolio's custodian bank by a Federal Reserve Bank).
The Portfolio reserves the right to cease accepting investments at any
time or to reject any investment order.
REDEMPTION.
An investor in the Trust may withdraw all or a portion of its
investment in the Portfolio on any Pricing Day at the net asset value next
determined after a withdrawal request in proper form is furnished by the
investor to the Portfolio. The proceeds of the withdrawal will be paid by the
Portfolio normally on the business day on which the withdrawal is effected, but
in any event within seven days. Investments in the Portfolio of the Trust may
not be transferred.
TAX CONSEQUENCES.
Under the anticipated method of operation of the Portfolio, the
Portfolio will be treated as a separate partnership for tax purposes and, thus,
will not be subject to any income tax. Based upon the status of the Portfolio
as a partnership, each investor in the Portfolio will be taxable on its share
(as determined in accordance with the governing instruments of the Portfolio)
of such Portfolio's ordinary income and capital gain in determining its income
tax liability. The determination of such share will be made in accordance with
the Internal Revenue Code of 1986, as amended (the "Code") and Treasury
Regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code assuming that the investor
invested all of its assets in the Portfolio.
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 Portfolio could be
adversely affected if the computer systems used by Portfolio management or
other service providers do not properly address this problem before January 1,
2000. Portfolio management expects to have addressed this problem before then,
and does not anticipate that the services it provides will be adversely
affected. The Portfolio's other service providers have told Fund Asset
Management, L.P. that they also expect to resolve the Year 2000 Problem, and
Fund Asset Management, L.P. will continue to monitor the situation as the Year
2000 approaches. However, if the problem has not been fully addressed, the
Portfolio could be negatively affected. The Year 2000 Problem could also have
a negative impact on the companies in which the Portfolio invests. This
negative impact may be greater for companies in foreign markets, since they may
be less prepared for the Year 2000 Problem than
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domestic companies and markets. If the companies in which the Portfolio
invests have Year 2000 Problems, the Portfolio's returns could be adversely
affected.
ITEM 8. - DISTRIBUTION ARRANGEMENTS.
Investments in the Portfolio will be made without a sales load. All
investments are made at net asset value next determined after an order is
received by the Portfolio. The net asset value of the Portfolio is determined
on each Pricing Day.
The Trust's placement agent is Mercury Funds Distributor, a division
of Princeton Funds Distributor, Inc.
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Mercury Master Global Balanced Portfolio
PART B
Except as otherwise indicated herein, all capitalized terms shall have
the meaning assigned to them in Part A hereof.
ITEM 10.
Mercury Master Global Balanced Portfolio (the "Portfolio") is a series
of Mercury Asset Management Master Trust (the "Trust"). This Statement of
Additional Information is not a prospectus and should be read in conjunction
with the Prospectus of the Portfolio, dated April 27, 1999 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
and can be obtained, without charge, by calling the Trust at 1-888-763-2260, or
by writing to Mercury Asset Management Master Trust, P.O. Box 9011, Princeton,
New Jersey 08543-9011. The Prospectus is incorporated by reference into this
Statement of Additional Information, and this Statement of Additional
Information has been incorporated by reference into the Prospectus.
The date of this Statement of Addition Information is April 27, 1999.
<PAGE> 18
<TABLE>
<CAPTION>
TABLE OF CONTENTS.
Page
<S> <C>
Trust History . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Description of the Portfolio and Its Investments and Risks . . . 3
Management of the Registrant . . . . . . . . . . . . . . . . . . 18
Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Investment Advisory And Other Services . . . . . . . . . . . . . 21
Brokerage Allocation and Other Practices . . . . . . . . . . . . 23
Capital Stock and Other Securities . . . . . . . . . . . . . . . 24
Purchase, Redemption and Pricing of Securities . . . . . . . . . 25
Taxation of the Trust . . . . . . . . . . . . . . . . . . . . . . 27
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Calculation of Performance Data . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
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<PAGE> 19
ITEM 11. - TRUST HISTORY.
The Trust is a Delaware business trust organized on April 23, 1998.
The Trust consists of seven series, one of which is the Portfolio.
ITEM 12. - DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.
The Portfolio's investment objective is a combination of long-term
capital growth and current income. This is a fundamental policy and cannot be
changed without shareholder approval. The Portfolio tries to achieve its goal
by investing in a mix of stocks and high quality bonds of issuers located in
the U.S. and other developed countries. The Portfolio's neutral position
consists of approximately 60% of its portfolio in stocks and 40% in bonds,
although the Portfolio may vary each of these percentages up to 15% in either
direction based on its view of current economic and market conditions.
The Portfolio is a diversified, open-end, management investment
company. The investment objective and policies are described in more detail in
Part A. There can be no guarantee that the Portfolio's investment objective
will be achieved.
The equity portion of the Portfolio's portfolio will invest only in
companies located in countries that comprise the MSCI World Index. As of the
date of this Part B, the countries that comprise the Index are Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United
States. The bond portion will invest only in securities of governmental or
private issuers located in countries that comprise the Salomon Smith Barney
World Government Bond Index. As of the date of this Part B, the countries that
comprise the Index are Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain,
Sweden, Switzerland, the United Kingdom and the United States. The composition
of both indices is subject to change.
For purposes of the Portfolio's policy to invest in the U.S. and other
developed countries, an issuer ordinarily will be considered to be located in
the country under the laws of which it is organized or where the primary
trading market of its securities is located. The Portfolio, however, may
consider a company to be located in a country, without reference to its
domicile or to the primary trading market of its securities, when at least 50%
of its non-current assets, capitalization, gross revenues or profits in any one
of the two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such country. The Portfolio also
may consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
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While it is the policy of the Portfolio generally not to engage in
trading for short-term gains, Mercury Asset Management International Ltd.
("Mercury International" or the "Investment Adviser") will effect portfolio
transactions without regard to a holding period if, in its judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or in general market,
economic or financial conditions.
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on non-U.S. investments by U.S.
investors such as the Portfolio. If such restrictions should be reinstated, it
might become necessary for the Portfolio to invest all or substantially all of
its assets in U.S. securities. In such event, the Portfolio would review its
investment objective or fundamental policies to determine whether changes are
appropriate. Any changes in the investment objective or fundamental policies
set forth under "Investment Restrictions" below would require the approval of
the holders of a majority of the Portfolio's outstanding voting securities.
The Portfolio's ability and decisions to purchase or sell portfolio
securities may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Under present conditions, the
Investment Adviser does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no
assurance in this regard.
The Portfolio may invest in the securities of non-U.S. issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") or other securities convertible
into securities of non-U.S. issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. However, they would generally be subject to the same risks as the
securities into which they may be converted (as more fully described in Part A
and below). ADRs are receipts typically issued by a U.S. bank or trust company
that evidence ownership of underlying securities issued by a non-U.S.
corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. GDRs are receipts issued throughout the world that
evidence a similar ownership arrangement. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets, and EDRs, in bearer form,
are designed for use in European securities markets. GDRs are tradeable both
in the United States and Europe and are designed for use throughout the world.
The Portfolio may invest in unsponsored ADRs, EDRs and GDRs. The issuers of
unsponsored ADRs, EDRs and GDRs are not obligated to disclose material
information in the United States, and therefore, there may be no correlation
between such information and the market value of such securities.
The Portfolio's investment objective and policies are described in
Part A. Certain types of securities in which the Portfolio may invest and
certain investment practices that the Portfolio may employ are discussed more
fully below.
International Investing. International investments involve certain
risks not typically involved in domestic investments, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of
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<PAGE> 21
exchange controls or other U.S. or non-U.S. governmental laws or restrictions
applicable to such investments. Securities prices in different countries are
subject to different economic, financial and social factors. Because the
Portfolio will invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates may affect the
value of securities in the portfolio and the unrealized appreciation or
depreciation of investments insofar as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand in the
foreign exchange markets. These forces are, in turn, affected by international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. With respect to certain
countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments that could affect investments in those countries.
In addition, certain non-U.S. investments may be subject to non-U.S.
withholding taxes. As a result, management of the Portfolio may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country.
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 l, 1999 and has replaced the existing national
currencies of all EMU participants. The use of notes and coins of the relevant
national currencies will be phased out by July 1, 2002. Upon implementation of
EMU, certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and thereafter,
will be listed, traded, and make dividend and other payments only in euros.
No assurance can be given that the EMU will proceed as planned, that
the changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or completely unwound. Because any participating country may
opt out of EMU within the first three years, it is also possible that a
significant participant could choose to abandon EMU, which would diminish its
credibility and influence. Any of these occurrences could have adverse effects
on the markets of both participating and non-participating countries, including
sharp appreciation or depreciation of the participants' national currencies and
a significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of
EMU. Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact
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<PAGE> 22
on the Portfolio's investments in Europe generally or in specific countries
participating in EMU. Gains or losses resulting from the euro conversion may
be taxable to the Portfolio's interestholders under foreign or, in certain
limited circumstances, U.S. tax laws.
Many of the securities held by the Portfolio will not be
registered in the U.S. with the Securities and Exchange Commission nor will the
issuers thereof be subject to the Commission's reporting requirements.
Accordingly, there may be less publicly available information about a non-U.S.
company than about a U.S. company, and non-U.S. companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject.
Non-U.S. financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many non-U.S. companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The non-U.S. markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Portfolio incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement could
result in temporary periods when assets of the Portfolio are uninvested and no
return is earned thereon and could cause the Portfolio to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems either could result in losses to the Portfolio due to
subsequent declines in value of the portfolio security or, if the Portfolio has
entered into a contract to sell the security, could result in possible
liability to the purchaser. Brokerage commissions and other transaction costs
on non-U.S. securities exchanges are generally higher than in the United
States. In some non-U.S. countries there is less governmental supervision and
regulation of exchanges, brokers and issuers than there is in the United
States.
A number of non-U.S. countries have authorized the formation of
closed-end investment companies to facilitate indirect foreign investment in
their capital markets. In accordance with the Investment Company Act of 1940,
as amended (the "Investment Company Act"), the Portfolio may invest up to 10%
of its total assets in securities of closed-end investment companies, not more
than 5% of which may be invested in any one such company. This restriction on
investments in securities of closed-end investment companies may limit
opportunities for the Portfolio to invest indirectly in certain smaller capital
markets. Shares of certain closed-end investment companies may at times be
acquired only at market prices representing premiums to their net asset values.
If the Portfolio acquires shares in closed-end investment companies,
interestholders would bear both their proportionate share of expenses in the
Portfolio (including investment advisory fees) and, indirectly, the expenses of
such closed-end investment companies. The Portfolio also may seek, at its own
cost, to create their own investment entities under the laws of certain
countries.
In some countries, banks or other financial institutions may
constitute a substantial number of the leading companies or companies with the
most actively-traded securities. The Investment Company Act limits the
Portfolio's ability to invest in any equity security of an issuer that, in its
most recent fiscal year,
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<PAGE> 23
derived more than 15% of its revenues from "securities related activities" as
defined by the rules thereunder. These provisions may restrict the Portfolio's
investments in certain foreign banks and other financial institutions.
As described above, the Portfolio may invest outside the U.S. The
securities markets of many countries have at times in the past moved relatively
independently of one another due to different economic, financial, political
and social factors. When such lack of correlation or negative correlation in
movements of these securities markets occurs, it may reduce risk for the
Portfolio's portfolio as a whole. This negative correlation also may offset
unrealized gains the Portfolio has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be
offset by changes in foreign currency exchange rates, where the different
markets are denominated in different currencies. Exchange rates frequently
move independently of securities markets in a particular country. As a result,
gains in a particular securities or commodities market may be affected by
changes in exchange rates.
Debt Securities. The Portfolio may hold convertible and
non-convertible debt securities, and preferred securities. The Portfolio may
hold debt securities in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by entities,
such as the World Bank, constituted by the governments of several countries to
promote economic development), asset-backed securities, including
mortgage-backed securities, and stripped securities. These debt securities may
have any maturity. The Portfolio limits its investments to bonds rated at
least A by Moody's Investors Services, Inc., Standard & Poor's and/or Fitch
IBCA, Inc. or if unrated, considered by Portfolio management to be of
comparable quality. Of these, at least 80% will be rated AA/Aa or higher, or
if unrated, considered by Portfolio management to be of comparable quality.
The Investment Adviser considers ratings as one of several factors in its
independent credit analysis of issuers.
Debt securities are subject to interest rate and credit risk.
Interest rate risk is the risk that when interests rates go up, the value of
debt instruments generally goes down. In general, the market price of debt
securities with longer maturities will go up or down more in response to
changes in interest rates than shorter term securities. Credit risk is the
risk that the issuer will be unable to pay the interest or principal when due.
The degree of credit risk depends on both the financial condition of the issuer
and the terms of the obligation.
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
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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 non-convertible form.
In analyzing convertible securities, the Investment Adviser will
consider both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible
securities held by the Portfolio are denominated in U. S. dollars, the
underlying equity securities may be quoted in the currency of the country where
the issuer is domiciled. With respect to a convertible security denominated in
a currency different from that of the underlying equity security, 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 consideration, the value of a convertible security
is influenced by both the yield of non-convertible 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
Portfolio is called for redemption, the Portfolio 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.
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<PAGE> 25
Sovereign Debt. The Portfolio may invest a significant portion of its
assets in debt obligations ("sovereign debt") issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) of
developed countries or their agencies and instrumentalities ("governmental
entities"). Investment in sovereign debt may involve a high degree of risk
that the governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject. In
certain countries, governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on
the part of these governments, agencies and others to make such disbursements
may be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the Portfolio, may be requested
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign
debt on which a governmental entity has defaulted may be collected in whole or
in part.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and
other "full faith and credit" obligations of the U.S. Government. The
Portfolio may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. "Agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. U.S. Government agencies may include the
Federal Farm Credit Bank and the Government National Mortgage Association.
"Agency" obligations are not explicitly guaranteed by the U.S. Government and
so are perceived as somewhat riskier than comparable Treasury bonds.
Asset-Backed Securities. Asset-backed securities are "pass-through"
securities, meaning that principal and interest payments made by the borrower
on the underlying assets (such as credit card receivables) are passed through
to the Portfolio. The value of the asset-backed securities, like that of
traditional fixed-income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, asset-backed securities
differ from traditional fixed-income securities because of their potential for
prepayment. The price paid by the Portfolio for its asset-backed securities,
the yield the Portfolio expects to receive from such securities and the average
life of the securities are based on a number of factors, including the
anticipated rate of prepayment of the underlying assets. In a period of
declining interest rates, borrowers may prepay the underlying assets more
quickly than anticipated, thereby reducing the yield to maturity and the
average life of the asset-backed securities. Moreover, when the Portfolio
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<PAGE> 26
reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was
prepaid. To the extent that the Portfolio purchases asset-backed securities at
a premium, prepayments may result in a loss to the extent of the premium paid.
If the Portfolio buys such securities at a discount, both scheduled payments
and unscheduled prepayments will increase current and total returns and will
accelerate the recognition of income which, when distributed to
interestholders, will be taxable as ordinary income. In a period of rising
interest rates, prepayments of the underlying assets may occur at a slower than
expected rate, creating maturity extension risk. This particular risk may
effectively change a security that was considered short or intermediate-term at
the time of purchase into a long-term security. Since long-term securities
generally fluctuate more widely in response to changes in interest rates than
shorter-term securities, maturity extension risk could increase the inherent
volatility of the Portfolio. See "Debt Securities" above and "Illiquid
Securities" below.
Stripped Securities. The Portfolio may also invest in stripped
securities. Stripped securities are created when the issuer separates the
interest and principal components of an instrument and sells them as separate
securities. In general, one security is entitled to receive the interest
payments on the underlying assets (the interest only or "IO" security) and the
other to receive the principal payments (the principal only or "PO" security).
Some securities may receive a combination of interest and principal payments.
The yields to maturity on IOs and POs are sensitive to the expected or
anticipated rate of principal payments (including prepayments) on the related
underlying assets, and principal payments may have a material effect on yield
to maturity. If the underlying assets experience greater than anticipated
prepayments of principal, the Portfolio may not fully recoup its initial
investment in IOs. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be adversely
affected. Stripped securities may be highly sensitive to changes in interest
rates and rates of prepayment.
Mortgage-Backed Securities. Mortgage-backed securities are
"pass-through" securities, meaning that principal and interest payments made by
the borrower on the underlying mortgages are passed through to the Portfolio.
The value of mortgage-backed securities, like that of traditional debt
securities, typically increases when interest rates fall and decreases when
interest rates rise. However, mortgage-backed securities differ from
traditional debt securities because of their potential for prepayment without
penalty. The price paid by the Portfolio for its mortgage-backed securities,
the yield the Portfolio expects to receive from such securities and the average
life of the securities are based on a number of factors, including the
anticipated rate of prepayment of the underlying mortgages. In a period of
declining interest rates, borrowers may prepay the underlying mortgages more
quickly than anticipated, thereby reducing the yield to maturity and the
average life of the mortgage-backed securities. Moreover, when the Portfolio
reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was
prepaid. To the extent that the Portfolio purchases mortgage-backed securities
at a premium, mortgage foreclosures and principal prepayments may result in a
loss to the extent of the premium paid. If the Portfolio buys such securities
at a discount, both scheduled payments of principal and unscheduled prepayments
will increase current and total returns and will accelerate the recognition of
income which, when distributed to interestholders will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
mortgages may occur at a slower than expected rate, resulting in maturity
extension. This particular risk may effectively change a security that was
considered short or intermediate-term at the time of purchase into a long-term
security. Since long-
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<PAGE> 27
term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility to the Portfolio. Stripped mortgage-backed
securities may be highly volatile and highly sensitive to changes in prepayment
and interest rates. See "Debt Securities" above and "Illiquid Securities"
below.
Borrowing and Leverage. The Portfolio 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), and may borrow up to an additional 5%
of its total assets for temporary purposes. The Portfolio may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities and may purchase securities on margin to the extent
permitted by applicable law, and may use borrowing to enable it to meet
redemptions.
The use of leverage by the Portfolio 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 Portfolio
interests and in the yield on the Portfolio's portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change
in value during the time the borrowings are outstanding. Borrowings will
create interest expenses for the Portfolio which can exceed the income from the
assets purchased with the borrowings. To the extent the income or capital
appreciation derived from securities purchased with borrowed funds exceeds the
interest the Portfolio will have to pay on the borrowings, the Portfolio'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 Portfolio 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 Portfolio's
leveraged position if it expects that the benefits to the Portfolio's
interestholders of maintaining the leveraged position will outweigh the current
reduced return.
Illiquid or Restricted Securities. The Portfolio may invest up to 15%
of its net assets in securities that lack an established secondary trading
market or otherwise are considered illiquid. Liquidity of a security relates
to the ability to dispose easily of the security and the price to be obtained
upon disposition of the security, which may be less than would be obtained for
a comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Portfolio's assets
in illiquid securities may restrict the ability of the Portfolio 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 Portfolio's operations require
cash, such as when the Portfolio redeems shares or pays dividends, and could
result in the Portfolio borrowing to meet short-term cash requirements or
incurring capital losses on the sale of illiquid investments.
The Portfolio may invest in securities that are "restricted
securities." Restricted securities have contractual or legal restrictions on
their resale and include "private placement" securities that the Portfolio may
buy directly from the issuer. Restricted securities may be neither listed on
an exchange nor traded in other established markets. Privately placed
securities may or 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
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<PAGE> 28
public trading market, privately placed securities may be more difficult to
value than publicly traded securities and may be less liquid, or illiquid, and
therefore may be subject to the risks associated with illiquid securities as
described in the preceding paragraph. Some restricted securities however, may
be liquid. 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 Portfolio are required to be registered
under the securities laws of one or more jurisdictions before being resold, the
Portfolio may be required to bear the expenses of registration. Certain of the
Portfolio'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 Portfolio may obtain access to
material nonpublic information which may restrict the Portfolio's ability to
conduct portfolio transactions in such securities.
Other Special Considerations. The Portfolio may invest without limit
in short-term investments, high quality bonds or derivatives, to reduce
exposure to equity securities and longer term bonds when the Portfolio believes
it is advisable to do so (on a temporary defensive basis). Short-term
investments and temporary defensive positions may limit the potential for
growth in the value of the interests of a Portfolio and may reduce the level of
current income.
Securities Lending. The Portfolio may lend securities with a value
not exceeding 33 1/3% of its total assets. In return, the Portfolio receives
collateral in an amount equal to at least 100% of the current market value of
the loaned securities in cash or securities issued or guaranteed by the U.S.
Government. If cash collateral is received by the Portfolio, it is invested in
short-term money market securities, and a portion of the yield received in
respect of such investment is retained by the Portfolio. Alternatively, if
securities are delivered to the Portfolio as collateral, the Portfolio and the
borrower negotiate a rate for the loan premium to be received by the Portfolio
for lending its portfolio securities. In either event, the total yield on the
Portfolio's portfolio is increased by loans of its portfolio securities. The
Portfolio 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 Portfolio 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 Portfolio could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Repurchase Agreements. The Portfolio may invest in securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the bank
or primary dealer or an affiliate thereof agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This insulates
the Portfolio from fluctuations in the market value of the underlying security
during such period, although, to the extent the repurchase agreement is not
denominated in U.S. dollars, the Portfolio's return may be affected by currency
fluctuations. The Portfolio may not invest more than 15% of its total
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<PAGE> 29
assets in repurchase agreements maturing in more than seven days (together with
other illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. The Portfolio 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 Portfolio
but only constitute collateral for the seller's obligation to pay the
repurchase pace. Therefore, the Portfolio 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 Portfolio shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Portfolio 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.
Warrants. The Portfolio may invest in warrants, which are securities
permitting, but not obligating, the warrant holder to subscribe for other
securities. Buying a warrant does not make the Portfolio a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason an investment in warrants may be more speculative than
other equity-based investments.
When-lssued Securities and Forward Commitments. The Portfolio may
purchase or sell securities that they are entitled to receive on a when-issued
basis. The Portfolio may also purchase or sell securities through a forward
commitment. These transactions involve the purchase or sale of securities by
the Portfolio at an established price with payment and delivery taking place in
the future. The Portfolio enters into these transactions to obtain what is
considered an advantageous price to the Portfolio at the time of entering into
the transaction. The Portfolio has not established any limit on the percentage
of its assets that may be committed in connection with these transactions.
When the Portfolio is purchasing securities in these transactions, the
Portfolio maintains a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other 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 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 Portfolio's purchase price. The
Portfolio 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.
Standby Commitment Agreements. The Portfolio may enter into standby
commitment agreements. These agreements commit the Portfolio, for a stated
period of time, to purchase a stated amount of securities which may be issued
and sold to the Portfolio 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 Portfolio is paid a commitment fee, regardless of whether or
not the security is ultimately issued. The Portfolio will enter into such
agreements for the purpose of investing in the security underlying the
commitment at a price that is
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<PAGE> 30
considered advantageous to the Portfolio. The Portfolio will not enter into a
standby commitment with a remaining term in excess of 45 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 Portfolio 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
Portfolio 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 Portfolio'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.
Foreign Exchange Transactions. The Portfolio may engage in spot and
forward foreign exchange transactions and currency swaps, purchase and sell
options on currencies and purchase and sell currency futures and related
options thereon (collectively, "Currency Instruments") for purposes of hedging
against fluctuations in the value of currencies in which its bond holdings are
denominated against the U.S. dollar. The Portfolio is not required to use
hedging transactions and may not do so.
Forward foreign exchange transactions are over the counter ("OTC")
contracts to purchase or sell a specified amount of a specified currency or
multinational currency unit at a price and future date set at the time of the
contract. Spot foreign exchange transactions are similar but require current,
rather than future, settlement. The Portfolio will enter into foreign exchange
transactions only for purposes of hedging either a specific transaction by, for
example, purchasing a currency needed to settle a security transaction at a
future date or selling a currency in which the Portfolio has received or
anticipates receiving a dividend or distribution. The Portfolio 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 Portfolio is
denominated or by purchasing a currency in which the Portfolio anticipates
acquiring a portfolio position in the near future. The Portfolio may also
hedge portfolio positions through currency swaps, which are transactions in
which one currency is simultaneously bought for a second currency on a spot
basis and sold for the second currency on a forward basis.
The Portfolio may also hedge against the decline in the value of a
currency against the U.S. dollar through the 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"
in Appendix A.
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<PAGE> 31
The Portfolio may also hedge against the decline in the value of a
currency against the U.S. dollar through the use of currency options. Currency
options are similar to options on securities, but in consideration for an
option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency.
The Portfolio may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). The Portfolio will only enter into a
cross-hedge if the Investment Adviser believes that (i) there is a demonstrably
high correlation between the currency in which the cross-hedge is denominated
and the currency being hedged, and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly more
cost-effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.
The Portfolio will not speculate in Currency Instruments.
Accordingly, the Portfolio will not hedge a currency in excess of the aggregate
market value of the securities that it owns (including receivables for
unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency.
Risk Factors in Hedging Foreign Currency Risks. While the Portfolio's
use of Currency Instruments to effect hedging strategies is intended to reduce
the volatility of the net asset value of the Portfolio's shares, the net asset
value of the Portfolio'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 may not be accurately predicted and the
Portfolio's hedging strategies may be ineffective. To the extent that the
Portfolio hedges against anticipated currency movements that do not occur, the
Portfolio may realize losses, and decrease its total return, as the result of
its hedging transactions. Furthermore, the Portfolio 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 Portfolio 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 Portfolio 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 or in which their availability is limited such as certain
emerging markets and it is not possible to engage in effective foreign currency
hedging.
For a discussion of the Portfolio's policies with respect to, and the
risks associated with, investments in indexed and inverse securities, options,
futures and swaps, please see Appendix A.
INVESTMENT RESTRICTIONS.
The Trust has adopted the following restrictions and policies relating
to the investment of the Portfolio's assets and its activities. The
fundamental restrictions set forth below may not be changed with
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<PAGE> 32
respect to the Portfolio without the approval of the holders of a majority of
the Portfolio's outstanding voting securities (which for this purpose and under
the Investment Company Act means the lesser of (i) 67% of the interests
represented at a meeting at which more than 50% of the outstanding interests
are represented or (ii) more than 50% of the outstanding interests). The
Portfolio may not:
1. Make any investment inconsistent with the Portfolio'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 issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management. Investments by the Portfolio in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Portfolio 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
governmental 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 Portfolio 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 Portfolio's Registration Statement, as
it 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 Portfolio 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 Portfolio may borrow
up to an additional 5% of its total assets for temporary purposes, (iii) the
Portfolio may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Portfolio
may purchase securities on margin to the extent permitted by applicable law.
The Portfolio may not pledge its assets other than to secure such borrowings
or, to the extent permitted by the Portfolio's investment policies as set forth
in its Registration Statement, as it 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
Portfolio technically may be deemed an underwriter under the Securities Act of
1933, as amended (the "Securities Act"), in selling portfolio securities.
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9. Purchase or sell commodities or contracts on commodities,
except to the extent that the Portfolio may do so in accordance with applicable
law and the Portfolio's Registration Statement, as it may be amended from time
to time, and without registering as a commodity pool operator under the
Commodity Exchange Act.
In addition, the Trust has adopted non-fundamental restrictions that
may be changed by the Board of Trustees without interestholder approval. Under
the non-fundamental investment restrictions, the Portfolio may not:
(a) Purchase securities of other investment companies, except to
the extent such purchases are permitted by applicable law. As a matter of
policy, however, the Portfolio 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 Portfolio's shares are owned by another
investment company that is part of the same group of investment companies as
the Portfolio.
(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Portfolio 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 net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Trustees of the Trust have otherwise determined to be
liquid pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act (which are restricted securities that can be
resold to qualified institutional buyers, but not to the general public) and
determined to be liquid by the Trustees are not subject to the limitations set
forth in this investment restriction.
If a percentage restriction on the investment or use of assets set
forth above is adhered to at the time a transaction is effected, later changes
in percentages resulting from changing values will not be considered a
violation.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Trust has adopted an investment policy pursuant to
which the Portfolio will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding that are held by the
Portfolio, the market value of the underlying securities covered by OTC call
options currently outstanding that were sold by the Portfolio and margin
deposits on the Portfolio's existing OTC options on futures contracts exceeds
15% of the net assets of the Portfolio taken at market value, together with all
other assets of the Portfolio that are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by the Portfolio to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Portfolio has the unconditional contractual
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<PAGE> 34
right to repurchase such OTC option from the dealer at a predetermined price,
then the Portfolio will treat as illiquid such amount of the underlying
securities as is equal to the repurchase price less the amount by which the
option is "in-the-money" (i.e., current market value of the underlying
securities minus the option's strike price). The repurchase price with the
primary dealers is typically a formula price that 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 Portfolio and may be amended by the Trustees without the approval
of the interestholders. However, the Trustees will not change or modify this
policy prior to the change or modification by the Commission staff of its
position.
Portfolio securities of the Portfolio 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.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser and Fund Asset
Management, L.P. ("FAM"), the Portfolio is prohibited from engaging in certain
transactions involving Merrill Lynch, the Investment Adviser, or any of 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." Rule 10f-3 under the Investment Company
Act sets forth conditions under which a Portfolio may purchase from an
underwriting syndicate of which Merrill Lynch is a member.
ITEM 13. - MANAGEMENT OF THE REGISTRANT.
TRUSTEES AND OFFICERS.
The Trustees of the Trust consist of six individuals, four of whom are
not "interested persons" of the Trust as defined in the Investment Company Act.
The Trustees are responsible for the overall supervision of the operations of
the Trust and perform the various duties imposed on the trustees of investment
companies by the Investment Company Act. Information about the Trustees and
executive officers of the Trust, their ages and their principal occupations for
at least the last five years are set forth below. Unless otherwise noted, the
address of each executive officer and Trustee is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
Jeffrey M. Peek (52)--Trustee and President(1)(2)--President of MLAM
and FAM since 1997; President and Director of Princeton Services, Inc. since
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1997; Co-Head of Merrill Lynch Investment Banking Division from March 1997 to
December 1997; Director of Merrill Lynch Global Securities Research and
Economics Division from 1995 to 1997; Head of Merrill Lynch Global Industries
Group from 1993 to 1995.
Terry K. Glenn (58)--Trustee and Executive Vice President(1)
(2)--Executive Vice President of MLAM and FAM since 1983; Executive Vice
President and Director of Princeton Services, Inc. since 1993;
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President of Princeton Funds Distributor, Inc. since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
David O. Beim (58)--Trustee (2)--410 Uris Hall, Columbia University,
New York, New York 10027. Professor at Columbia University since 1991; Chairman
of Outward Bound USA since 1997; Chairman of Wave Hill, Inc. since 1980.
James T. Flynn (59)--Trustee(2)--340 East 72nd Street, New York, New
York 10021. Chief Financial Officer of J.P. Morgan & Co. Inc. from 1990 to 1995
and an employee of J.P. Morgan in various capacities from 1967 to 1995.
W. Carl Kester (47)--Trustee(2)--Harvard Business School, Morgan Hall
393, Soldiers Field, Boston, Massachusetts 02163. James R. Williston Professor
of Business Administration of Harvard University Graduate School of Business
since 1997; MBA Class of 1958 Professor of Business Administration of Harvard
University Graduate School of Business Administration from 1981 to 1997;
Independent Consultant since 1978.
Karen P. Robards (48)--Trustee (2)--Robards & Company, 173 Riverside
Drive, New York, New York 10024. President of Robards & Company, a financial
advisory firm, for more than five years; Director of Enable Medical Corp. since
1996; Director of Cine Muse Inc. since 1996; Director of the Cooke Center for
Learning and Development, a not-for-profit organization, since 1993.
Peter John Gibbs (40)--Senior Vice President (1)(2)--33 King William
Street, London, EC4R 9AS, England. Chairman of Mercury Asset Management
International Ltd. since 1998; Director of Mercury Asset Management Ltd since
1993; Director of Mercury Asset Management International Channel Islands Ltd.
since 1997.
Donald C. Burke (38)--Treasurer and Vice President (1)(2)--Senior Vice
President and Treasurer of MLAM and FAM since 1999; Senior Vice President and
Treasurer of Princeton Services since 1999; Vice President and Treasurer of
Princeton Funds Distributor, Inc. since 1999; First Vice President of MLAM and
FAM from 1997 to 1999; Director of Taxation of MLAM and FAM since 1990; Vice
President of MLAM and FAM from 1990 to 1997.
Robert E. Putney, III (38)--Secretary (1)(2)--Director (Legal
Advisory) of MLAM and Princeton Administrators, L.P. since 1997; Vice President
of MLAM from 1994 to 1997; Vice President of Princeton Administrators, L.P.
from 1996 to 1997; Attorney with MLAM from 1991 to 1994.
- ----------------
(1) Interested person, as defined in the Investment Company Act, of the
Trust.
(2) Such Trustee or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or the
Portfolio's sub-adviser, FAM, or their affiliates, acts as investment
adviser.
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<PAGE> 36
As of the date of this Part B, the officers and Trustees of the Trust
as a group (nine 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 Portfolio.
COMPENSATION OF DIRECTORS/TRUSTEES.
Mercury Asset Management Funds, Inc., (the "Corporation"), the
registered investment company whose series, Mercury Global Balanced Fund (the
"Fund"), invests all of its assets in the Portfolio, and the Trust expect to
pay each Director/Trustee not affiliated with the Investment Adviser or FAM or
with an affiliate of the Investment Adviser or FAM (each a "non-affiliated
Director/Trustee"), for service to the Fund and Portfolio, a fee of $3,000 per
year plus $500 per in-person meeting attended, together with such individual's
actual out-of-pocket expenses relating to attendance at meetings. The
Corporation and the Trust also expect to compensate members of the Audit and
Nominating Committee, which consists of all of the non-affiliated
Directors/Trustees, at the rate of $1,000 annually for the service to the Fund
and Portfolio.
The following table sets forth the aggregate compensation the
Corporation and the Trust expect to pay to the non-affiliated
Directors/Trustees for their first full fiscal year and the aggregate
compensation paid by all investment companies advised by Mercury International,
FAM, or their affiliates ("Mercury and Affiliates-Advised Funds") to the
non-affiliated Directors/Trustees for the calendar year ended December 31,
1998.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
PENSION OR RETIREMENT FUND/PORTFOLIO AND MERCURY
BENEFITS ACCRUED AS PART AND AFFILIATES-ADVISED
AGGREGATE COMPENSATION OF FUND/PORTFOLIO FUNDS PAID TO
NAME OF DIRECTOR/TRUSTEE FROM FUND/PORTFOLIO EXPENSES DIRECTORS/TRUSTEES(1)
------------------------ ------------------- -------- ------------------
<S> <C> <C> <C>
David O. Beim . . . . . . $6,000 None $10,000
James T. Flynn . . . . . $6,000 None $49,000
W. Carl Kester . . . . . $6,000 None $49,000
Karen P. Robards $6,000 None $10,000
</TABLE>
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(1) In addition to the Corporation and the Trust, the Directors/Trustees
served on other Mercury and Affiliates-Advised Funds as follows: Mr.
Beim (1 registered investment company consisting of 2 portfolios); Mr.
Flynn (3 registered investment companies consisting of 8 portfolios);
Mr. Kester (3 registered investment companies consisting of 8
portfolios); and Ms. Robards (1 registered investment company
consisting of 2 portfolios).
ITEM 14. - CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
Mercury Global Balanced Fund (the "Fund") of Mercury Asset Management
Funds, Inc. (the "Corporation"), a Maryland corporation, controls the
Portfolio. As of April 9, 1999, the Fund owns 99.9% of the currently
outstanding interests of the Portfolio and FAM owns 100% of the currently
outstanding interests of the Fund. As of April 9, 1999, the Fund's holdings of
the Portfolio represent less than 0.1% of the Trust as a whole.
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All holders of interests ("Holders") are entitled to vote in
proportion to the amount of their interest in a Portfolio or in the Trust, as
the case may be. There is no cumulative voting. Accordingly, the Holder or
Holders of more than 50% of the aggregate beneficial interests of the Trust
would be able to elect all the Trustees. With respect to the election of
Trustees and ratification of accountants the Holders of separate Portfolios
vote together; they generally vote separately by Portfolio on other matters.
ITEM 15. - INVESTMENT ADVISORY AND OTHER SERVICES.
The Trust on behalf of the Portfolio has entered into an investment
advisory agreement with Mercury International as Investment Adviser (the
"Advisory Agreement"). As discussed in Part A, the Investment Adviser receives
for its services to the Portfolio monthly compensation at the annual rate of
0.60% 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 Mercury
Funds Distributor, a division of Princeton Funds Distributors, Inc., as
Placement Agent), 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 Placement Agent will pay certain of the expenses of the Portfolio incurred
in connection with continuous offering of its interests. 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 when one or more
clients are selling the same security. If purchases or sales of securities by
the Investment Adviser for the Trust's portfolios or other funds for which it
acts as investment adviser or for its advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of the Investment Adviser or its affiliates during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
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Mercury International is located at 33 King William Street, London
EC4R 9AS, England. Mercury International's intermediate parent company is
Mercury Asset Management Group Ltd, a London-based holding company of a group
engaged in the provision of investment management and advisory services
globally. The ultimate parent of Mercury Asset Management Group Ltd. is ML &
Co., a financial services holding company. ML & Co. is a controlling person of
Mercury International as defined under the Investment Company Act because of
its power to exercise a controlling influence over its management or policies.
The Trust has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with FAM with respect to the Portfolio, pursuant to which FAM
provides investment advisory services with respect to all or a portion of the
Portfolio's daily cash assets. The Trust has agreed to use its reasonable best
efforts to cause the Investment Adviser to pay to FAM a fee in an amount to be
determined from time to time by the Investment Adviser and FAM but in no event
in excess of the amount that the Investment Adviser actually receives for
providing services to the Trust pursuant to the Advisory Agreement.
FAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536. FAM, an affiliate of Mercury International, 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.
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 contracts are
not assignable and may be terminated with respect to the Portfolio without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the interestholders of the Portfolio.
CODE OF ETHICS.
The Board of Trustees of the Trust, the Board of Directors of the
Corporation, the Investment Adviser, and FAM 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 FAM and, as described below, impose additional,
more onerous, restrictions on portfolio investment personnel. Among other
substantive restrictions, the Codes contain reporting and preclearance
requirements for employees of the Investment Adviser and FAM 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.
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INDEPENDENT ACCOUNTANTS.
Deloitte & Touche LLP, has been selected as the independent auditors
of the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Trust.
LEGAL COUNSEL.
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York
10022, is counsel for the Trust.
CUSTODIAN.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, acts as the custodian of the Portfolio's assets. Under its contract
with the Trust, the Custodian is authorized to establish separate accounts in
foreign currencies and to cause foreign securities owned by the Portfolio to be
held in its offices outside the United States and with certain foreign banks
and securities depositors. The Custodian is responsible for safe guarding and
controlling the Portfolio's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Portfolio's
investments.
ITEM 16. - BROKERAGE ALLOCATION AND OTHER PRACTICES.
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 practicable,
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 a
corresponding series of the Corporation 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 benefited by supplemental
research services, the Investment Adviser is authorized to pay brokerage
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commissions to a broker furnishing such services in excess of commissions that
another broker may have charged for effecting the same transaction. 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.
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 generally 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 the 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 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 Portfolio's annual sales or purchases of portfolio securities (exclusive of
purchases and 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 also
result in negative tax consequences, such as an increase in capital gains
dividends or in ordinary income dividends.
ITEM 17. - CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust that establishes the Trust, a Delaware
business trust, the Trustees are authorized to issue beneficial interests in
the Portfolio of the Trust. Investors are entitled to participate, in
proportion to their investment, in distributions of taxable income, loss, gain
and deduction with respect to the Portfolio in which they have invested. Upon
liquidation or dissolution of the Portfolio, investors are entitled to share in
proportion to their investment in the Portfolio's net assets available for
distribution to its investors. Interests in the Portfolio have no preference,
preemptive, conversion or similar rights and are
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fully paid and nonassessable, except as set forth below. Investments in the
Portfolio generally may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
interest in the Portfolio or in the Trust, as the case may be. Investors in
the Trust, or in the Portfolio, do not have cumulative voting rights, and
investors holding more than 50% of the aggregate beneficial interests in the
Trust may elect all of the Trustees of the Trust if they choose to do so and in
such event the other investors in the Trust would not be able to elect any
Trustee. The Trust is not required and has no current intention to hold annual
meetings of investors but the Trust will hold special meetings of investors
when in the judgment of the Trustees it is necessary or desirable to submit
matters for an investor vote.
The Portfolio shall be dissolved by unanimous consent of the Trustees
by written notice of dissolution to the Holders of the interests of the
Portfolio. The Trust shall be dissolved upon the dissolution of the last
remaining Portfolio.
The Declaration of Trust provides that obligations of the Trust and
the Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act (including without limitation, the failure to compel
in any way any former or acting Trustee to redress any breach of trust), but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The Declaration of Trust provides that the Trust may
maintain appropriate insurance (for example, fidelity bond and errors and
omissions insurance) for the protection of the Portfolio, its Holders,
Trustees, officers, employees and agents covering possible tort and other
liabilities.
The Trust currently consists of seven Portfolios. The Trust reserves
the right to create and issue interests in a number of additional Portfolios.
As indicated above, Holders of each Portfolio participate equally in the
earnings and assets of the particular Portfolio. Holders of each Portfolio are
entitled to vote separately to approve advisory agreements or changes in
investment policy, but Holders of all Portfolios vote together in the election
or selection of Trustees and accountants for the Trust. Upon liquidation or
dissolution of a Portfolio, the Holders of such Portfolio are entitled to share
in proportion to their investment in the net assets of such Portfolio available
for distribution to Holders.
ITEM 18. - PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Trust are not offered to the public and
are issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Trust may be made only by a limited number of institutional
investors, including investment companies, common or commingled trust funds,
group trusts and certain other entities that are "accredited investors" within
the meaning of Regulation D under the 1933 Act. The number of Holders of the
Portfolio shall be limited to fewer than 100. This Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
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The net asset value of the shares of the Portfolio is determined once
daily Monday through Friday as of 15 minutes after the close of business on the
New York Stock Exchange ("NYSE") on each day the NYSE is open for trading (a
"Pricing Day"). The close of business on the NYSE is generally 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. The net asset value is computed by
deducting the amount of the Portfolio's total liabilities from the value of its
total assets. Expenses, including the advisory fees payable to the Investment
Adviser, are accrued daily.
Portfolio securities, including ADRs, EDRs, or GDRs, that are traded
on stock exchanges are valued at the last sale price (regular way) on the
exchange on which such securities are traded, as of the close of business on
the day the securities are being valued, or lacking any sales, at the last
available bid price for long positions, and at the last available ask price for
short positions. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Trustees as the primary market. Securities traded in
the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest and
most representative market. Short positions in securities traded on the OTC
market are valued at the last available ask price in the OTC market prior to
the time of valuation. When the Portfolio writes a call option, the amount of
the premium received is recorded on the books of the Portfolio 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
Portfolio 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 Board of Trustees of the Trust.
Such valuations and procedures will be reviewed periodically by the Board of
Trustees.
Bonds held by the Portfolio are traded primarily in the OTC markets.
In determining net asset value, the Portfolio uses the valuations of portfolio
securities furnished by a pricing service approved by the Board of Trustees.
The pricing service typically values portfolio securities at the bid price or
the yield equivalent when quotations are readily available. The bonds for
which quotations are not readily available are valued at fair market value on a
consistent basis as determined by the pricing service using a matrix system to
determine valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Portfolio under the general supervision of
the Board of Trustees. The Board of Trustees has determined in good faith that
the use of a pricing service is a fair method of determining the valuation of
portfolio securities.
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
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NYSE. The values of such securities used in computing the net asset value of
the Portfolio'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 Portfolio's net asset value.
Each investor in the Trust may add to or reduce its investment in the
Portfolio on each Pricing Day. The value of each investor's interest in the
Portfolio will be determined as of 15 minutes after the close of business on
the NYSE by multiplying the net asset value of the Portfolio by the percentage,
effective for that day, that represents that investor's share of the aggregate
interests in the Portfolio. The close of business on the NYSE is generally
4:00 p.m., Eastern time. Any additions or withdrawals to be effected on that
day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of the time or determination on such
day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investor's investments in the Portfolio effected on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of such time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in the
Portfolio as of 15 minutes after the close of business of the NYSE on the next
Pricing Day of the Portfolio. For further information concerning the
Portfolio's net asset value, and the valuation of the Portfolio's assets, see
Part A.
REDEMPTIONS.
An investor in the Trust may withdraw all or a portion of its
investment in the Portfolio on any Pricing Day at the net asset value next
determined after a withdrawal request in proper form is furnished by the
investor to the Portfolio. The proceeds of the withdrawal will be paid by the
Portfolio normally on the business day on which the withdrawal is effected, but
in any event within seven days. Investments in the Portfolio of the Trust may
not be transferred.
ITEM 19. - TAXATION OF THE TRUST
The Trust is organized as a Delaware business trust. The Portfolio is treated
as a separate partnership under the Internal Revenue Code of 1986, as amended
(the "Code") and, thus, is not subject to income tax. Based upon the status of
the Portfolio as a partnership, each investor in the Portfolio will be taxable
on its share (as determined in accordance with the governing instruments of the
Portfolio) of the Portfolio's ordinary income and capital gain in determining
its income tax liability. The determination of such share will be made in
accordance with the Code and regulations promulgated thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns. Each
prospective Investor Fund which is a regulated investment company ("RIC") will
be required to agree, in its subscription agreement, that, for purposes of
determining its
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required distribution under Code Section 4982(a), it will
account for its share of items of income, gain, loss and deduction of the
Portfolio as they are taken into account by the Portfolio.
The Portfolio may invest in futures contracts or options. Certain
options, futures contracts and options on futures contracts are "section 1256
contracts." Any gains or losses on section 1256 contracts are generally
considered 60% long-term and 40% short-term capital gains or losses ("60/40").
Also, section 1256 contracts held by the Portfolio at the end of each taxable
year are treated for federal income tax purposes as being sold on such date for
their fair market value. The resultant paper gains or losses are also treated
as 60/40 gains or losses. When the section 1256 contract is subsequently
disposed of, the actual gain or loss will be adjusted by the amount of any
preceding year-end gain or loss.
Foreign currency gains or losses on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not section 1256
contracts generally will be treated as ordinary income or loss.
Certain hedging transactions undertaken by the Portfolio may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Portfolio. In addition, losses
realized by the Portfolio on positions that are part of a straddle may be
deferred, rather than being taken into account in calculating taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of hedging transactions to the Portfolio are not entirely clear.
The Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions. Additionally, the conversion transaction or
constructive sale rules may apply to certain transactions (including straddles)
to change the character of capital gains to ordinary income or require the
recognition of income prior to the economic recognition of such income.
The Portfolio may be subject to a tax on dividend or interest income
received from securities of a non-U.S. issuer withheld by a foreign country at
the source. The United States has entered into tax treaties with many foreign
countries which entitle the Portfolio to a reduced rate of tax or exemption
from tax on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Portfolio's assets to be
invested within various countries is not known.
The Portfolio may make investments that produce income that is not
matched by a corresponding cash receipt by the Portfolio, such as investments
in obligations having original issue discount or market discount (if the
Portfolio elects to accrue the market discount on a current basis with respect
to such instruments). Because such income may not be matched by a
corresponding cash receipt, the Portfolio may be required to borrow money or
dispose of other securities to be able to make distributions to investors.
The Portfolio's taxable income will in most cases be determined on the
basis of reports made to the Portfolio by the issuers of the securities in
which the Portfolio invests. The tax treatment of certain
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securities in which the Portfolio may invest is not free from doubt, and it is
possible that an Internal Revenue Service examination of the issuers of such
securities or of the Portfolio could result in adjustments to the income of the
Portfolio.
Under the Trust, the Portfolio is to be managed in compliance with the
provisions of the Code applicable to RICs as though such requirements were
applied at the Portfolio level. Thus, consistent with its investment
objectives, the Portfolio will meet the income and diversification of assets
tests of the Code applicable to RICs. The Portfolio has received a ruling from
the Internal Revenue Service that Holders of interests in the Portfolio that
are RICs will be treated as owners of their proportionate shares of the
Portfolio's assets and income for purposes of the Code's requirements
applicable thereto.
ITEM 20. - UNDERWRITERS.
The exclusive placement agent for the Portfolio of the Trust is
Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc.,
(the "Placement Agent"), an affiliate of the Investment Adviser and of Merrill
Lynch, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Placement Agent receives no compensation for serving in this capacity.
Investment companies, common and commingled trust funds and similar
organizations and entities may continuously invest in the Portfolio.
ITEM 21. - CALCULATION OF PERFORMANCE DATA.
Beneficial interests in the Trust are not offered to the public and
are issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Accordingly, the Trust will not advertise the Portfolio's performance. However,
certain of the Trust's Holders may from time to time advertise their
performance, which will be based upon the Trust's performance.
Total return figures are based on historical performance and are not
intended to indicate future performance. Average annual total return is
determined in accordance with a formula specified by the Securities and
Exchange 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.
Annual, average annual and annualized total return and aggregate total
return performance data, both as a percentage and as a dollar amount, are based
on a hypothetical $1,000 investment and computed as described above, except
that as required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted. Actual annual
or annualized total return data generally will be lower than average annual
total return data since the average rates of return reflect
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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.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the period
by (b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period.
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ITEM 22. - FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Investor,
Mercury Asset Management Master Trust:
We have audited the accompanying statement of assets and liabilities of Mercury
Master Global Balanced Portfolio of Mercury Asset Management Master Trust as of
April 21, 1999. This financial statement is the responsibility of the Trust'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 that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of the Mercury Master Global
Balanced Portfolio of Mercury Asset Management Trust as of April 21, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 21, 1999
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<PAGE> 48
MERCURY MASTER GLOBAL BALANCED PORTFOLIO OF
MERCURY ASSET MANAGEMENT MASTER TRUST
STATEMENT OF ASSETS AND LIABILITIES
APRIL 21, 1999
<TABLE>
<CAPTION>
Mercury Master
Global Balanced
Portfolio
------------------
<S> <C>
Assets:
Cash $100,100
Prepaid offering costs (Note 3) 10,000
----------------
Total Assets 110,100
Less liabilities and accrued expenses 10,000
----------------
Net Assets applicable to investors' interest
in the Portfolio. (Note 1) $100,100
================
</TABLE>
- ----------------------------------------------
Notes to Financial Statement.
(1) Mercury Asset Management Master Trust (the "Trust") was organized as a
Delaware business trust on April 23, 1998. Mercury Master Global
Balanced Portfolio (the "Portfolio") is a portfolio of the Trust. To
date, the Portfolio has not had any transactions other than those
relating to organizational matters, an indirect $100,000 capital
contribution to the Portfolio by Fund Asset Management, L.P., an
affiliate of Mercury Asset Management International Ltd. (the
"Investment Adviser") through the corresponding portfolio of the
Mercury Asset Management Funds, Inc., and a $100 partnership
contribution to the Portfolio by Mercury Funds Distributor Inc.
(2) The Trust on behalf of the Portfolio has entered into an investment
advisory agreement (the "Advisory Agreement") with the Investment
Adviser. (See "Investment Advisory and Other Services" in Part B of
the Registration Statement.) Certain officers and/or Trustees of the
Trust are officers and/or directors of the Investment Adviser.
(3) Prepaid offering costs consist of legal and printing fees related to
preparing the registration statement, and will be amortized over a 12
month period beginning with the commencement of operations of the
Portfolio. The Investment Adviser on behalf of the Portfolio will
incur organization costs, estimated at $13,500.
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APPENDIX A
Investment Policies Involving the Use of Indexed
Securities, Options, Futures, Swaps and Foreign Exchange
The Portfolio is authorized to use certain derivative instruments,
including indexed and inverse securities, options, futures, and swaps, and to
purchase and sell foreign exchange, as described below. Such instruments are
referred to collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures
transactions (as defined below in "Risk Factors in Options, Futures and
Currency Instruments"), the Investment Adviser believes that, because the
Portfolio will generally engage in these transactions, if at all, for hedging
purposes, including anticipatory hedges (other than options on securities that
may be used to seek increased return), the options and futures portfolio
strategies of the Portfolio will not subject the Portfolio to the risks
frequently associated with the speculative use of options and futures
transactions. While the Portfolio's use of hedging strategies is intended to
reduce the volatility of the net asset value of Portfolio interests the
Portfolio's net asset value will fluctuate. There can be no assurance that the
Portfolio's hedging transactions will be effective. Furthermore, the Portfolio
will engage in hedging activities, if at all, only 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. The Portfolio is not
required to enter into hedging transactions and may choose not to do so.
INDEXED AND INVERSE SECURITIES
The Portfolio may invest in securities the potential return of which
is based on the change in particular measurements of value or rate, including
interest rates (an "index"). As an illustration, the Portfolio may invest in a
debt security that pays interest and returns principal based on the change in
the value of a securities index or a basket of securities, or interest rate or
based on the relative changes of two indices. In addition, the Portfolio may
invest in securities the potential return of which is based inversely on the
change in an index. For example, the Portfolio may invest in securities that
pay a higher rate of interest when a particular index decreases and pay a lower
rate of interest (or do not fully return principal) when the value of the index
increases. If the Portfolio invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of an
adverse movement in the relevant index or indices. Furthermore, where such a
security includes a contingent liability, in the event of such an adverse
movement, the Portfolio may be required to pay substantial additional margin to
maintain the position.
Certain indexed and inverse securities may have the effect of
providing investment leverage because the rate of interest or amount of
principal payable increases or decreases at a rate that is a multiple of the
changes in the relevant index. As a consequence, the market value of such
securities may be substantially more volatile than the market values of other
debt securities. The Portfolio believes that indexed and inverse securities
may provide portfolio management flexibility that permits the Portfolio to seek
enhanced
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returns, hedge other portfolio positions or vary the degree of portfolio
leverage with greater efficiency than would otherwise be possible under certain
market conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Portfolio is authorized to purchase put
options on securities held in its portfolio or securities indices the
performance of which is substantially replicated by securities held in its
portfolio. When the Portfolio purchases a put option, in consideration for an
up-front payment (the "option premium") the Portfolio acquires a right to sell
to another party specified securities owned by the Portfolio 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 Portfolio'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 Portfolio 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 Portfolio is also authorized to purchase call options on
securities it intends to purchase or securities indices the performance of
which substantially replicates the performance of the types of securities it
intends to purchase. When the Portfolio purchases a call option, in
consideration for the option premium the Portfolio 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 Portfolio 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
Portfolio 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 Portfolio believes to be attractive, in the case of an option on an
index (an "anticipatory hedge"). In the event the Portfolio determines not to
purchase a security underlying a call option, however, the Portfolio may lose
the entire option premium.
The Portfolio 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 Portfolio is authorized to write (i.e., sell)
call options on securities held in its portfolio or securities indices the
performance of which is substantially replicated by securities held in its
portfolio. When the Portfolio writes a call option, in return for an option
premium the Portfolio is legally obligated to sell specified securities owned
by the Portfolio at the exercise price on or before the expiration date, in the
case of an option on securities, or 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, however
much the exercise price exceeds the market price. The Portfolio may write call
options to earn income, through the receipt of option premiums. In the event
the party to
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which the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio may also write put options on securities or securities
indices. When the Portfolio writes a put option, in return for an option
premium the Portfolio gives another party the right to sell to the Portfolio 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 to another party an
amount based on any decline in a specified securities index below a specified
level on or before the expiration date, in the case of an option on a
securities index. The Portfolio may write put options to earn income, through
the receipt of option premiums. In the event the party to which the Portfolio
has written an option fails to exercise its right under the option because the
value of the underlying securities is greater than the exercise price, the
Portfolio will profit by the amount of the option premium. By writing a put
option, however, the Portfolio 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 decline in the
index, in the case of an option on an index. Accordingly, when the Portfolio
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 Portfolio for writing the put option. The Portfolio will write a put
option on a security or a securities index only if the Portfolio 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 Portfolio is also authorized to sell put or call options in
connection with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Portfolio will
write only call or put options that are "covered." A put option will be
considered covered if the Portfolio has segregated assets with respect to such
option in the manner described in "Risk Factors in Options, Futures and
Currency Instruments" below. A call option will be considered covered if the
Portfolio 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 Portfolio may engage in transactions in options
on securities or securities indices, on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated
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between the buyer and the seller, but generally do not require the parties to
post margin and are subject to greater risk of counterparty default. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" below.
FUTURES
The Portfolio may engage in transactions in futures and options
thereon. Futures are standardized, exchange-traded contracts that obligate a
purchaser to take delivery, and a seller to make delivery, of a specific amount
of a commodity at a specified future date at a specified price. No price is
paid upon entering into a futures contract. Rather, upon purchasing or selling
a futures contract the Portfolio is required to deposit collateral ("margin")
equal to a percentage (generally less than 10%) of the contract value with the
Futures Commission Merchants (the "FCM") effecting the Portfolio's exchanges or
in a third-party account with the Portfolio's Custodian. Each day thereafter
until the futures position is closed, the Portfolio 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. Whether the margin is deposited with
the FCM or with the Custodian, the margin may be deemed to be in the FCM's
custody, and, consequently, in the event of default due to the FCM's
bankruptcy, the margin may be subject to pro rata treatment as the FCM's
assets, which could result in potential losses to a Portfolio and its
interestholders. Even if a transaction is profitable, the Portfolio may not
get back the same assets which were deposited as margin or may receive payment
in cash.
The sale of a futures contract limits the Portfolio's risk of loss
through a decline in the market value of portfolio holdings correlated with the
futures contract prior to the future's 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 Portfolio 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 Portfolio from
having to pay more for securities as a consequence of increases in the market
value for such securities during a period when the Portfolio was attempting to
identify specific securities in which to invest in a market the Portfolio
believes to be attractive. In the event that such securities decline in value
or the Portfolio determines not to complete an anticipatory hedge transaction
relating to a futures contract, however, the Portfolio may realize a loss
relating to the futures position.
The Portfolio 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
Portfolio will further limit transactions in futures and options on futures to
the extent necessary to prevent the Portfolio from being deemed a "commodity
pool" under regulations of the Commodity Futures Trading Commission. The
Portfolio will only engage in futures and options transactions from time to
time. The Portfolio is under no obligation to use such transactions and may
not do so.
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SWAPS
The Portfolio is authorized to enter into equity swap agreements,
which are OTC contracts in which one party agrees to make periodic payments
based on the change in market value of a specified equity security, basket of
equity securities or equity index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a different
equity security, basket of equity securities or equity index. Swap agreements
may be used to obtain exposure to an equity or market without owning or taking
physical custody of securities.
The Portfolio will enter into a swap transaction only if, immediately
following the time the Portfolio enters into the transaction, the aggregate
notional principal amount of swap transactions to which the Portfolio is a
party would not exceed 5% of the Portfolio's net assets.
RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments, the
Portfolio will experience a gain or loss that will not be completely offset by
movements in the value of the hedged instruments.
The Portfolio intends to enter into transactions involving Strategic
Instruments only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC transactions,
such instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Strategic Instrument or the
Portfolio will otherwise be able to sell such instrument at an acceptable
price. Therefore, it may not be possible to close a position in a Strategic
Instrument without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Portfolio to potential losses that exceed the amount originally invested by
the Portfolio in such instruments. When the Portfolio engages in such a
transaction, the Portfolio will deposit in a segregated account at its
custodian liquid securities with a value at least equal to the Portfolio'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
Portfolio has assets available to satisfy its obligations with respect to the
transactions, but will not limit the Portfolio's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including indexed
securities, swaps and OTC options, may be substantially less liquid than other
instruments in which the Portfolio may invest. The absence of liquidity may
make it difficult or impossible for the Portfolio to sell such instruments
promptly at an acceptable price. The absence of liquidity may also make it
more difficult for the Portfolio to
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ascertain a market value for such instruments. The Portfolio 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
Portfolio 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 Portfolio has therefore adopted an investment policy pursuant to which the
Portfolio 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 Portfolio, the
market value of the securities underlying OTC call options currently
outstanding that have been sold by the Portfolio and margin deposits on the
Portfolio's outstanding OTC options exceeds 15% of the total assets of the
Portfolio, taken at market value, together with all other assets of the
Portfolio that are deemed to be illiquid or are otherwise not readily
marketable. However, if an OTC option is sold by the Portfolio to a dealer in
U.S. government securities recognized as a "primary dealer" by the Federal
Reserve Bank of New York and the Portfolio has the unconditional contractual
right to repurchase such OTC option at a predetermined price, then the
Portfolio 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).
Because Strategic Instruments traded in OTC markets are not guaranteed
by an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Portfolio has unrealized gains in such
instruments or has deposited collateral with its counterparty, the Portfolio is
at risk that its counterparty will become bankrupt or otherwise fail to honor
its obligations. The Portfolio will attempt to minimize the risk that a
counterparty will default by engaging in transactions in Strategic Instruments
traded in OTC markets only with financial institutions that have a credit
rating of AA- or better from Standard & Poor's, or Aa3 or better from Moody's,
or AA or better of Fitch.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Portfolio may not use any Strategic Instrument to gain exposure to
an asset or class of assets that it would be prohibited by its investment
restrictions from purchasing directly.
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APPENDIX B
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC.'S CORPORATE DEBT RATINGS
Aaa Bonds that 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 that 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 that make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds that 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
that suggest a susceptibility to impairment sometime in the
future.
Baa Bonds that 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 that 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 that 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 that 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.
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Ca Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds that 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, as amended.
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, 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
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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 that is 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 that is 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.
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a An issue that is 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 "aa" classifications, earnings
and asset protection are, nevertheless, expected to be
maintained at adequate levels.
baa An issue that is 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 that is 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 that is 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 that is 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 that is 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 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 obligers 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
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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 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 that
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
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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
that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt that 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.
* Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed 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.
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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 Issues 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.
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<PAGE> 62
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.
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 predominantly
B, speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB"
CCC 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.
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<PAGE> 63
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.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
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<PAGE> 64
Fitch ratings are based on information obtained from issuers, other
obligers, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus ( ): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer fails
to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive" indicating a potential upgrade, "Negative," for
potential downgrade, or
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<PAGE> 65
"Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be resolved
within 12 months.
Ratings Outlook: An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is described as
"Positive" or "Negative." The absence of a designation indicates a stable
outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repa9 principal may be affected over time by adv%rse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
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<PAGE> 66
DDD Bonds are in default on interest and/or principal payments. Such
bonds are
DD extremely speculative and should be valued on the basis of their
ultimate recovery
D value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds,
and "D" represents the lowest potential for recovery.
Plus (+) or Minus ( - ): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "DDD," "DD," or
"D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual
or imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
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<PAGE> 67
ALL PORTFOLIOS
PART C. OTHER INFORMATION
ITEM 23. - EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C> <C>
1(a) -- Declaration of Trust of Registrant(1)
1(b) -- Amendment No. 1 to Declaration of Trust of Registrant(1)
1(c) -- Certificate of Trust(1)
1(d) -- Certificate of Amendment of Certificate of Trust(1)
1(e) -- Certificate of Amendment of Certificate of Trust(1)
1(f) -- Certificate of Amendment of Certificate of Trust
2 -- Amended and Restated By-Laws of Registrant(1)
3 -- Instrument Defining Rights of Security Holders. Incorporated by reference to Exhibits 1 and
2 above.
4(a) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master International
Portfolio and Mercury Asset Management International Ltd.(1)
4(b) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master Pan-European Growth
Portfolio and Mercury Asset Management International Ltd.(1)
4(c) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master International Portfolio and
Fund Asset Management, L.P.
4(d) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Pan-European Growth Portfolio
and Fund Asset Management, L.P.
4(e) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master U.S. Large Cap Portfolio
and Mercury Asset Management International Ltd.(2)
4(f) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master Gold and Mining Portfolio
and Mercury Asset Management International Ltd.(2)
4(g) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master U.S. Large Cap Portfolio and Fund
Asset Management, L.P.
4(h) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Gold and Mining Portfolio and
Fund Asset Management, L.P.
4(i) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Mercury Asset Management International Ltd.
4(j) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Fund Asset Management, L.P.
5 -- Not Applicable.
6 -- Not Applicable.
7 -- Custody Agreement between Registrant and Brown Brothers Harriman & Co.(1)
8(a) -- Placement Agent Agreement between Registrant and Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.(1)
-- License Agreement relating to Use of Name among Mercury Asset Management International Ltd.,
8b) Mercury Asset Management Group Ltd. and Mercury Funds Distributor, a division of Princeton
Funds Distributor, Inc.(1)
8(c) -- License Agreement relating to Use of Name among Mercury Asset Management International Ltd.,
Mercury Asset Management Group Ltd. and Registrant.(1)
9 -- Not Applicable.
10(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
10(b) -- Consent of Swidler Berlin Shereff Friedman, LLP, counsel for Registrant
11 -- Not Applicable.
12(a) -- Certificate of Mercury Asset Management Funds, Inc. with respect to Mercury Master International
Portfolio and Mercury Master Pan-European Growth Portfolio(1)
12(b) -- Certificate of Mercury Asset Management Funds, Inc. and Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc. with respect to Mercury Master U.S. Large Cap Portfolio and
Mercury Master Gold and Mining Portfolio(2)
12(c) -- Certificate of Mercury Asset Management Funds, Inc. and Mercury Funds Distributor, a
division of Princeton Funds Distributor, Inc. with respect to Mercury Master Global Balanced
Portfolio.
13 -- Not Applicable.
14 -- Not Applicable.
15 -- Not Applicable.
</TABLE>
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<PAGE> 68
- -----------------
(1) Incorporated by reference to same numbered exhibits to
Registrant's initial Registration Statement on Form N-1A (File No. 811-09049).
(2) Incorporated by reference to same numbered exhibits to
Amendment No. 1 to Registrant's Registration Statement on Form N-1A (File No.
811-09049).
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<PAGE> 69
ITEM 24. - PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
Mercury International Fund ("International Fund") of Mercury Asset
Management Funds, Inc. (the "Corporation") controls Mercury Master
International Portfolio ("International Portfolio"). As of April 9, 1999,
International Fund owns 100% of the currently outstanding interests of
International Portfolio. As of April 9, 1999, International Fund's holdings of
International Portfolio represented 0.19% of the Trust as a whole.
Mercury Pan-European Growth Fund, Inc. ("Pan-European Growth Fund") of
the Corporation controls Mercury Master Pan-European Growth Portfolio ("Pan-
European Growth Portfolio"). As of April 9, 1999, Pan-European Growth Fund
owns 100% of the currently outstanding interests of Pan-European Growth
Portfolio. As of April 9, 1999, Pan-European Growth Fund's holdings of
Pan-European Growth Portfolio represented 0.32% of the Trust as a whole.
Mercury U.S. Large Cap Fund ("U.S. Large Cap Fund") of the Corporation
controls Mercury Master U.S. Large Cap Portfolio ("U.S. Large Cap Portfolio").
As of April 9, 1999, U.S. Large Cap Fund owns 100% of the currently outstanding
interests of U.S. Large Cap Portfolio. As of April 9, 1999, U.S. Large Cap
Fund's holdings of U.S. Large Cap Portfolio represented 0.48% of the Trust as a
whole.
Mercury Gold and Mining Fund ("Gold and Mining Fund") of the
Corporation controls Mercury Master Gold and Mining Portfolio ("Gold and Mining
Portfolio"). As of April 9, 1999, Gold and Mining Fund owns 100% of the
currently outstanding interests of Gold and Mining Portfolio. As of April 9,
1999, Gold and Mining Fund's holdings of Gold and Mining Portfolio represented
0.01% of the Trust as a whole.
Mercury Global Balanced Fund (the "Fund") of Mercury Asset Management
Funds, Inc. (the "Corporation") and Fund Asset Management, L.P. ("FAM") each
control Mercury Master Global Balanced Portfolio (the "Portfolio"). As of
April 9, 1999, the Fund owns 99.9% of the currently outstanding interests of
the Portfolio and FAM owns 100% of the currently outstanding interests of the
Fund. Therefore, the Fund is under common control with the Portfolio. As of
April 9, 1999, the Fund's holdings of the Portfolio represent less than .1%
of the Trust as a whole.
Mercury Asset Management Funds, Inc. was incorporated under the laws
of the State of Maryland. FAM is a Delaware limited partnership.
ITEM 25. - INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended (the "1940 Act"), and pursuant to Sections 8.2, 8.3 and 8.4,
of Article VIII of the Registrant's Declaration of Trust (Exhibit 1 to this
Registrant Statement), Trustees, officers, employees and agents of the Trust
will be indemnified to the maximum extent permitted by Delaware law and the
1940 Act.
Article VIII, Section 8.2 provides, inter alia, that no Trustee,
officer, employee or agent of the Registrant shall be liable to the Registrant,
its holders, or to any other Trustee, officer, employee or agent thereof for
any action or failure to act (including, without limitation, the failure to
compel in any way any former or acting Trustee to redress any breach of trust)
except for his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties.
Article VIII, Section 8.3 of the Registrant's Declaration of Trust
provides:
Section 8.3. Indemnification. The Trust shall indemnify each of
its Trustees, officers, employees, and agents (including persons who serve at
its request as directors, officers or trustees of another organization in which
it has any interest, as a shareholder, creditor or otherwise) against all
liabilities and expenses (including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while in office or thereafter, by reason of
his being or having been such a Trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to have
acted in bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties, such liabilities and expenses being liabilities belonging to the
Series out of which such claim for indemnification arises; provided, however,
that as to any matter disposed of by a compromise payment by such Person,
pursuant to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless there has been a
determination that such Person did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving
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<PAGE> 70
the settlement or other disposition or, in the absence of a judicial
determination, by a reasonable determination, based upon a review of readily
available facts (as opposed to a full trial-type inquiry), that he did not
engage in such conduct, which determination shall be made by a majority of a
quorum of Trustees who are neither Interested Persons of the Trust (within the
meaning of the 1940 Act) nor parties to the action, suit or proceeding, or by
written opinion from independent legal counsel approved by the Trustees. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no Person may
satisfy any right of indemnity or reimbursement granted herein or to which he
may be otherwise entitled except out of the Trust Property. The Trustees may
make advance payments in connection with indemnification under this Section
8.3; provided that any advance payment of expenses by the Trust to any Trustee,
officer, employee or agent shall be made only upon the undertaking by such
Trustee, officer, employee or agent to repay the advance unless it is
ultimately determined that he is entitled to indemnification as above provided,
and only if one of the following conditions is met:
(a) the Trustee, officer, employee or
agent to be indemnified provides a
security for his undertaking; or
(b) the Trust shall be insured against
losses arising by reason of any
lawful advances; or
(c) there is a determination, based on a
review of readily available facts,
that there is reason to believe that
the Trustee, officer, employee or
agent to be indemnified ultimately
will be entitled to indemnification,
which determination shall be made
by:
(i) a majority of a quorum of
Trustees who are neither
Interested Persons of the Trust
nor parties to the Proceedings;
or
(ii) an independent legal counsel in
a written opinion.
Article VIII, Section 8.4 of the Registrant's Declaration of Trust further
provides:
Section 8.4. No Protection Against Certain 1940 Act Liabilities.
Nothing contained in Sections 8.1, 8.2 or 8.3 hereof shall protect any Trustee
or officer of the Trust from any liability to the Trust or its Holders to which
he would otherwise
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<PAGE> 71
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Nothing contained in Sections 8.1, 8.2 or 8.3 hereof or in any agreement of the
character described in Section 4.1 or 4.2 hereof shall protect any Investment
Adviser to the Trust or any Series against any liability to the Trust or any
Series to which he would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of his or its duties to the
Trust or Series, or by reason of his or its reckless disregard to his or its
obligations and duties under the agreement pursuant to which he serves as
Investment Adviser to the Trust or any Series.
As permitted by Article VIII, Section 8.7, the Registrant may insure
its Trustees and officers against certain liabilities, and certain costs of
defending claims against such Trustees and officers, to the extent such
Trustees and officers are not found to have committed conduct constituting
conflict of interest, intentional non-compliance with statutes or regulations
or dishonest, fraudulent or criminal acts or omissions. The Registrant will
purchase an insurance policy to cover such indemnification obligation. The
insurance policy also will insure the Registrant against the cost of
indemnification payments to Trustees and officers under certain circumstances.
Insurance will not be purchased that protects, or purports to protect, any
Trustee or officer from liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
The Registrant hereby undertakes that it will apply the
indemnification provisions of its Declaration of Trust and Bylaws in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
ITEM 26. - BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Set forth below is a list of each executive officer and partner of the
adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November, 1997 for his own account or in the capacity of director, officer,
partner or trustee.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME ADVISER VOCATION OR EMPLOYMENT
- --------- ------------------ ----------------------------------------
<S> <C> <C>
Peter John Gibbs.............................. Chairman Director of Mercury Asset Management
Ltd; and Director of Mercury Asset
Management International Channel Islands
Ltd.
Carol Consuelo Brooke ........................ Deputy Chairman Director of Mercury Asset Management
Ltd.
David Morris Fitzgerald Scott ................ Director Director of Corporation of St. Lawrence
College
Debra Ann Searle.............................. Secretary None
John Eric Nelson.............................. Director None
Steve Warner Golann .......................... Director None
</TABLE>
Set forth below is a list of the name and principal business address
of any company for which a person listed above serves in the capacity of
director, officer, employee, partner or trustee. The address of each, unless
otherwise stated is 33 King William Street, London, England EC4R 9AS.
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<PAGE> 72
Mrs. Brooke also serves as director of the following companies:
Munich London Investment Management Ltd.; Benenden School (Kent) Ltd.,
Cranbrook Kent, TN17 4AA; and Mercury Asset Management Pension Trustee Co. Ltd.
Ms. Searle also serves as officer of the following companies:
Forum House Limited; Grosvenor Alternate Partner Limited; Grosvenor
General Partner Limited; Grosvenor Ventures Limited; Grosvenor Venture Managers
Limited; 33 King William Street, Ltd; Mercury Asset Management Employee Trust
Co. Ltd.; Mercury Asset Management Finance Ltd.; Mercury Asset Management Group
Ltd; Mercury Asset Management Group Services Ltd; Mercury Asset Management
Holdings Ltd.; Mercury Asset Management International Ltd.; Mercury Asset
Management No. 1 Limited; Mercury Asset Management Ltd.; Mercury Asset
Management Pension Trustee Co. Ltd.; Mercury Fund Managers Limited; Mercury
Financial Services Ltd.; Mercury Investment Management Limited; Mercury
Investment Services Ltd.; Mercury Investment Trust Managers Ltd.; Mercury Life
Assurance Company Ltd.; Mercury Life Limited.; Mercury Life Nominees Ltd.;
Mercury Private Equity Holdings Ltd.; Mercury Rowan Mullens Ltd.; Munich London
Investment Management Ltd.; Mercury Private Equity MUST 3 Limited; Third
Grosvenor Limited; Wimco Nominees Ltd.; Toll Company; SNC International
(Holdings) Limited; SNC Securities Limited; SNCS Limited; Storey Saver Limited;
Merrill Lynch Private Capital Limited; Merrill Lynch, Pierce, Fenner & Smith
(Brokers & Dealers) Limited; Merrill Lynch, Pierce, Fenner & Smith Limited;
Mership Nominees Limited; ML Europe Property Ltd.; ML Invest Holdings Limited;
ML Invest Limited; N.Y. Nominees Limited; Paramount Nominees Limited; Prismbond
Limited; RNML Limited; S.N.C. Nominees Limited; Sealion Nominees Limited; Smith
Bros (Services & Leasing) Limited; Smith Bros Nominees Limited; Smith Bros
Participations Limited; Smith Bros PLC; SNC Corporate Finance Limited; SNC
Financial Services; McIntosh Services (UK) Limited; Merrill Lynch (UK) Pension
Plan Trustees Limited; Merrill Lynch Capital Markets Bank Limited; Merrill
Lynch Equities Limited; Merrill Lynch Europe Funding; Merrill Lynch Europe
Holdings Limited; Merrill Lynch Europe PLC; Merrill Lynch Financial Services
Limited; Merrill Lynch Gilts (Nominees) Limited; Merrill Lynch Gilts Holdings
Limited; Merrill Lynch Gilts Investments Limited; Merrill Lynch Gilts Limited;
Merrill Lynch Group Holdings Limited; Merrill Lynch International; Merrill
Lynch International Bank Limited; Merrill Lynch Investment Services Limited;
Merrill Lynch Investments Limited; Merrill Lynch Limited; Merrill Lynch
Nominees Limited; Merrill Lynch Private Capital Limited; Benson Nominees
Limited; C.P.W. Limited; Capital Markets; Chetwynd Nominees Limited; Citygale
Nominees Limited; CLO Funding Limited; and McIntosh Services (UK) Limited.
Set forth below is a list of each executive officer and director of
Fund Asset Management, L.P. ("FAM") indicating each business, profession,
vocation or employment of a substantial nature in which each such person has
been engaged since November, 1997 for his own account or in the capacity of
director, officer, partner or trustee.
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<PAGE> 73
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
---- ----------------- -------------------------------------------
<S> <C> <C>
ML & Co. . . . . . . . . . . . . . Limited Partner Financial Services Holding Company;
Limited Partner of Merrill Lynch Asset
Management, L.P. ("MLAM")
Fund Asset Management, Inc. . . . Limited Partner Investment Advisory Service
Princeton Services . . . . . . . . General Partner General Partner of MLAM
Jeffrey M. Peek . . . . . . . . . . President President of MLAM; President and Director of
Princeton Services; Executive Vice President of
ML & Co.; Managing Director and Co-Head of the
Investment Banking Division of Merrill Lynch in
1997; Senior Vice President and Director of the
Global Securities and Economics division of
Merrill Lynch from 1995 to 1997
Terry K. Glenn . . . . . . . . . . Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President and Director of Princeton
Funds Distributor, Inc.; Director of FDS;
President of Princeton Administrators, L.P.
Donald C. Burke . . . . . . . . . . Senior Vice President and Senior Vice President and Treasurer of MLAM
Treasurer since 1999; Senior Vice President and Treasurer
of Princeton Services; Vice President and
Treasurer of Princeton Funds Distributor, Inc.;
First Vice President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990
Michael G. Clark . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Mark A. Desario . . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Linda L. Federici . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Vincent R. Giordano . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Elizabeth A. Griffin . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Norman R. Harvey . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel . . . . . . Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of MLAM; Senior Vice President
Counsel of Princeton Services
Philip L. Kirstein . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President, General Counsel, Director
and Secretary of Princeton Services
</TABLE>
C-7
<PAGE> 74
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
---- ----------------- -------------------------------------------
<S> <C> <C>
Ronald M. Kloss . . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of Princeton Funds
Distributor, Inc.
Stephen M.M. Miller . . . . . . . . Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Brian A. Murdock . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gregory D. Upah . . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
Mr. Glenn is President and Mr. Burke is Treasurer of all or
substantially all of the investment companies described in the following two
paragraphs. Mr. Glenn is a director of such companies. Messrs. Giordano,
Harvey, Kirstein, and Monagle are officers of one or more of such companies.
FAM, located at P.O. Box 9011, Princeton, New Jersey 08543-9011, an
affiliate of 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 the following
closed-end investment companies: Apex Municipal Fund, 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 Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund Inc., MuniHoldings
Insured Fund II, Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings
California Insured Fund II, Inc., MuniHoldings California
C-8
<PAGE> 75
Insured Fund III, Inc., MuniHoldings California Insured Fund IV, Inc,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund
II, MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured Fund
IV, MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
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.
MLAM, located at P.O. Box 9011, Princeton, New Jersey 08543-9011, acts
as investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, 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 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., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
C-9
<PAGE> 76
ITEM 27. - PRINCIPAL UNDERWRITERS.
(a) Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc. ("MFD") acts as placement agent for the Registrant and as
principal underwriter for each of the following open-end investment companies:
Mercury Global Balanced Fund of Mercury Asset Management Funds, Inc.;
Mercury Gold and Mining Fund of Mercury Asset Management Funds, Inc.; Mercury
International Fund of Mercury Asset Management Funds, Inc.; Mercury Japan
Capital Fund of Mercury Asset Management Funds, Inc.; Mercury Pan-European
Growth Fund of Mercury Asset Management Funds, Inc.; Mercury U.S. Large Cap Fund
of Mercury Asset Management Funds, Inc.; Summit Cash Reserves Fund of Financial
Institutions Series Trust; Mercury V.I. Pan-European Growth Fund of Mercury
Asset Management V.I. Funds, Inc.; Mercury V.I. U.S. Large Cap Fund of Mercury
Asset Management V.I. Funds, Inc.
A separate division of Princeton Funds Distributor, Inc. acts as the
principal underwriter for a number of other investment companies.
(b) Set forth below is information concerning each director and
officer of MFD. The principal business address of each such person is P.O. Box
9081, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Crook, Aldrich, Breen, Fatseas, and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND POSITIONS AND
NAME OFFICES WITH MFD OFFICES WITH REGISTRANT
- ------- ------------------------ -------------------------------
<S> <C> <C>
Terry K. Glenn.................................... President and Director Executive Vice President
Michael G. Clark.................................. Director None
Thomas J. Verage.................................. Director None
Robert W. Crook .................................. Senior Vice President None
Michael J. Brady.................................. Vice President None
William M. Breen.................................. Vice President None
James J. Fatseas.................................. Vice President None
Debra W. Landsman-Yaros .......................... Vice President None
Michelle T. Lau .................................. Vice President None
Donald C. Burke .................................. Vice President and Treasurer
Treasurer
Salvatore Venezia ................................ Vice President None
William Wasel .................................... Vice President None
Robert Harris .................................... Secretary None
</TABLE>
ITEM 28. - LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of:
C-10
<PAGE> 77
(1) the registrant, Mercury Asset
Management Master Trust, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536;
(2) the custodian, Brown Brothers
Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109;
(3) the investment adviser, Mercury
Asset Management International ltd., 33 King
William Street, London EC4R 9AS, England; and
(4) the sub-adviser, Fund Asset
Management, L.P., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
ITEM 29. - MANAGEMENT SERVICES.
Other than as set forth under the caption "Management, Organization,
and Capital Structure" in Part A of the Registration Statement and under
"Investment Advisory and Other Services" in Part B of the Registration
Statement, the Registrant is not party to any Management-related service
contract.
ITEM 30. - UNDERTAKINGS.
None.
C-11
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this Amendment to the Registration Statement to
be signed on its behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 27th day of April, 1999.
MERCURY ASSET MANAGEMENT MASTER TRUST
(Registrant)
By: /s/ TERRY K. GLENN
--------------------------------
(Terry K. Glenn, Executive Vice
President)
C-12
<PAGE> 79
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-----------
NUMBER
<S> <C> <C>
1(f) -- Certificate of Amendment of Certificate of Trust
4(c) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master International
Portfolio and Fund Asset Management, L.P.
4(d) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Pan-European
Growth Portfolio and Fund Asset Management, L.P.
4(g) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master U.S. Large Cap
Portfolio and Fund Asset Management, L.P.
4(h) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Gold and Mining Portfolio
and Fund Asset Management, L.P.
4(i) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Mercury Asset Management International Ltd.
4(j) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Fund Asset Management, L.P.
10(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
10(b) -- Consent of Swidler Berlin Shereff Friedman, LLP, counsel for Registrant
12 -- Certificate of Mercury Asset Management Funds, Inc. and Mercury Funds Distributor, a division
of Princeton Funds Distributor, Inc. with respect to Mercury Master Global Balanced Portfolio
</TABLE>
C-13
<PAGE> 1
EXHIBIT 1 (f)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF TRUST
OF
MERCURY ASSET MANAGEMENT MASTER TRUST
MERCURY ASSET MANAGEMENT MASTER TRUST, a business trust
organized and existing under the Delaware Business Trust Act (12 Del. C.
Section 3801, et seq.), does hereby certify that:
1. Name. The name of the business trust (hereinafter
called the "Trust") is MERCURY ASSET MANAGEMENT MASTER TRUST.
2. Paragraph 5 of the Certificate of Trust of the Trust
is hereby amended to change the name of one of the series of the Trust from
"Mercury Master Portfolio 7" to "Mercury Master Global Balanced Portfolio."
3. Effective Date. This Certificate of Trust shall be
effective upon the date and time of filing.
IN WITNESS WHEREOF, the undersigned, being a trustee of the
Trust, has executed this Certificate of Amendment as of February 11, 1999.
/s/ TERRY K. GLENN
----------------------
Terry K. Glenn
Trustee
C-14
<PAGE> 1
EXHIBIT 4(c)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of February 11, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER INTERNATIONAL PORTFOLIO (the
"Portfolio"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "FAM").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as a
series of the Trust; and
WHEREAS, FAM is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, the Trust, on behalf of the Portfolio, has entered into an
investment advisory agreement (the "MAM Advisory Agreement"), dated September
23, 1998, with Mercury Asset
<PAGE> 2
Management International Ltd. (hereinafter referred to as "MAM") pursuant to
which MAM will provide investment advisory and management services to the Trust
and the Portfolio; and
WHEREAS, FAM is willing to provide investment advisory services to the
Portfolio with respect to all or a portion of the daily cash position of the
Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and FAM hereby agree as follows:
ARTICLE I
Duties of FAM
The Trust hereby employs FAM to act as an investment adviser for all or a
portion of the daily cash position of the Portfolio and to furnish, or arrange
for affiliates to furnish, certain investment advisory services with respect to
such portion of the Portfolio, as described below, subject to the policies of,
review by and overall control of the Trustees of the Trust, for the period and
on the terms and conditions set forth in this Agreement. FAM 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, to be paid by MAM, provided for herein. FAM 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 Trust or Portfolio in any way or
otherwise be deemed agents of the Trust or Portfolio.
2
<PAGE> 3
FAM shall provide (or arrange for affiliates to provide) the Trust with
such investment research, advice and supervision as the latter may from time to
time consider necessary for the proper management of the portion of the daily
cash position of the Portfolio from time to time managed by FAM. All advice and
recommendations provided by FAM shall be subject to the restrictions of the
Declaration of Trust and By-Laws of the Trust, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Portfolio's investment objectives, investment policies and investment
restrictions as the same are set forth in the Trust's current Registration
Statement.
ARTICLE II
Allocation of Charges and Expenses
FAM assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall pay all
compensation of officers of the Trust and all Trustees of the Trust who are
affiliated persons of FAM to the extent not otherwise paid by MAM.
ARTICLE III
Compensation of FAM
For the services rendered, the facilities furnished and expenses assumed
by FAM, the Trust shall use its reasonable best efforts to cause MAM to pay to
FAM at the end of each calendar month a fee of at least $1.00 or another amount
to be determined from time to time by MAM and FAM, but in no event in excess of
the amount that MAM actually receives for providing services to the Trust and
the Portfolio pursuant to the MAM Advisory Agreement.
3
<PAGE> 4
ARTICLE IV
Limitation of Liability of FAM
FAM shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of services rendered hereunder with respect to the Trust and the
Portfolio, 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 "FAM" shall include
any affiliates of FAM performing services for the Trust contemplated hereby and
partners, directors, officers and employees of FAM and such affiliates.
ARTICLE V
Activities of FAM
The services of FAM to the Trust and the Portfolio are not to be deemed
to be exclusive, and FAM and any person controlled by or under common control
with FAM (for purposes of this Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees, officers, employees
and shareholders of the Trust and Portfolio are or may become interested in FAM
and its affiliates, as directors, officers, partners, employees and
shareholders, and that FAM and its affiliates are or may become similarly
interested in the Trust or Portfolio.
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 the date of termination of the Advisory
Agreement (but not later than two years
4
<PAGE> 5
after the effective date of this Agreement) and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) a majority of those Trustees 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 Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio, or by FAM, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
approved in compliance with the requirements of the Investment Company Act and
the rules and regulations thereunder.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a 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
5
<PAGE> 6
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 the 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.
ARTICLE X
Limitation of Obligations of the Portfolio
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed by
the parties hereto in any number of counterparts, all of which together shall
constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of its series
MERCURY MASTER INTERNATIONAL
PORTFOLIO
By:
---------------------------------
Title:
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
GENERAL PARTNER
By:
---------------------------------
Title:
7
<PAGE> 1
EXHIBIT 4(d)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of February 11, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER PAN-EUROPEAN GROWTH
PORTFOLIO (the "Portfolio"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited
partnership (hereinafter referred to as "FAM").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as a
series of the Trust; and
WHEREAS, FAM is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, the Trust, on behalf of the Portfolio, has entered into an
investment advisory agreement (the "MAM Advisory Agreement"), dated September
23, 1998, with Mercury Asset
<PAGE> 2
Management International Ltd. (hereinafter referred to as "MAM") pursuant to
which MAM will provide investment advisory and management services to the Trust
and the Portfolio; and
WHEREAS, FAM is willing to provide investment advisory services to the
Portfolio with respect to all or a portion of the daily cash position of the
Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and FAM hereby agree as follows:
ARTICLE I
Duties of FAM
The Trust hereby employs FAM to act as an investment adviser for all or a
portion of the daily cash position of the Portfolio and to furnish, or arrange
for affiliates to furnish, certain investment advisory services with respect to
such portion of the Portfolio, as described below, subject to the policies of,
review by and overall control of the Trustees of the Trust, for the period and
on the terms and conditions set forth in this Agreement. FAM 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, to be paid by MAM, provided for herein. FAM 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 Trust or Portfolio in any way or
otherwise be deemed agents of the Trust or Portfolio.
2
<PAGE> 3
FAM shall provide (or arrange for affiliates to provide) the Trust with
such investment research, advice and supervision as the latter may from time to
time consider necessary for the proper management of the portion of the daily
cash position of the Portfolio from time to time managed by FAM. All advice and
recommendations provided by FAM shall be subject to the restrictions of the
Declaration of Trust and By-Laws of the Trust, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Portfolio's investment objectives, investment policies and investment
restrictions as the same are set forth in the Trust's current Registration
Statement.
ARTICLE II
Allocation of Charges and Expenses
FAM assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall pay all
compensation of officers of the Trust and all Trustees of the Trust who are
affiliated persons of FAM to the extent not otherwise paid by MAM.
ARTICLE III
Compensation of FAM
For the services rendered, the facilities furnished and expenses assumed
by FAM, the Trust shall use its reasonable best efforts to cause MAM to pay to
FAM at the end of each calendar month a fee of at least $1.00 or another amount
to be determined from time to time by MAM and FAM, but in no event in excess of
the amount that MAM actually receives for providing services to the Trust and
the Portfolio pursuant to the MAM Advisory Agreement.
3
<PAGE> 4
ARTICLE IV
Limitation of Liability of FAM
FAM shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of services rendered hereunder with respect to the Trust and the
Portfolio, 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 "FAM" shall include
any affiliates of FAM performing services for the Trust contemplated hereby and
partners, directors, officers and employees of FAM and such affiliates.
ARTICLE V
Activities of FAM
The services of FAM to the Trust and the Portfolio are not to be deemed
to be exclusive, and FAM and any person controlled by or under common control
with FAM (for purposes of this Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees, officers, employees
and shareholders of the Trust and Portfolio are or may become interested in FAM
and its affiliates, as directors, officers, partners, employees and
shareholders, and that FAM and its affiliates are or may become similarly
interested in the Trust or Portfolio.
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 the date of termination of the Advisory
Agreement (but not later than two years
4
<PAGE> 5
after the effective date of this Agreement) and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) a majority of those Trustees 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 Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio, or by FAM, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
approved in compliance with the requirements of the Investment Company Act and
the rules and regulations thereunder.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a 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
5
<PAGE> 6
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 the 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.
ARTICLE X
Limitation of Obligations of the Portfolio
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed by
the parties hereto in any number of counterparts, all of which together shall
constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of its series
MERCURY MASTER PAN-EUROPEAN
GROWTH PORTFOLIO
By:
---------------------------------
Title:
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
GENERAL PARTNER
By:
---------------------------------
Title:
7
<PAGE> 1
EXHIBIT 4(g)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of February 11, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER U.S. LARGE CAP PORTFOLIO
(the "Portfolio"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited
partnership (hereinafter referred to as "FAM").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as a
series of the Trust; and
WHEREAS, FAM is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, the Trust, on behalf of the Portfolio, has entered into an
investment advisory agreement (the "MAM Advisory Agreement"), dated December 22,
1998, with Mercury Asset
<PAGE> 2
Management International Ltd. (hereinafter referred to as "MAM") pursuant to
which MAM will provide investment advisory and management services to the Trust
and the Portfolio; and
WHEREAS, FAM is willing to provide investment advisory services to the
Portfolio with respect to all or a portion of the daily cash position of the
Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and FAM hereby agree as follows:
ARTICLE I
Duties of FAM
The Trust hereby employs FAM to act as an investment adviser for all or a
portion of the daily cash position of the Portfolio and to furnish, or arrange
for affiliates to furnish, certain investment advisory services with respect to
such portion of the Portfolio, as described below, subject to the policies of,
review by and overall control of the Trustees of the Trust, for the period and
on the terms and conditions set forth in this Agreement. FAM 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, to be paid by MAM, provided for herein. FAM 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 Trust or Portfolio in any way or
otherwise be deemed agents of the Trust or Portfolio.
2
<PAGE> 3
FAM shall provide (or arrange for affiliates to provide) the Trust with
such investment research, advice and supervision as the latter may from time to
time consider necessary for the proper management of the portion of the daily
cash position of the Portfolio from time to time managed by FAM. All advice and
recommendations provided by FAM shall be subject to the restrictions of the
Declaration of Trust and By-Laws of the Trust, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Portfolio's investment objectives, investment policies and investment
restrictions as the same are set forth in the Trust's current Registration
Statement.
ARTICLE II
Allocation of Charges and Expenses
FAM assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall pay all
compensation of officers of the Trust and all Trustees of the Trust who are
affiliated persons of FAM to the extent not otherwise paid by MAM.
ARTICLE III
Compensation of FAM
For the services rendered, the facilities furnished and expenses assumed
by FAM, the Trust shall use its reasonable best efforts to cause MAM to pay to
FAM at the end of each calendar month a fee of at least $1.00 or another amount
to be determined from time to time by MAM and FAM, but in no event in excess of
the amount that MAM actually receives for providing services to the Trust and
the Portfolio pursuant to the MAM Advisory Agreement.
3
<PAGE> 4
ARTICLE IV
Limitation of Liability of FAM
FAM shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of services rendered hereunder with respect to the Trust and the
Portfolio, 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 "FAM" shall include
any affiliates of FAM performing services for the Trust contemplated hereby and
partners, directors, officers and employees of FAM and such affiliates.
ARTICLE V
Activities of FAM
The services of FAM to the Trust and the Portfolio are not to be deemed
to be exclusive, and FAM and any person controlled by or under common control
with FAM (for purposes of this Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees, officers, employees
and shareholders of the Trust and Portfolio are or may become interested in FAM
and its affiliates, as directors, officers, partners, employees and
shareholders, and that FAM and its affiliates are or may become similarly
interested in the Trust or Portfolio.
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 the date of termination of the Advisory
Agreement (but not later than two years
4
<PAGE> 5
after the effective date of this Agreement) and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) a majority of those Trustees 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 Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio, or by FAM, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
approved in compliance with the requirements of the Investment Company Act and
the rules and regulations thereunder.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a 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
5
<PAGE> 6
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 the 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.
ARTICLE X
Limitation of Obligations of the Portfolio
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed by
the parties hereto in any number of counterparts, all of which together shall
constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of its series
MERCURY MASTER U.S. LARGE CAP
PORTFOLIO
By:
------------------------------
Title:
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
GENERAL PARTNER
By:
------------------------------
Title:
7
<PAGE> 1
EXHIBIT 4(h)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of February 11, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER GOLD AND MINING PORTFOLIO
(the "Portfolio"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited
partnership (hereinafter referred to as "FAM").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each of
which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as a
series of the Trust; and
WHEREAS, FAM is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, the Trust, on behalf of the Portfolio, has entered into an
investment advisory agreement (the "MAM Advisory Agreement"), dated January 27,
1999, with Mercury Asset
<PAGE> 2
Management International Ltd. (hereinafter referred to as "MAM") pursuant to
which MAM will provide investment advisory and management services to the Trust
and the Portfolio; and
WHEREAS, FAM is willing to provide investment advisory services to the
Portfolio with respect to all or a portion of the daily cash position of the
Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and FAM hereby agree as follows:
ARTICLE I
Duties of FAM
The Trust hereby employs FAM to act as an investment adviser for all or a
portion of the daily cash position of the Portfolio and to furnish, or arrange
for affiliates to furnish, certain investment advisory services with respect to
such portion of the Portfolio, as described below, subject to the policies of,
review by and overall control of the Trustees of the Trust, for the period and
on the terms and conditions set forth in this Agreement. FAM 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, to be paid by MAM, provided for herein. FAM 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 Trust or Portfolio in any way or
otherwise be deemed agents of the Trust or Portfolio.
2
<PAGE> 3
FAM shall provide (or arrange for affiliates to provide) the Trust with
such investment research, advice and supervision as the latter may from time to
time consider necessary for the proper management of the portion of the daily
cash position of the Portfolio from time to time managed by FAM. All advice and
recommendations provided by FAM shall be subject to the restrictions of the
Declaration of Trust and By-Laws of the Trust, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Portfolio's investment objectives, investment policies and investment
restrictions as the same are set forth in the Trust's current Registration
Statement.
ARTICLE II
Allocation of Charges and Expenses
FAM assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall pay all
compensation of officers of the Trust and all Trustees of the Trust who are
affiliated persons of FAM to the extent not otherwise paid by MAM.
ARTICLE III
Compensation of FAM
For the services rendered, the facilities furnished and expenses assumed
by FAM, the Trust shall use its reasonable best efforts to cause MAM to pay to
FAM at the end of each calendar month a fee of at least $1.00 or another amount
to be determined from time to time by MAM and FAM, but in no event in excess of
the amount that MAM actually receives for providing services to the Trust and
the Portfolio pursuant to the MAM Advisory Agreement.
3
<PAGE> 4
ARTICLE IV
Limitation of Liability of FAM
FAM shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of services rendered hereunder with respect to the Trust and the
Portfolio, 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 "FAM" shall include
any affiliates of FAM performing services for the Trust contemplated hereby and
partners, directors, officers and employees of FAM and such affiliates.
ARTICLE V
Activities of FAM
The services of FAM to the Trust and the Portfolio are not to be deemed
to be exclusive, and FAM and any person controlled by or under common control
with FAM (for purposes of this Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees, officers, employees
and shareholders of the Trust and Portfolio are or may become interested in FAM
and its affiliates, as directors, officers, partners, employees and
shareholders, and that FAM and its affiliates are or may become similarly
interested in the Trust or Portfolio.
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 the date of termination of the Advisory
Agreement (but not later than two years
4
<PAGE> 5
after the effective date of this Agreement) and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) a majority of those Trustees 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 Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio, or by FAM, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
approved in compliance with the requirements of the Investment Company Act and
the rules and regulations thereunder.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a 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
5
<PAGE> 6
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 the 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.
ARTICLE X
Limitation of Obligations of the Portfolio
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed by
the parties hereto in any number of counterparts, all of which together shall
constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of its series
MERCURY MASTER GOLD AND MINING
PORTFOLIO
By:
------------------------------
Title:
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
GENERAL PARTNER
By:
------------------------------
Title:
7
<PAGE> 1
EXHIBIT 4(i)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of March 24, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER GLOBAL BALANCED PORTFOLIO
(the "Portfolio") and MERCURY ASSET MANAGEMENT INTERNATIONAL LTD., a
corporation organized under the laws of England and Wales (hereinafter referred
to as the "Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each
of which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as
a series of the Trust; and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940 and regulated by the
Investment Management Regulatory Organization, a self-regulating organization
recognized under the Financial Services Act of 1986 of the United Kingdom
(hereinafter referred to as "IMRO"), and the conduct of its investment business
is regulated by IMRO; and
<PAGE> 2
WHEREAS, the Trust desires to retain the Investment Adviser to provide
management and investment advisory services to the Portfolio in the manner and
on the terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Portfolio on the terms and conditions
hereafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Investment Adviser hereby agree as
follows:
ARTICLE I
DUTIES OF THE INVESTMENT ADVISER
The Trust hereby employs the Investment Adviser to act as a manager
and investment adviser of the Portfolio and to furnish, or arrange for
affiliates to furnish, the management and investment advisory services
described below, subject to the policies of, review by and overall control of
the Trustees, for the period and on the terms and conditions set forth in this
Agreement. The Investment Adviser 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 Investment Adviser 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 Trust or the Portfolio in any way or otherwise be
deemed agents of the Trust or the Portfolio.
(a) Management Services. The Investment Adviser shall perform (or
arrange for the performance by affiliates of) the management and administrative
services necessary for the operation of the Trust and the Portfolio. The
Investment Adviser shall provide the Trust and the Portfolio with
2
<PAGE> 3
office space, facilities, equipment and necessary personnel and such other
services as the Investment Adviser, subject to review by the Trustees, shall
from time to time determine to be necessary or useful to perform its
obligations under this Agreement. The Investment Adviser shall also, on behalf
of the Trust and the Portfolio, 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 Investment Adviser shall
generally monitor the Trust's and the Portfolio's compliance with investment
policies and restrictions as set forth in the Registration Statement of the
Trust filed with the Securities and Exchange Commission under the Investment
Company Act, as amended from time to time (the "Registration Statement"). The
Investment Adviser shall make reports to the Trustees of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Portfolio as it shall
determine to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall
provide (or arrange for affiliates to provide) the Trust with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of the assets of the Portfolio, shall
furnish continuously an investment program for the Portfolio and shall
determine from time to time which securities shall be purchased, sold or
exchanged and what portion of the assets of the Portfolio shall be held in the
various securities and other financial instruments in which the Portfolio
invests or cash, subject always to the restrictions of the Declaration of Trust
and By-Laws of the Trust, as amended from time to time, the provisions of the
Investment Company Act and the statements relating to the Portfolio's
investment objectives, investment policies and investment
3
<PAGE> 4
restrictions as the same are set forth in the Trust's current Registration
Statement. The Investment Adviser shall make decisions for the Trust as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to investment policy and notify the Investment Adviser thereof
in writing, the Investment Adviser shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified that such
determination has been revoked. The Investment Adviser shall take, on behalf
of the Portfolio, all actions which it deems necessary to implement the
investment policies determined as provided above, and in particular to place
all orders for the purchase or sale of portfolio securities for the Portfolio's
account with brokers or dealers selected by it, and to that end, the Investment
Adviser is authorized as the agent of the Trust to give instructions to the
custodian of the Portfolio as to deliveries of securities and payments of cash
for the account of the Portfolio. In connection with the selection of such
brokers or dealers and the placing of such orders with respect to assets of the
Portfolio, the Investment Adviser is directed at all times to seek to obtain
execution and price within the policy guidelines determined by the Trustees and
set forth in the then current Registration Statement. Subject to this
requirement and the provisions of the Investment Company Act, the Securities
Exchange Act of 1934, as amended, and other applicable provisions of law, the
Investment Adviser may select brokers or dealers with which it or the Trust is
affiliated.
(c) Affiliated Sub-Advisers. In carrying out its responsibilities
hereunder, the Investment Adviser may employ, retain or otherwise avail itself
of the services of other persons or entities including without limitation,
affiliates of the Investment Adviser, on such terms as the Investment Adviser
shall determine to be necessary, desirable or appropriate. However, if the
Investment
4
<PAGE> 5
Adviser chooses to retain or avail itself of the services of another person or
entity to manage assets of the Fund, such other person or entity must be (i) an
affiliate of the Investment Adviser, (ii) retained at the Investment Adviser's
own cost and expense, and (iii) retained subject to the requirements of Section
15 of the Investment Company Act. Retention of one or more affiliated
sub-advisers, or the employment or retention of other persons or entities to
perform services, shall in no way reduce the responsibilities or obligations of
the Investment Adviser under this Agreement and the Investment Adviser shall be
responsible for all acts and omissions of such affiliated sub-advisers, or
other persons or entities, in connection with the performance of the Investment
Adviser's duties hereunder.
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) The Investment Adviser. The Investment Adviser assumes and
shall pay, or cause its affiliate to 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 provide under Article I hereof. The
Investment Adviser shall pay, or cause its affiliate to pay, compensation of
all Officers of the Trust and all Trustees of the Trust who are affiliated
persons of the Investment Adviser or any sub-adviser, or of an affiliate of the
Investment Adviser or any sub-adviser.
(b) The Trust. The Trust assumes and shall pay or cause to be
paid all other expenses of the Trust and the Portfolio (except for the expenses
paid by the Mercury Funds Distributor division of Princeton Funds Distributor,
Inc. (the "Distributor")), including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, shareholder reports,
copies of the
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<PAGE> 6
Registration Statement, 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 Trustees who are not affiliated persons of the Investment Adviser
or any sub-adviser, or of an affiliate of the Investment Adviser or any
sub-adviser, 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 Trust or the Portfolio. It is also understood that the Trust
shall reimburse the Investment Adviser or an affiliate of the Investment
Adviser for its costs in providing accounting services to the Trust and the
Portfolio. The Distributor will pay certain of the expenses of the Portfolio
incurred in connection with the continuous offering of shares of beneficial
interest of the Portfolio.
ARTICLE III
COMPENSATION OF THE INVESTMENT ADVISER
Management and Investment Advisory Fee. For the services rendered,
the facilities furnished and expenses assumed by the Investment Adviser, the
Portfolio shall pay to the Investment Adviser at the end of each calendar month
a fee based upon the average daily value of the net assets of the Portfolio, as
determined and computed in accordance with the description of the determination
of net asset value contained in the Registration Statement, at the annual rate
of 0.60% of the average daily net assets of the Portfolio, 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 Investment
6
<PAGE> 7
Adviser'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 Trustees,
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 INVESTMENT ADVISER
The Investment Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the management of the Trust and the Portfolio, 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 "Investment Adviser" shall
include any affiliates of the Investment Adviser performing services for the
Trust or the Portfolio contemplated hereby and partners, directors, officers
and employees of the Investment Adviser and such affiliates.
ARTICLE V
ACTIVITIES OF THE INVESTMENT ADVISER
The services of the Investment Adviser to the Trust and the Portfolio
are not to be deemed to be exclusive, and the Investment Adviser and each
affiliate is free to render services to others. It is understood that
Trustees, officers, employees and shareholders of the Trust and the Portfolio
are or may become interested in the Investment Adviser and its affiliates, as
directors, officers, employees, partners and shareholders or otherwise, and
that the Investment Adviser and directors, officers, employees, partners and
shareholders of the Investment Adviser and its affiliates are or may become
similarly interested in the Trust or the Portfolio as shareholders or
otherwise.
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<PAGE> 8
ARTICLE VI
INVESTMENT ADVISER STATEMENTS PURSUANT TO IMRO RULES
Any complaints concerning the Investment Adviser should be in writing
addressed to the attention of the Managing Director of the Investment Adviser.
The Trust has the right to obtain from the Investment Adviser a copy of the
IMRO complaints procedure and to approach IMRO and the Investment Ombudsman
directly.
The Investment Adviser may make recommendations, subject to the
investment restrictions referred to in Article I herein, regarding Investments
Not Readily Realisable (as that term is used in the IMRO Rules) or investments
denominated in a currency other than British pound sterling. There can be no
certainty that market makers will be prepared to deal in unlisted or thinly
traded securities and an accurate valuation may be hard to obtain. The value
of investments recommended by the Investment Adviser may be subject to exchange
rate fluctuations which may have favorable or unfavorable effects on
investments.
The Investment Adviser may make recommendations, subject to the
investment restrictions referred to in Article I herein, regarding options,
futures or contracts for differences. Markets can be highly volatile and such
investments carry a high degree of risk of loss exceeding the original
investment and any margin on deposit.
ARTICLE VII
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the date first above
written, and shall remain in force for two years thereafter and thereafter, but
only so long as such continuance is specifically approved at least annually by
(i) the Trustees, or by the vote of a majority of the outstanding voting
securities of the Portfolio, and (ii) a majority of those Trustees who are not
parties to this Agreement
8
<PAGE> 9
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 Trustees or by the vote of a majority of the outstanding
voting securities of the Portfolio, or by the Investment Adviser, on sixty
days' written notice to the other party. This Agreement shall automatically
terminate in the event of its assignment.
ARTICLE VIII
AMENDMENTS OF THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) by the vote of a majority of outstanding voting
securities of the Portfolio, and (ii) a majority of those Trustees 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 IX
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 X
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
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<PAGE> 10
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.
ARTICLE XI
LIMITATION OF OBLIGATIONS OF THE PORTFOLIO
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written. This Agreement may be
executed by the parties hereto on any number of counterparts, all of which
together shall constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of
its series, MERCURY MASTER
GLOBAL BALANCED PORTFOLIO
By:
-------------------------
Title:
MERCURY ASSET MANAGEMENT
INTERNATIONAL LTD.
By:
-------------------------
Title:
10
<PAGE> 1
EXHIBIT 4(j)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of March 24, 1999, by and between MERCURY ASSET
MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter referred to as
the "Trust") on behalf of its series MERCURY MASTER GLOBAL BALANCED PORTFOLIO
(the "Portfolio"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited
partnership (hereinafter referred to as "FAM").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust 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 Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each
of which may offer separate classes of shares; and
WHEREAS, the Trustees have established and designated the Portfolio as
a series of the Trust; and
WHEREAS, FAM is engaged principally in rendering investment advisory
services and is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, the Trust, on behalf of the Portfolio, has entered into an
investment advisory agreement (the "MAM Advisory Agreement"), dated March 24,
1999, with Mercury Asset
<PAGE> 2
Management International Ltd. (hereinafter referred to as "MAM") pursuant to
which MAM will provide investment advisory and management services to the Trust
and the Portfolio; and
WHEREAS, FAM is willing to provide investment advisory services to the
Portfolio with respect to all or a portion of the daily cash position of the
Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and FAM hereby agree as follows:
ARTICLE I
Duties of FAM
The Trust hereby employs FAM to act as an investment adviser for all
or a portion of the daily cash position of the Portfolio and to furnish, or
arrange for affiliates to furnish, certain investment advisory services with
respect to such portion of the Portfolio, as described below, subject to the
policies of, review by and overall control of the Trustees of the Trust, for
the period and on the terms and conditions set forth in this Agreement. FAM
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, to be paid by
MAM, provided for herein. FAM 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 Trust or
Portfolio in any way or otherwise be deemed agents of the Trust or Portfolio.
2
<PAGE> 3
FAM shall provide (or arrange for affiliates to provide) the Trust
with such investment research, advice and supervision as the latter may from
time to time consider necessary for the proper management of the portion of the
daily cash position of the Portfolio from time to time managed by FAM. All
advice and recommendations provided by FAM shall be subject to the restrictions
of the Declaration of Trust and By-Laws of the Trust, as amended from time to
time, the provisions of the Investment Company Act and the statements relating
to the Portfolio's investment objectives, investment policies and investment
restrictions as the same are set forth in the Trust's current Registration
Statement.
ARTICLE II
Allocation of Charges and Expenses
FAM assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall pay all
compensation of officers of the Trust and all Trustees of the Trust who are
affiliated persons of FAM to the extent not otherwise paid by MAM.
ARTICLE III
Compensation of FAM
For the services rendered, the facilities furnished and expenses
assumed by FAM, the Trust shall use its reasonable best efforts to cause MAM to
pay to FAM at the end of each calendar month a fee of at least $1.00 or another
amount to be determined from time to time by MAM and FAM, but in no event in
excess of the amount that MAM actually receives for providing services to the
Trust and the Portfolio pursuant to the MAM Advisory Agreement.
3
<PAGE> 4
ARTICLE IV
Limitation of Liability of FAM
FAM shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of services rendered hereunder with respect to the Trust and the
Portfolio, 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 "FAM"
shall include any affiliates of FAM performing services for the Trust
contemplated hereby and partners, directors, officers and employees of FAM and
such affiliates.
ARTICLE V
Activities of FAM
The services of FAM to the Trust and the Portfolio are not to be
deemed to be exclusive, and FAM and any person controlled by or under common
control with FAM (for purposes of this Article V referred to as "affiliates")
is free to render services to others. It is understood that Trustees,
officers, employees and shareholders of the Trust and Portfolio are or may
become interested in FAM and its affiliates, as directors, officers, partners,
employees and shareholders, and that FAM and its affiliates are or may become
similarly interested in the Trust or Portfolio.
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 the date of termination of the
Advisory Agreement (but not later than two years
4
<PAGE> 5
after the effective date of this Agreement) and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) a majority of those Trustees 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 Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio, or by FAM, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
approved in compliance with the requirements of the Investment Company Act and
the rules and regulations thereunder.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a 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
5
<PAGE> 6
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 the 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.
ARTICLE X
Limitation of Obligations of the Portfolio
The obligations of the Portfolio shall be limited to the assets of the
Portfolio, shall be separate from the obligations of any other series of the
Trust, and the Portfolio shall not be liable for the obligations of any other
series of the Trust.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written. This Agreement may be executed
by the parties hereto in any number of counterparts, all of which together
shall constitute one and the same instrument.
MERCURY ASSET MANAGEMENT
MASTER TRUST on behalf of its series
MERCURY MASTER GLOBAL BALANCED
PORTFOLIO
By:
---------------------------------------
Title:
FUND ASSET MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.,
GENERAL PARTNER
By:
---------------------------------------
Title:
7
<PAGE> 1
EXHIBIT 10(a)
INDEPENDENT AUDITORS' CONSENT
Mercury Asset Management Master Trust:
We consent to the incorporation by reference in this Registration Statement of
Mercury Asset Management Master Trust of our reports dated October 9, 1998 for
Mercury Master International Portfolio and Mercury Master Pan-European Growth
Portfolio, and January 21, 1999 for Mercury Master U.S. Large Cap Portfolio and
Mercury Master Gold and Mining Portfolio respectively and to our report dated
April 21, 1999 for Mercury Master Global Balanced Portfolio, appearing in part
B of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 27, 1999
<PAGE> 1
EXHIBIT 10(b)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in Part A and
Part B of Mercury Master Global Balanced Portfolio of Mercury Asset Management
Master Trust, filed as part of Registration Statement No. 811-09049.
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP
New York, New York
April 26, 1999
<PAGE> 1
EXHIBIT 12
CERTIFICATE OF HOLDERS OF BENEFICIAL INTERESTS
Mercury Asset Management Funds, Inc., and Mercury Funds Distributor, a
division of Princeton Funds Distributor, Inc., each a holder of the beneficial
interests in the amounts indicated below, of Mercury Asset Management Master
Trust (the "Trust"), do hereby confirm to the Trust their representations that
they purchased such shares for investment purposes, with no present intention
of redeeming or reselling any portion thereof.
<TABLE>
<S> <C>
Mercury Asset Management Funds, Inc.
By: /s/ TERRY K. GLENN
------------------------------------
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
By: /s/ DONALD C. BURKE
------------------------------------
Dated: April 9, 1999
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================================
Mercury Master Global Balanced Portfolio of Mercury
Asset Management Master Trust
===========================================================================================================
<S> <C>
Mercury Asset Management
Funds, Inc. $100,000
- -----------------------------------------------------------------------------------------------------------
Mercury Funds Distributor,
a division of Princeton Funds
Distributor, Inc. $100
- -----------------------------------------------------------------------------------------------------------
Total $100,100
===========================================================================================================
</TABLE>
