As filed with the Securities and Exchange Commission on March 3, 2000
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. 5
(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
The Chrysler Building Princeton, New Jersey 08543-9011
405 Lexington Avenue
New York, New York 10174
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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.
This Registration Statement has been prepared as a single document
consisting of Parts A, B and C, none of which is to be used or distributed as a
stand alone document.
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Parts A and B of Amendment No. 4 to the Registrant's Registration Statement,
dated October 26, 1999, which relate to the Mercury Master International
Portfolio, Mercury Master Pan-European Growth Portfolio, Mercury Master U.S.
Large Cap Portfolio, Mercury Master Gold and Mining Portfolio and Mercury Master
U.S. Small Cap Growth Portfolio, are incorporated by reference into this
Amendment No. 5 to the Registrant's Registration Statement.
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TABLE OF CONTENTS
PART A. INFORMATION REQUIRED IN A PROSPECTUS
ITEM 1. FRONT AND BACK COVER PAGES ....................................... *
ITEM 2. RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE .......... *
ITEM 3. RISK/RETURN SUMMARY: FEE TABLE ................................... *
ITEM 4. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES,
AND RELATED RISKS ................................................ 2
ITEM 5. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE ...................... *
ITEM 6. MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE .................. 9
ITEM 7. SHAREHOLDER INFORMATION .......................................... 11
ITEM 8. DISTRIBUTION ARRANGEMENTS ........................................ 14
ITEM 9. FINANCIAL HIGHLIGHTS INFORMATION ................................. *
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
ITEM 10. COVER PAGE ....................................................... 1
ITEM 11. TRUST HISTORY .................................................... 2
ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS ....... 2
ITEM 13. MANAGEMENT OF THE REGISTRANT ..................................... 17
ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES .............. 19
ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES ........................... 20
ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES ......................... 22
ITEM 17. CAPITAL STOCK AND OTHER SECURITIES ............................... 23
ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SECURITIES ................... 24
ITEM 19. TAXATION OF THE TRUST ............................................ 26
ITEM 20. UNDERWRITERS ..................................................... 28
ITEM 21. CALCULATION OF PERFORMANCE DATA .................................. 28
ITEM 22. FINANCIAL STATEMENTS ............................................. 29
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS ......................................................... C-1
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT .... C-3
ITEM 25. INDEMNIFICATION .................................................. C-3
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER ............. C-5
ITEM 27. PRINCIPAL UNDERWRITERS ........................................... C-10
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS ................................. C-10
ITEM 29. MANAGEMENT SERVICES .............................................. C-11
ITEM 30. UNDERTAKINGS ..................................................... C-11
* Responses to Items 1, 2, 3, 5 and 9 have been omitted pursuant to paragraph
2(b) of Instruction B of the General Instructions to Form N-1A.
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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
will 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 are 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 to be 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 stripped securities. The 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 invests 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 and it has certain
investment restrictions all of which 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.
Market and Selection Risk
Market risk is the risk that the stock or bond markets in one or more
countries in which the Portfolio invests will go down in value, including
the possibility that one or more markets will go down sharply and
unpredictably. Selection risk is the risk that the investments that
Portfolio management selects will underperform the stock or bond markets
or other funds with similar investment objectives and investment
strategies.
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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 certain 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").
A number of European countries have entered into EMU in an effort to
reduce barriers between themselves and eliminate fluctuations in their
currencies. EMU established a single European currency (the "euro"), which
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all initial EMU participants by July 1, 2002.
Certain securities (beginning with government and corporate bonds) were
redenominated in the euro. These securities trade and make dividend and
other payments only in euros. Like other investment companies and business
organizations, including the companies in which the Portfolio invests, the
Portfolio could be adversely affected:
- If the transition to euro, or EMU as a whole, does not
continue to proceed as planned.
- If a participating country withdraws from EMU.
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 may 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 in the yield on the Portfolio's
investments. Borrowing will cost the Portfolio interest expense and other
fees. These costs of borrowing may reduce the Portfolio's return. Certain
securities that the Portfolio buys may create leverage, including, for
example, derivative securities.
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.
PART B
If you would like further information about the Portfolio, including how
it invests, please see Part B.
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 $550 billion in
assets (as of January 2000) 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.
Peter Kaye has been employed as an investment professional by the
Investment Adviser or its Mercury affiliates since 1994.
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.
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:
Rupert Watson, Director of Mercury Asset Management, has been employed as
an investment professional by the Investment Adviser or its Mercury
affiliates since 1998 and was employed by the Bank of England from 1994 to
1997. Mr. Watson is primarily responsible for the day-to-day management of
the bond portion of the Portfolio's portfolio.
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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 Mercury
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 twenty-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 (the "Exchange") is open after
the close of business on the Exchange, based on prices at the time of closing.
The Exchange generally closes at 4:00 p.m. Eastern
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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
placed. 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 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 day the Exchange is open for trading. 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 day the Portfolio calculates its net asset value.
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 day the Exchange is open for trading 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 that is a regulated
investment company will be able to satisfy the requirements of Subchapter M of
the Code assuming that the investor has invested all of its assets in the
Portfolio.
A NOTE ABOUT YEAR 2000:
As the year 2000 began, there were few problems caused by the inability of
certain computer systems to tell the difference between the year 2000 and the
year 1900 (commonly known as the "Year 2000 Problem"). It is still possible that
some computer systems could malfunction in the future because of the Year 2000
Problem or as a result of actions taken to address the Year 2000 Problem.
Portfolio management does not anticipate that its services or those of the
Portfolio's other service providers will be adversely affected, but Portfolio
management will continue to monitor the situation. If malfunctions related to
the Year 2000 Problem do arise, the Portfolio and its investments could be
negatively affected.
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ITEM 8. - DISTRIBUTION ARRANGEMENTS.
Investments in the Portfolio will be made without a sales charge. 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 day the Exchange is open for trading.
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 March 3, 2000 (the "Prospectus"),
which has been filed with the Securities and Exchange Commission (the
"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 Portfolio's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. The financial statements 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 in this Statement of Additional Information by reference to their
1999 annual reports and November 1999 semi-annual reports to shareholders. In
addition, the financial statements which relate to the Mercury Master U.S. Small
Cap Growth Portfolio are incorporated by reference to its November 1999
semi-annual report to shareholders. You may request copies of the annual and
semi-annual reports at no charge by calling 1-888-763-2260 between 8:00 a.m. and
8:00 p.m. on any business day. In addition, the Prospectus and Statement of
Additional Information included in Amendment No.4 to the Registrant's
Registration Statement, dated October 26, 1999, which relate to the Mercury
Master International Portfolio, Mercury Master Pan-European Growth Portfolio,
Mercury Master U.S. Large Cap Portfolio, Mercury Master Gold and Mining
Portfolio and Mercury Master U.S. Small Cap Growth Portfolio, are incorporated
by reference into this Statement of Additional Information.
The date of this Statement of Addition Information is March 3, 2000.
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ITEM 11. - TRUST HISTORY.
The Trust is a Delaware business trust organized on April 23, 1998. The
Trust consists of twenty-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 investment objective of the Portfolio 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
realized.
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 policies 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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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") set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). EMU established a single
common European currency (the "euro") that was introduced on January l, 1999 and
is expected to replace the existing national currencies of all EMU participants
by July 1, 2002. EMU took effect for the initial EMU participants on January 1,
1999. Certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are listed,
are traded, and make dividend and other payments only in euros.
No assurance can be given that the EMU will continue to 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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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 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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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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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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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 or Restricted 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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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 or Restricted
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 sold in private placement transactions
between issuers and their purchasers and may be neither listed on an exchange
nor traded in other established markets. In many cases, privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a
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public trading market, privately placed securities may be less liquid and more
difficult to value than publicly traded securities. To the extent that privately
placed securities may be resold in privately negotiated transactions, the prices
realized from the sales, due to illiquidity, could be less than those originally
paid by the Portfolio or less than their fair market value. In addition, issuers
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
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.
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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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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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 choose not to 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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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. 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.
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.
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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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 Portfolio's Board of 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 transactions, the sum of the
market value of OTC options currently outstanding which are held by the
Portfolio, the market value of the underlying securities covered by OTC call
options currently outstanding which were sold by the Portfolio and margin
deposits on the Portfolio's existing OTC options on futures contracts exceed 15%
of the net assets of the Portfolio, taken at market value, together with all
other assets of the Portfolio which are illiquid or are not otherwise readily
marketable. However, if an 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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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.
Portfolio Turnover. The portfolio turnover rate is calculated by dividing
the lesser of the Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. The portfolio turnover rate is
generally anticipated to be under 100% for the equity portion of the portfolio
and under 200% for the bond portion of the portfolio. A high rate of portfolio
turnover results in correspondingly higher brokerage commission expenses and may
also result in negative tax consequences, such as an increase in capital gains
dividends or in ordinary income dividends.
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 (59)--Trustee (2)(3)--410 Uris Hall, Columbia University,
New York, New York 10027. Professor of Finance and Economics at the Columbia
University Graduate School of Business since 1991; Chairman of Outward Bound USA
since 1997; Chairman of Wave Hill, Inc. since 1980.
James T. Flynn (60)--Trustee(2)(3)--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 (48)--Trustee(2)(3)--Harvard Business School, Morgan Hall
393, Soldiers Field, Boston, Massachusetts 02163. Industrial Bank of Japan
Professor of Finance, Senior Associate Dean and Chairman of the MBA Program of
Harvard University Graduate School of Business Administration since 1999; James
R. Williston Professor of Business Administration of Harvard University Graduate
School of Business from 1997 to 1999; 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)(3)--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 1987.
Peter John Gibbs (41)--Senior Vice President (1)(2)--33 King William
Street, London, EC4R 9AS, England. Chairman and Chief Executive Officer of
Mercury International since 1998; Director of Mercury Asset Management Ltd.
since 1993; Director of Mercury Asset Management International Channel Islands
Ltd. since 1997.
Donald C. Burke (39)--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, Inc. since 1999; Vice President of Princeton
Funds Distributor, Inc. since 1999; First Vice President of MLAM and FAM from
1997 to 1999; Director of Taxation of MLAM since 1990; Vice President of MLAM
and FAM from 1990 to 1997.
Robert E. Putney, III (39)--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.
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(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.
(3) Member of the Trust's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of Trustees not affiliated with the Investment Adviser or FAM
or with an affiliate of the Investment Adviser or FAM.
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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 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-interested
Director/Trustee"), for service to the Fund and Portfolio, a fee of $3,000 per
year plus $500 per in-person Board meeting attended. The Corporation and the
Trust also compensate each member of the Audit and Nominating Committee (the
"Committee"), which consists of all of the non-interested Directors/Trustees, at
a rate of $1,000 per year. The Corporation and the Trust reimburse each
non-interested Director/Trustee for his out-of-pocket expenses relating to
attendance at Board and Committee meetings.
The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay to the non-interested 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-interested Directors/Trustees for the
calendar year ended December 31, 1999.
<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 $35,667
James T. Flynn . . . . . $6,000 None $67,500
W. Carl Kester . . . . . $6,000 None $67,167
Karen P. Robards $6,000 None $35,667
</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 (defined above as the "Fund") of Mercury
Asset Management Funds, Inc. (defined above as the "Corporation"), a Maryland
corporation, controls the Portfolio. As of February 29, 2000, the Fund owns of
record 100% of the currently outstanding interests of the Portfolio. As of
February 29, 2000, the Fund's holdings of the Portfolio represent 16.46% 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
"Investment 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. For the period
April 30, 1999 (commencement of operations) to November 30, 1999, the Portfolio
paid the Investment Adviser a fee of $1,578,240.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay, or cause an 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 an 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 the
transfer agent, expenses of portfolio transactions, expenses of redemption of
shares, Commission fees, expenses of registering the shares under Federal, state
or non-U.S. laws, fees and actual out-of-pocket expenses of non-interested
Trustees, accounting and pricing costs (including the daily calculation of net
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Trust or the Portfolio. 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 Investment Advisory Agreement.
For the period April 30, 1999 (commencement of operations) to November 30, 1999,
the Investment Adviser paid no fees to FAM pursuant to the Sub-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 ownership of
its voting securities or their power to exercise a controlling influence over
its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Advisory Agreement and Sub-Advisory Agreement will each continue 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 of the Trust
or by a majority of the outstanding shares of the Portfolio and (b) by a
majority of the Trustees of the Trust who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the Investment Company
Act) of any such party. The Investment Advisory Agreement is not assignable and
will automatically terminate in the event of its assignment. In addition, such
contract may be terminated with respect to the Portfolio by the vote of a
majority of the outstanding voting securities of such Portfolio, or by the
Investment Adviser without penalty on 60 days' written notice to the other
party.
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 AUDITORS.
Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village
Boulevard, Princeton, New Jersey 08540-6400, 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, The Chrysler Building, 405 Lexington
Avenue, New York, New York 10174, is counsel for the Trust.
CUSTODIAN.
Brown Brothers Harriman & Co., (the "Custodian") 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.
Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of Portfolio's portfolio
transactions and the allocation of brokerage. The Trust has no obligation to
deal with any broker or group of brokers in the execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, the Investment Adviser seeks to
obtain the best net results for the Portfolio, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonable competitive commission rates, the Portfolio does not
necessarily pay the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Trustees, the Investment Adviser may consider sales of shares of the
Portfolio as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Trust; however, whether or not a particular
broker or dealer sells shares of a Portfolio neither qualifies not disqualifies
such broker or dealer to execute transactions for the Trust.
Subject to obtaining the best net results, brokers who provide
supplemental investment research services to the Investment Adviser may receive
orders for transactions by the 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 its Investment Advisory Agreement and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. If in the judgment of the Investment
Adviser the Trust will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Investment Adviser exercises investment
discretion. Conversely, the Trust may be the primary beneficiary of the
supplemental research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Trust anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Trust
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
For the period April 30, 1999 to November 30, 1999, the following table
shows the amount of brokerage commissions paid by the Portfolio to Merrill
Lynch, the percentage of the Portfolio's brokerage commissions paid to Merrill
Lynch, the percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Merrill Lynch and
aggregate brokerage commissions paid by the Portfolio:
Aggregate brokerage commissions paid to Merrill Lynch........... $ 7,597
% of Portfolio's aggregate brokerage commissions
paid to Merrill Lynch........................................ 2.04%
% of Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through
Merrill Lynch................................................ 0.70%
Aggregate brokerage commissions paid............................ $372,541
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The Trust may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Trust and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Trust as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts, the Trust
will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Trust may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Trust may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Trustees of the Trust that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objectives and Policies -- Investment
Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Trust in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Trust and annual statements as
to aggregate compensation will be provided to the Trust.
The Board of Trustees of the Trust has considered the possibility of
seeking to recapture for the benefit of the Portfolio brokerage commissions and
other expenses of portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the
Portfolio to the Investment Adviser. After considering all factors deemed
relevant, the Board of Trustees made a determination not to seek such recapture.
The Trustees will reconsider this matter from time to time.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Trust or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being purchased or
the supply or securities being sold, there may be an adverse effect on price.
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 twenty-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 after the close of business on the New York Stock
Exchange ("NYSE") on each day the NYSE is open for trading based on prices at
the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The NYSE is not open for
trading on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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 that are traded on stock exchanges are valued at the
last sale price on the exchange on which such securities are traded as of the
close of business on the day the securities are being valued, or lacking any
sales, at the last available bid price for long positions, and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Board of Trustees as the primary market. Long
positions in securities traded in the OTC market are valued at the last
available bid price or yield equivalent obtained from one or more dealers or
pricing services approved by the Board of Trustees of the Trust. Short positions
in securities traded in the OTC market are valued at the last available ask
price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. When the Portfolio writes an 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 ask 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. The value of swaps,
including interest rate swaps, caps and floors, will be determined by obtaining
dealer quotations. Other investments, including financial futures contracts and
related options, are stated at market value. Obligations with remaining
maturities of 60 days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair valuations. Repurchase
agreements will be valued at cost plus accrued interest. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of Trustees
of the Trust. Such valuations and procedures will be reviewed periodically by
the Board of Trustees of the Trust.
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 may 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 day the NYSE is open for trading. 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 after
the close of business of the NYSE on the next determination of net asset value
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 day the NYSE is open for trading 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.
The Trust, on behalf of the Portfolio, has entered into a joint committed
line of credit with other investment companies advised by the Investment Adviser
and its affiliates and a syndicate of banks that is intended to provide the
Portfolio with a temporary source of cash to be used to meet redemption requests
from Portfolio shareholders in extraordinary or emergency circumstances.
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.
ITEM 22. - FINANCIAL STATEMENTS
The Portfolio's audited financial statements are incorporated in this Part
B by reference to its 1999 annual report to shareholders. The financial
statements 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 in this Statement
of Additional Information by reference to their 1999 annual reports and November
1999 semi-annual reports to shareholders. In addition, the financial statements
which relate to the Mercury Master U.S. Small Cap Growth Portfolio are
incorporated by reference to its November 1999 semi-annual report to
shareholders. You may request copies of the annual and semi-annual reports, at
no charge by calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. on any
business day.
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APPENDIX A
Investment Policies Involving the Use of Indexed
Securities, Options, Futures and Swaps
The Portfolio is authorized to use certain derivative instruments,
including indexed and inverse securities, options, futures, swaps and foreign
exchange transactions, as described below and in Part B. 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, 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. 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. 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 futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the 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 choose not to 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 exceed 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 of 1933, as amended (the "Securities Act").
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 is 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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<PAGE>
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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<PAGE>
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>
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>
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>
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>
"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 repay principal may be affected over time by adverse 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>
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>
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(2)
1(f) -- Certificate of Amendment of Certificate of Trust(3)
1(g) -- Amendment No. 2 to Declaration of Trust of Registrant(4)
1(h) -- Amendment No. 3 to Declaration of Trust of Registrant(4)
1(i) -- Certificate of Amendment of Trust(5)
1(j) -- Amendment No. 4 to Declaration of Trust of Registrant(5)
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.(3)
4(d) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Pan-European Growth Portfolio
and Fund Asset Management, L.P.(3)
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.(3)
4(h) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Gold and Mining Portfolio and
Fund Asset Management, L.P.(3)
4(i) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Mercury Asset Management International Ltd.(3)
4(j) -- Sub-Advisory Agreement between the Trust on behalf of Mercury Master Global Balanced
Portfolio and Fund Asset Management, L.P.(3)
4(k) -- Investment Advisory Agreement between the Trust on behalf of Mercury Master U.S. Small Cap Growth
Portfolio and Mercury Asset Management US, a division of Fund Asset Management, L.P.(5)
4(l) -- Sub-Advisory Agreement between Mercury Asset Management US, a division of Fund Asset Management, L.P.
and Mercury Asset Management International, Ltd.(5)
5 -- Not Applicable.
6 -- Not Applicable.
7 -- Custody Agreement between Registrant and Brown Brothers Harriman & Co.(1)
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8(a) -- Placement Agent Agreement between Registrant and Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.(1)
8(b) -- License Agreement relating to Use of Name among Mercury Asset Management International Ltd.,
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)
8(d) -- Fee Agreement among Mercury Asset Management International Ltd., Fund Asset Management, L.P.
and the Trust on behalf of Mercury Master Pan-European Growth Portfolio.(4)
8(e) -- Fee Agreement among Mercury Asset Management International Ltd., Fund Asset Management, L.P.
and the Trust on behalf of Mercury Master International Portfolio.(4)
8(f) -- Fee Agreement among Mercury Asset Management International Ltd., Fund Asset Management, L.P.
and the Trust on behalf of Mercury Master U.S. Large Cap Portfolio.(4)
8(g) -- Fee Agreement among Mercury Asset Management International Ltd., Fund Asset Management, L.P.
and the Trust on behalf of Mercury Master Gold and Mining Portfolio.(4)
8(h) -- Fee Agreement among Mercury Asset Management International Ltd., Fund Asset Management, L.P.
and the Trust on behalf of Mercury Master Global Balanced Portfolio.(4)
8(i) -- Credit Agreement between the Registrant and a syndicate of banks(6)
8(j) -- Fee Waiver/Expense Reimbursement Agreement relating to Mercury Master Gold and Mining Portfolio(7)
9 -- Not Applicable.
10 -- Consent of Deloitte & Touche LLP, independent auditors for the 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.(3)
12(d) -- 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. Small Cap
Growth Portfolio.(5)
13 -- Not Applicable.
14 -- Not Applicable.
15 -- Not Applicable.
16 -- Form of Code of Ethics.
</TABLE>
- ----------
(1) Incorporated by reference to identically numbered exhibit to
Registrant's initial Registration Statement on Form N-1A (File No. 811-09049).
(2) Incorporated by reference to identically numbered exhibit to Amendment
No. 1 to Registrant's Registration Statement on Form N-1A (File No. 811-09049).
(3) Incorporated by reference to identically numbered exhibit to Amendment
No. 2 to Registrant's Registration Statement on Form N-1A (File No. 811-09049).
(4) Incorporated by reference to identically numbered exhibit to Amendment
No. 3 to Registrant's Registration Statement on Form N-1A (File No. 811-09049).
(5) Incorporated by reference to identically numbered exhibit to Amendment
No. 4 to Registrant's Registration Statement on Form N-1A (File No. 811-09049).
(6) Incorporated by reference to Exhibit 8(b) to the Registration
Statement on Form N-1A of Master Premier Growth Trust (File No. 811-09733),
filed December 31, 1999.
(7) Incorporated by reference to Exhibit 8(e) to the Registration
Statement on Form N-1A of Mercury Gold and Mining Portfolio of Mercury Asset
Management Master Funds, Inc. (File Nos. 333-65955 and 811-08797).
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<PAGE>
ITEM 24. - PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
None.
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>
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>
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
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since May 1997 for his own account or in the capacity of director, officer,
partner or trustee.
<TABLE>
<CAPTION>
POSITIONS WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ---------- ------------------ ---------------------------------------
<S> <C> <C>
Peter John Gibbs.............................. Chairman and Chief Director of Mercury Asset Management
Executive Officer Ltd; and Director of Mercury Asset
Management International Channel Islands
Ltd.
Carol Consuelo Brooke ........................ Deputy Chairman Director of Merrill Lynch (UK) Pension
Plan Trustees Limited; Director of Munich
London Investment Management Ltd.; Director
of Benenden School (Kent) Ltd., Cranbrook
Kent, TN17, 4AA; Director of Mercury Asset
Management Pension Trustee Co. Ltd.
David Morris Fitzgerald Scott ................ Director Director of Corporation of St. Lawrence
College
Debra Anne Searle............................. Secretary Secretary of Mercury Asset Management Ltd.;
Secretary of Mercury Asset Management Group, Ltd.
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>
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
Services Ltd; Mercury Asset Management Holdings Ltd.; Mercury Asset Management
No. 1 Limited; Mercury Asset Management No. 2 Limited; Mercury Asset Management
Pension Trustee Co. Ltd.; Mercury Executor & Trustee Co. Ltd.; Mercury
(Finance) 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; Seligman Trust Limited; and Third Grosvenor
Limited.
The address of each of the following is 25 Ropemaker Place, London,
England EC4R 9AS.
Ms. Searle also serves as officer of the following companies: Wimco
Nominees Ltd.; 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; Benson Nominees Limited;
C.P.W. Limited; Capital Markets; Chetwynd Nominees Limited; Citygate Nominees
Limited; and CLO Funding 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 July 1, 1997 for his, her or its own account or in the capacity of
director, officer, partner or trustee.
C-6
<PAGE>
<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")
Princeton Services . . . . . . . . General Partner General Partner of MLAM
Jeffrey M. Peek . . . . . . . . . . President President of MLAM; President and Director of
Princeton Services; Executive Vice President of
ML & Co.; Managing Director and Co-Head of the
Investment Banking Division of Merrill Lynch in
1997.
Terry K. Glenn . . . . . . . . . . Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President and Director of Princeton
Funds Distributor, Inc. ("PFD"); Director of FDS;
President of Princeton Administrators.
Gregory A. Bundy . . . . . . . . . Chief Operating Officer Chief Operating Officer and Managing Director
and Managing of MLAM; Chief Operating Officer and Director of
Director Princeton Services; Co-CEO of Merrill Lynch
Australia from 1997 to 1999.
Donald C. Burke . . . . . . . . . . Senior Vice President, Senior Vice President and Treasurer of MLAM
Treasurer and since 1999; Senior Vice President and Treasurer
Director of of Princeton Services; Vice President
Taxation of PFD; First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from 1990 to 1997.
Michael G. Clark . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Treasurer and
Director of PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1996 to 1997.
Robert C. Doll, Jr. . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Chief Investment
Officer of Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from 1991 to 1999.
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.
Michael J. Hennewinkel . . . . . . Senior Vice President Senior Vice President and General Counsel of MLAM;
and General Counsel Senior Vice President of Princeton Services.
Philip L. Kirstein . . . . . . . . Senior Vice President Senior Vice President and Secretary of MLAM;
and Secretary Senior Vice President, Director and Secretary
of Princeton Services.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME FAM VOCATION OR EMPLOYMENT
---- ----------------- -------------------------------------------
<S> <C> <C>
Debra W. Landsman-Yaros . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of PFD.
Stephen M.M. Miller . . . . . . . . Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services.
Joseph T. Monagle, Jr. . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Brian A. Murdock . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
Gregory D. Upah . . . . . . . . . . Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services.
</TABLE>
Mr. Glenn is President and Mr. Burke is Vice President and Treasurer of
all or substantially all of the investment companies described in the following
two paragraphs, and Messrs. Doll, Giordano, 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 Focus Twenty Fund, Inc., Merrill Lynch Funds for
Institutions Series, Merrill Lynch Large Cap Series Funds, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Premier Growth Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
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 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California
C-8
<PAGE>
Insured Fund III, Inc., MuniHoldings California Insured Fund IV, Inc.,
MuniHoldings California Insured Fund V, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Insured Fund, Inc.,
MuniHoldings Insured Fund II, Inc., MuniHoldings Insured Fund III, Inc.,
MuniHoldings Insured Fund IV, Inc., MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured Fund IV, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings New York Insured Fund IV, Inc., 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, an
affiliate of the Investment Adviser, 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 Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Index
Funds, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund II, Inc. MLAM also acts as sub-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
Mercury Asset Management International, Ltd., an affiliate of MLAM, acts
as the investment adviser or sub-adviser for the following open-end registered
investment companies: Mercury Master Global Balanced Portfolio of Mercury Asset
Management Master Trust (the "Trust"); Mercury Master Gold and Mining Portfolio
of the Trust; Mercury Master International Portfolio of the Trust; Mercury
Master Pan-European Growth Portfolio of the Trust; Mercury Master U.S. Large Cap
Portfolio of the Trust; Mercury Master U.S. Small Cap Growth Portfolio of the
Trust and Mercury V.I. U.S. Large Cap Fund of Mercury Asset Management V.I.
Funds, Inc.
C-9
<PAGE>
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 Pan-European
Growth Fund of Mercury Asset Management Funds, Inc.; Mercury U.S. Large Cap Fund
of Mercury Asset Management Funds, Inc.; Mercury U.S. Small Cap Growth Fund of
Mercury Asset Management Funds, Inc.; Summit Cash Reserves Fund of Financial
Institutions Series Trust; 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,
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 President and Director
Michael G. Clark.................................. Treasurer and Director None
Thomas J. Verage.................................. Director None
Robert W. Crook .................................. Senior Vice President None
Michael J. Brady.................................. Vice President None
William M. Breen.................................. Vice President None
Donald C. Burke .................................. Vice President Vice President and Treasurer
James J. Fatseas.................................. Vice President None
Debra W. Landsman-Yaros .......................... Vice President None
Michelle T. Lau .................................. Vice President None
Salvatore Venezia ................................ Vice President None
William Wasel .................................... Vice President None
Robert Harris .................................... Secretary None
</TABLE>
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>
(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>
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 3rd day of March, 2000.
MERCURY ASSET MANAGEMENT MASTER TRUST
(Registrant)
By: /s/ Terry K. Glenn
--------------------------------
(Terry K. Glenn,
Executive Vice President)
C-12
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
16 -- Form of Code of Ethics.
C-13
INDEPENDENT AUDITORS' CONSENT
Mercury Asset Management Master Trust:
We consent to the incorporation by reference in Amendment No. 5 of Registration
Statement No. 811-09049 of Mercury Asset Management Master Trust of our reports
dated July 19, 1999 for Mercury Master International Portfolio, Mercury Master
Pan-European Growth Portfolio, Mercury Master U.S. Large Cap Portfolio and
Mercury Master Gold and Mining Portfolio, and to our report dated January 18,
2000 for Mercury Master Global Balanced Portfolio, all appearing in their
respective annual reports to shareholders.
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
Princeton, New Jersey
March 1, 2000
CODE OF ETHICS
MERRILL LYNCH ASSET MANAGEMENT GROUP (MLAMG)
REGISTERED INVESTMENT COMPANIES
AND THEIR INVESTMENT ADVISERS
AND PRINCIPAL UNDERWRITER
Section 1 - Background
This Code of Ethics is adopted under Rule 17j-1 under the Investment
Company Act of 1940 ("1940 Act") and Rule 204-2(a) under the Investment Advisers
Act of 1940 and has been approved by the Boards of Directors of each of the
MLAMG funds.(1) Except where noted, the Code applies to all MLAMG employees.
Section 17(j) under the Investment Company Act of 1940 makes it unlawful
for persons affiliated with investment companies, their principal underwriters
or their investment advisers to engage in fraudulent personal securities
transactions. Rule 17j-1 requires each Fund, investment adviser and principal
underwriter to adopt a Code of Ethics that contains provisions reasonably
necessary to prevent an employee from engaging in conduct prohibited by the
principles of the Rule. The Rule also requires that reasonable diligence be used
and procedures be instituted which are reasonably necessary to prevent
violations of the Code of Ethics.
On August 23, 1999, the SEC adopted amendments to Rule 17j-1 which require
greater board oversight of personal trading practices, more complete reporting
of employee securities trading and preclearance of employee purchases of initial
public offerings and private placements. The amendments require, among other
things, that MLAMG provide its fund boards annually a written report that (i)
describes issues that arose during the previous year under the Code, including
information about material code violations and sanctions imposed and (ii)
certifies to the board that MLAMG has adopted procedures reasonably necessary to
prevent access persons from violating the Code.
Section 2 - Statement of General Fiduciary Principles
The Code of Ethics is based on the fundamental principle that MLAMG and
its employees must put client interests first. As an investment adviser, MLAMG
has fiduciary responsibilities to its clients, including the registered
investment companies (the "Funds") for which it serves as investment adviser.
Among MLAMG's fiduciary responsibilities is the responsibility to ensure that
its employees conduct their personal
- ----------
(1) As applicable herein, MLAMG includes all AMG investment advisory affiliates
and the affiliated principal underwriter of investment companies registered
under the 1940 Act.
<PAGE>
securities transactions in a manner which does not interfere or appear to
interfere with any Fund transactions or otherwise take unfair advantage of their
relationship to the Funds. All MLAMG employees must adhere to this fundamental
principle as well as comply with the specific provisions set forth herein. It
bears emphasis that technical compliance with these provisions will not insulate
from scrutiny transactions which show a pattern of compromise or abuse of an
employee's fiduciary responsibilities to the Funds. Accordingly, all MLAMG
employees must seek to avoid any actual or potential conflicts between their
personal interest and the interest of the Funds. In sum, all MLAMG employees
shall place the interest of the Funds before personal interests.
Section 3 - Insider Trading Policy
All MLAMG employees are subject to MLAMG's Insider Trading Policy, which
is considered an integral part of this Code of Ethics. MLAMG's Insider Trading
Policy, which is set forth in the MLAMG Code of Conduct, prohibits MLAMG
employees from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits MLAMG employees from communicating to third parties any material
nonpublic information about any security or issuer of securities. Additionally,
no MLAMG employee may use his or her position or knowledge of MLAMG activities
or the activities of any Merrill Lynch & Co., Inc. entity to benefit the Funds
or to gain personal benefit. Any violation of MLAMG's Insider Trading Policy may
result in sanctions, which could include termination of employment with MLAMG.
(See Section 10--Sanctions).
Section 4 - Restrictions Relating to Securities Transactions
A. General Trading Restrictions for all Employees
The following restrictions apply to all MLAMG employees:
1. Accounts. No employee, other than those employed by Mercury Asset
Management International Ltd. ("MAMI"), may engage in personal
securities transactions other than through an account maintained
with Merrill Lynch, Pierce, Fenner & Smith Inc. or another Merrill
Lynch broker/dealer entity ("Merrill Lynch") unless written
permission is obtained from the Compliance Director. Similarly, no
MAMI employee may engage in personal securities transactions other
than through an account maintained with Merrill Lynch or The Bank of
New York Europe Limited ("BNYE") unless written permission is
obtained from the Compliance Director.
2. Accounts Include Family Members and Other Accounts. Accounts of
employees include the accounts of their spouses, dependent relatives
and members of the same household, trustee and custodial accounts or
any other account in which the employee has a financial interest or
over which the employee
-2-
<PAGE>
has investment discretion.
3. Preclearance. All employees must obtain approval from the Compliance
Director or preclearance delegatee prior to entering any securities
transaction (with the exception of exempted securities as listed in
Section 5) in all accounts. Approval of a transaction, once given,
is effective only for the business day on which approval was
requested or until the employee discovers that the information
provided at the time the transaction was approved is no longer
accurate.
4. Restrictions on Purchases. No employee may purchase any security
which at the time is being purchased, or to the employee's knowledge
is being considered for purchase, by any Fund managed by MLAMG. This
restriction, however, does not apply to personal trades of employees
which coincide with trades by any MLAMG index fund.
5. Restrictions on Sales. No employee may sell any security which at
the time is actually being sold, or to the employee's knowledge is
being considered for sale, by any Fund managed by MLAMG. This
restriction, however, does not apply to personal trades of employees
which coincide with trades by any MLAMG index fund.
6. Restrictions on Related Securities. The restrictions and procedures
applicable to the transactions in securities by employees set forth
in this Code of Ethics shall similarly apply to securities that are
issued by the same issuer and whose value or return is related, in
whole or in part, to the value or return of the security purchased
or sold or being contemplated for purchase or sale during the
relevant period by the Fund. For example, options or warrants to
purchase common stock, and convertible debt and convertible
preferred stock of a particular issuer would be considered related
to the underlying common stock of that issuer for purposes of this
policy. In sum, the related security would be treated as if it were
the underlying security for the purpose of the pre-clearance
procedures described herein.
7. Private Placements. Employee purchases and sales of "private
placement" securities (including all private equity partnerships,
hedge funds, limited partnership or venture capital funds) must be
precleared directly with the Compliance Director or designee. No
employee may engage in any such transaction unless the Compliance
Director or his designee and the employee's senior manager have each
previously determined in writing that the contemplated investment
does not involve any potential for conflict with the investment
activities of the Funds.
If, after receiving the required approval, an employee has any
material role in the subsequent consideration by any Fund of an
investment in the same or affiliated
-3-
<PAGE>
issuer, the employee must disclose his or her interest in the
private placement investment to the Compliance Director and the
employee's department head. The decision to purchase securities of
the issuer by a Fund must be independently reviewed and authorized
by the employee's department head.
8. Initial Public Offerings. Employees may not purchase securities in
"hot" initial public offerings.
9. Prohibition on Short-Term Profits. Employees are prohibited from
profiting on any sale and subsequent purchase, or any purchase and
subsequent sale of the same (or equivalent) securities occurring
within 60 calendars days ("short-term profit"). This holding period
also applies to all permitted options transactions; therefore, for
example, an employee may not purchase or write an option if the
option will expire in less than 60 days (unless the employee is
buying or writing an option on a security that the employee has held
more than 60 days). In determining short-term profits, all
transactions within a 60-day period in all accounts related to the
employee shall be netted regardless of an employee's intentions to
do otherwise (e.g., tax or other trading strategies). Should an
employee fail to preclear a trade that results in a short-term
profit, the trade would be subject to reversal with all costs and
expenses related to the trade borne by the employee, and the
employee would be required to disgorge the profit. Transactions not
required to be precleared under Section 5 will not be subject to
this prohibition.
B. Additional Trading Restrictions for Decision-Making Employees
The following additional restrictions apply to decision-making employees
(i.e., employees who recommend or determine which securities transactions a Fund
undertakes). The Compliance Department will retain and keep current a list of
decision-making employees.
1. Notification. A decision-making employee must notify the Compliance
Department or preclearance designee of any intended transactions in
a security for his or her own personal account which is owned or
contemplated for purchase by a Fund for which the employee has
decision-making authority.
2. Blackout Periods. A decision-making employee may not buy or sell a
security within 7 calendar days either before or after a purchase or
sale of the same or related security by a Fund or portfolio
management group for which the employee has decision-making
authority. For example, if a Fund trades a security on day 0, day 8
is the first day the manager, analyst or portfolio management group
member of that Fund may trade the security for his or her own
account.
3. Establishing Positions Counter to Fund Positions. No decision-making
employee may establish a long position in a personal account in a
security if a
-4-
<PAGE>
Fund for which the employee is a decision-making employee holds a
put option on such security (aside from a put purchased for hedging
purposes where the fund holds the underlying security), has written
a call option on such security, or otherwise maintains a position
that would benefit from a decrease in the value of the underlying
security (e.g., a short sale other than a short sale
"against-the-box").
No decision-making employee may purchase a put option or write a
call option where a Fund for which such person has decision-making
responsibilities holds a long position in the underlying security.
No decision-making employee may short sell any security where a Fund
for which the employee has decision-making authority holds a long
position in the same security or where such Fund otherwise maintains
a position in respect of which the Fund would benefit from an
increase in the value of the security.
4. Purchasing an Investment for a Fund that is a Personal Holding. A
decision-making employee may not purchase an investment for a Fund
that is also a personal holding of the employee or any other account
covered by this Code of Ethics, or the value of which is materially
linked to a personal holding, unless the decision-making employee
has obtained prior approval from the employee's senior manager.
5. Index Funds. The restrictions of this Section 4.B. do not apply to
purchases and sales of securities by decision-making employees which
coincide with trades by any MLAMG index fund.
C. Trading Restrictions for Disinterested Directors of the MLAMG Funds
The following restrictions apply only to disinterested directors of the
MLAMG Funds (i.e., any director who is not an "interested person" of a MLAMG
fund within the meaning of Section 2(a)(10) of the 1940 Act):
1. Restrictions on Purchases. No disinterested director may purchase
any security which, to the director's knowledge at the time, is
being purchased or is being considered for purchase by any Fund
managed by MLAMG.
2. Restrictions on Sales. No disinterested director may sell any
security which, to the director's knowledge at the time, is being
sold or is being considered for sale by any Fund managed by MLAMG.
3. Restrictions on Trades in Securities Related in Value. The
restrictions applicable to the transactions in securities by
disinterested directors shall similarly apply to securities that are
issued by the same issuer and whose value or return is related, in
whole or in part, to the value or return of the security purchased
or sold by the Fund (see Section 4.A.6.).
-5-
<PAGE>
Section 5 - Exempted Transactions/Securities
MLAMG has determined that the following securities transactions do not
present the opportunity for improper trading activities that Rule 17j-1 is
designed to prevent; therefore, the restrictions set forth in Section 4 of this
Code (including preclearance, prohibition on short-term profits and blackout
periods) shall not apply.
Exempted transactions/securities may not be executed/held in brokerage
accounts maintained outside of Merrill Lynch.
The reporting requirements listed in Section 6 of this Code, however,
shall apply to the securities and transaction types set forth in paragraphs F-J
of this section.
A. Purchases or sales in an account over which the employee has no direct or
indirect influence or control (e.g., an account managed on a fully
discretionary basis by an investment adviser or trustee).
B. Purchases or sales of direct obligations of the U.S. Government.
C. Purchases or sales of open-end investment companies (including money
market funds), variable annuities and unit investment trusts. (However,
unit investment trusts traded on a stock exchange (e.g., MITS, SPDRS,
DIAMONDS, NASDAQ 100, etc.) must be precleared.)
D. Purchases or sales of bank certificates, bankers acceptances, commercial
paper and other high quality short-term debt instruments, including
repurchase agreements.
E. Merrill Lynch common stock which is purchased and sold within any Merrill
Lynch employee benefit plan and stock purchased and sold through similar
such employer-sponsored plans in which a spouse of a MLAMG employee may
participate.
F. Purchases or sales which are non-volitional on the part of the employee
(e.g., an in-the-money option that is automatically exercised by a broker;
a security that is called away as a result of an exercise of an option; or
a security that is sold by a broker, without employee consultation, to
meet a margin call not met by the employee).
G. Purchases which are made by reinvesting cash dividends pursuant to an
automatic dividend reinvestment plan.
H. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer.
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I. Purchases or sales of commodities, futures (including currency futures and
futures on broad-based indices), options on futures and options on
broad-based indices. (Currently, "broad-based indices" include only the
S&P 100, S&P 500, FTSE 100 and Nikkei 225.)
J. The receipt of a bona fide gift of securities. (Donations of securities,
however, require preclearance.)
Section 6 - Reporting by Employees
The requirements of this Section 6 apply to all MLAMG employees. The
requirements will also apply to all transactions in the accounts of spouses,
dependent relatives and members of the same household, trustee and custodial
accounts or any other account in which the employee has a financial interest or
over which the employee has investment discretion. The requirements do not apply
to securities acquired for accounts over which the employee has no direct or
indirect control or influence. All employees whose accounts are maintained at
Merrill Lynch or BNYE are deemed to have automatically complied with the
requirements of this Section 6 B. and C. as to reporting executed transactions
and personal holdings. Transactions and holdings in such accounts are
automatically reported to the Compliance Department through automated systems.
Employees who have approved accounts outside of Merrill Lynch or BNYE are
deemed to have complied with the requirements of this Section 6 B. and C.
provided that the Compliance Department receives duplicate statements and
confirmations directly from their brokers.
Employees who effect reportable transactions outside of a brokerage
account (e.g., optional purchases or sales through an automatic investment
program directly with an issuer) will be deemed to have complied with this
requirement by preclearing transactions with the Compliance Department and by
reporting their holdings annually on the "Personal Securities Holdings" form, as
required by the Compliance Department.
A. Initial Holdings Report. Each new MLAMG employee will be given a copy of
this Code of Ethics upon commencement of employment. All new employees
must disclose their personal securities holdings to the Compliance
Department within 10 days of commencement of employment with MLAMG.
(Similarly, securities holdings of all new related accounts must be
reported to the Compliance Department within 10 days of the date that such
account becomes related to the employee.) With respect to exempt
securities referred to in Section 5 which do not require
preclearance/reporting, employees must nonetheless initially report those
exempt securities defined in Section 5.F.-J. (This reporting requirement
does not apply to holdings that are the result of transactions in exempt
securities as defined in Section 5.A.-E.) Initial holdings reports must
identify the title, number of shares, and principal amount with respect to
each security holding. Within 10 days of commencement of employment, each
employee shall file an Acknowledgement
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stating that he or she has read and understands the provisions of the
Code.
B. Records of Securities Transactions. All employees must preclear each
securities transaction (with the exception of exempt transactions in
Section 5) with the Compliance Department or preclearance designee. At the
time of preclearance, the employee must provide a complete description of
the security and the nature of the transaction. As indicated above,
employees whose accounts are maintained at Merrill Lynch or BNYE or who
provide monthly statements directly from their brokers/dealers are deemed
to have automatically complied with the requirement to report executed
transactions.
C. Annual Holdings Report. All employees must submit an annual holdings
report reflecting holdings as of a date no more than 30 days before the
report is submitted. As indicated above, employees whose accounts are
maintained at Merrill Lynch or BNYE or who provide monthly statements
directly from their brokers/dealers are deemed to have automatically
complied with this requirement.
With respect to exempt securities referred to in Section 5 which do not
require preclearance/reporting, employees must nonetheless annually report
the holdings of those exempt securities that are defined in Section
5.F.-J. (This reporting requirement, however, does not apply to exempt
securities as defined in Section 5.A.-E.)
D. Annual Certification of Compliance. All MLAMG employees must certify
annually to the Compliance Department that (1) they have read and
understand and agree to abide by this Code of Ethics; (2) they have
complied with all requirements of the Code of Ethics, except as otherwise
notified by the Compliance Department that they have not complied with
certain of such requirements; and (3) they have reported all transactions
required to be reported under the Code of Ethics.
E. Review of Transactions and Holdings Reports. All transactions reports and
holdings reports will be reviewed by appropriate management or compliance
personnel according to procedures established by the Compliance
Department.
Section 7 - Reporting by Disinterested Directors of MLAMG Funds
A disinterested director of a Fund need only report a transaction in a
security if the director, at the time of that transaction, knew or, in the
ordinary course of fulfilling the official duties of a director of such Fund,
should have known that, during the 15-day period immediately preceding the date
of the transaction by the director, the security was purchased or sold by the
Fund or was being considered for purchase or sale by the Fund. In reporting such
transactions, disinterested directors must provide: the date of the transaction,
a complete description of the security, number of shares, principal amount,
nature of the transaction, price, commission, and name of broker/dealer through
which the transaction was effected.
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As indicated in Section 6, disinterested directors are required to certify
annually to the Compliance Department that (1) they have read and understand and
agree to abide by this Code of Ethics; (2) they have complied with all
requirements of the Code of Ethics, except as otherwise reported to the
Compliance Department that they have no complied with certain of such
requirements; and (3) they have reported all transactions required to be
reported under the Code of Ethics.
Section 8 - Approval and Review by Boards of Directors
The Board of Directors of each MLAMG Fund, including a majority of
directors who are disinterested directors, must approve this Code of Ethics.
Additionally, any material changes to this Code must be approved by the Board of
Directors within six months after adoption of any material change. The Board of
Directors must base its approval of the Code and any material changes to the
Code on a determination that the Code contains provisions reasonably necessary
to prevent employees from engaging in any conduct prohibited by Rule 17j-1.
Prior to approving the Code or any material change to the Code, the Board of
Directors must receive a certification from the Fund, the Investment Adviser or
Principal Underwriter that it has adopted procedures reasonably necessary to
prevent employees from violating the Code of Ethics.
Section 9 - Review of MLAMG Annual Report
At least annually, the Fund, the Investment Adviser and the Principal
Underwriter must furnish to the Fund's Board of Directors, and the Board of
Directors must consider, a written report that (1) describes any issues arising
under this Code of Ethics or procedures since the last report to the Board of
Directors, including, but not limited to, information about material violations
of the Code of Ethics or procedures and sanctions imposed in response to the
material violations and (2) certifies that the Fund, Investment Adviser and
Principal Underwriter have adopted procedures reasonably necessary to prevent
employees from violating this Code of Ethics.
Section 10 - Sanctions
Potential violations of the Code of Ethics must be brought to the
attention of the Compliance Director or his designee and are investigated. Upon
completion of the investigation, if necessary, the matter will be reviewed by
the Code of Ethics Review Committee and the employee's senior manager. The Code
of Ethics Review Committee will make a determination as to whether any sanction
should be imposed. Sanctions will include, but are not limited to, a letter of
caution or warning, reversal of a trade, fine or other monetary penalty,
disgorgement of a profit or absorption of costs associated with a trade,
suspension of personal trading privileges, suspension of employment (with or
without compensation), and termination of employment.
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Section 11 - Exceptions
An exception to any of the policies, restrictions or requirements set forth
herein may be granted only upon a showing by the employee to the Code of Ethics
Review Committee that such employee would suffer extreme financial hardship
should an exception not be granted. Should the subject of the exception request
involve a transaction in a security, a change in the employee's investment
objectives, tax strategies, or special new investment opportunities would not
constitute acceptable reasons for a waiver.
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