<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
SECURITIES ACT FILE NO.
INVESTMENT COMPANY ACT FILE NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. [ ]
(Check appropriate box or boxes)
------------------------
MERCURY JAPAN FUND
of Mercury Alpha Fund, Inc.
(Exact name of Registrant as specified in charter)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of the Registration Statement.
------------------------
Copies to:
<TABLE>
<S> <C> <C>
Counsel for the Fund:
JOEL H. GOLDBERG, Esq. and PHILIP L. KIRSTEIN, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP Merrill Lynch Asset Management, L.P.
919 Third Avenue P.O. Box 9011
New York, New York 10022 Princeton, New Jersey 08543-9011
</TABLE>
Title of Securities Being Registered...................Shares of Common
Stock (par value $.0001 per share)
Mercury Master Trust has also executed this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
MERCURY JAPAN FUND
of Mercury Alpha Fund, Inc.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING
INFORMATION ABOUT RISKS. PLEASE READ IT BEFORE
YOU INVEST AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS - XXXXXXXX 00, 1998
<PAGE> 3
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[GRAPHIC] KEY FACTS
- -----------------------------------------------------------------
About the Mercury Japan Fund................................ 3
Fees and Expenses........................................... 5
[GRAPHIC] THE FUND IN DETAIL
- -----------------------------------------------------------------
How the Fund Invests........................................ 7
Investment Risks............................................ 8
Adviser's Historical Performance Data....................... 11
[GRAPHIC] YOUR ACCOUNT
- -----------------------------------------------------------------
Merrill Lynch Select Pricing System......................... 13
How to Buy, Sell and Exchange Shares........................ 18
Merrill Lynch Fee-Based Programs............................ 22
How Shares are Priced....................................... 22
[GRAPHIC] MORE ABOUT THE FUND
- -----------------------------------------------------------------
Master/Feeder Structure..................................... 24
Dividends, Capital Gains and Taxes.......................... 24
Management of the Fund...................................... 25
[GRAPHIC] ADDITIONAL INFORMATION
- -----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERCURY JAPAN FUND
<PAGE> 4
Key Facts [GRAPHIC]
As you read this paragraph you will notice terms that have been highlighted. In
an effort to help investors better understand the many concepts involved in
making an investment decision, we have defined terms in the sidebar.
COMMON STOCK -- units of ownership of a public corporation.
PREFERRED STOCK -- class of capital stock that often pays dividends at a
specified rate and has preference over common stock in dividend payments and
liquidation of assets.
CONVERTIBLE STOCK -- corporate securities (usually preferred stock) that are
exchangeable for another type of securities form (usually common stock) at a
pre- stated price or formula.
ABOUT THE MERCURY JAPAN FUND
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S GOALS?
The Fund's main goal is long-term capital growth. In other words, it tries to
choose investments that will go up in value. Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. We cannot guarantee that the Fund will achieve its goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund will invest primarily in equity securities of companies located in
Japan that the Fund believes are undervalued or have good prospects for earnings
growth. The Fund'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 Fund will invest in COMMON STOCK, PREFERRED STOCK,
securities convertible into common stock (also referred to as CONVERTIBLE STOCK)
and other instruments.
The Fund invests all of its assets in a Portfolio of Mercury Master Trust that
has the same goals as the Fund. All investments will be made at the level of the
Portfolio. This structure is sometimes called a "master/feeder" structure. The
Fund's investment results will correspond directly to the investment results of
the underlying Portfolio it invests in. For simplicity, this Prospectus uses the
term "Fund" to include the underlying Portfolio the Fund invests in.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any equity fund, the value of the Fund's investments, and therefore the
value of the Fund's shares, may go up or down. These price changes may occur
because the stock market in general is rising or falling. At other times, there
are specific factors that may affect the price of a particular investment. If
the value of the Fund's investments goes down, you may lose money.
In addition, because the Fund will invest a substantial part of its assets in
foreign securities, the Fund will be subject to additional risks. For example,
the Fund's securities may go up or down in value depending on foreign exchange
rates, foreign political and economic developments and U.S. and foreign laws
relating to foreign investment. Foreign securities may also be less liquid, more
volatile and harder to value than U.S. securities.
MERCURY JAPAN FUND 3
<PAGE> 5
[GRAPHIC] Key Facts
WHO SHOULD INVEST?
- --------------------------------------------------------------------------------
The Fund may be an appropriate investment for you if you:
- - Are investing with long-term goals, such as for retirement or to fund a
child's education.
- - Are not looking for current income.
- - Can tolerate the increased price volatility and currency fluctuations
associated with investments in foreign securities.
- - Are willing to accept the risk that your investment may fluctuate over the
short term in exchange for the potential of higher long-term gains.
- - Want to diversify your portfolio.
- - Want to complement your U.S. holdings through Japanese equity investments.
4 MERCURY JAPAN FUND
<PAGE> 6
[GRAPHICS] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which all mutual funds may charge:
Expenses paid directly by the shareholder:
SHAREHOLDER FEES -- fees paid directly from your investment. These include sales
charges and redemption fees, which you may pay when you buy or sell shares of
the Fund.
Expenses paid indirectly by the shareholder. (These costs are deducted from the
Fund's total assets before the daily share price is calculated and before
dividends and other distributions are made):
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- a fee paid to the investment advisor for managing the Fund.
DISTRIBUTION FEES -- a fee used to support the Fund's marketing and
distribution efforts, such as advertising and promotion.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S FEES AND EXPENSES?
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND.
MERCURY JAPAN FUND(a)
<TABLE>
<CAPTION>
SHAREHOLDER FEES: CLASS A CLASS B(b) CLASS C CLASS D
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE OF OFFERING
PRICE) 5.25%(c) NONE NONE 5.25%(c)
- ---------------------------------------------------------------------------------------------------------
MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS
A PERCENTAGE OF ORIGINAL PURCHASE PRICE
OR REDEMPTION PROCEEDS, WHICHEVER IS
LOWER) NONE (d) 4.00%(c) 1.00%(c) NONE(d)
- ---------------------------------------------------------------------------------------------------------
MAXIMUM SALES CHARGE (LOAD) ON DIVIDEND
REINVESTMENT NONE NONE NONE NONE
- ---------------------------------------------------------------------------------------------------------
REDEMPTION FEE NONE NONE NONE NONE
- ---------------------------------------------------------------------------------------------------------
EXCHANGE FEE NONE NONE NONE NONE
- ---------------------------------------------------------------------------------------------------------
MAXIMUM ACCOUNT FEES NONE NONE NONE NONE
- ---------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES:
- ---------------------------------------------------------------------------------------------------------
MANAGEMENT FEE(e) % % % %
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR ACCOUNT MAINTENANCE
(12B-1) FEE(F) NONE 1.00% 1.00% 0.25%
ACCOUNT MAINTENANCE FEES NONE 0.25% 0.25% 0.25%
DISTRIBUTION FEES NONE 0.75% 0.75% NONE
- ---------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCLUDING CUSTODIAN AND
TRANSFER AGENCY FEES)(G) % % % %
[ADMINISTRATIVE FEES(H)] % % % %
- ---------------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES % % % %
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fees and expenses include the expenses of both the Fund and the
Portfolio it invests in.
(b) Class B shares automatically convert to Class D about years after you buy
them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year. See page for details.
(e) Paid by the Portfolio. The sub-investment adviser provides accounting
services to the Fund at its cost.
(f) If you hold Class B or C shares for a long time, it may cost you more in
distribution (12b-1) fees than the maximum sales charges that you would have
paid if you had bought one of the other classes.
(g) Based on estimated amounts for the current fiscal year. The Fund pays the
Transfer Agent [$11.00] for each Class A and D shareholder account and
[$14.00] for each Class B and C shareholder account and reimburses the
Transfer Agent's out-of-pocket expenses. The Fund pays a [0.10%] fee for
certain accounts that participate in the Merrill Lynch Mutual Fund Advisor
Programs. The Fund also pays a [$0.20] monthly closing account charge which
is assessed upon all accounts which close during the year. This fee
commences the month following the month the account is closed and ends at
the end of the calendar year.
(h) Paid by the Fund.
MERCURY JAPAN FUND 5
<PAGE> 7
[GRAPHIC] Key Facts
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. This assumption is not meant to
indicate you will receive a 5% annual rate of return. Your annual return may be
more or less than the 5% used in this example. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
CLASS A CLASS B* CLASS C CLASS D
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ $ $ $
- ---------------------------------------------------------------------------------------
THREE YEARS $ $ $ $
- ---------------------------------------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
CLASS A CLASS B* CLASS C CLASS D
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR $ $ $ $
- ---------------------------------------------------------------------------------------
THREE YEARS $ $ $ $
- ---------------------------------------------------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately years after purchase. See
note (b) above.
6 MERCURY JAPAN FUND
<PAGE> 8
The Fund in Detail [GRAPHIC]
DERIVATIVES -- a financial instrument the value of which is derived from the
value of some underlying security, asset, indicator (such as interest rates) or
index.
OPTION CONTRACT -- a contract giving the buyer the right, but not the
obligation, to buy (in the case of a call) or sell (in the case of a put) a
particular security, index or other asset at a specified price and future time.
FUTURES CONTRACT -- a contract obligating a party to purchase (in the case of a
long contract) or sell (in the case of a short contract) a specified index or
other asset at a specified price and future time.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund seeks to provide shareholders with long-term capital growth by
investing primarily in a diversified portfolio of equity securities of companies
located in Japan. In selecting securities, the Fund places principal emphasis on
those securities that the management of the Fund believes are undervalued or
have good prospects for earnings growth.
The Fund will generally invest at least 80% of its assets in equity securities
of companies located in Japan. Equity securities consist of:
- - Common Stock
- - Preferred Stock
- - Securities convertible into Common Stock (including ADRs, GDRs and EDRs)
- - DERIVATIVE SECURITIES, such as OPTIONS (including warrants) and FUTURES, the
value of which is based on a common stock or group of common stocks.
The Fund will focus on investing in common stocks of companies that its
management believes are undervalued or have good prospects for earnings growth.
A company's stock is undervalued when the stock's current price is less than
what the Fund believes a share of the company is worth. A company's worth can be
assessed by several factors, such as financial resources, value of tangible
assets, sales and earnings growth, product development, quality of management,
and overall business prospects. A company's stock may become undervalued when
most investors fail to perceive the Company's strengths in one or more of these
areas. A company whose earnings per share grow faster than inflation and the
economy in general usually has a higher stock price over time than companies
with slower earnings growth. The Fund'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. Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities.
The Fund may invest in debt securities that are issued together with a
particular equity security. The Fund may invest in derivatives to hedge,
including anticipatory hedges. In an anticipatory hedge, the Fund uses
derivatives to enable it to reallocate its investments more quickly than it
could by buying and selling the securities underlying the hedge.
The Fund may invest in both large and small companies. The Fund has no
prescribed minimum holding period for investments, and will buy or sell
MERCURY JAPAN FUND 7
<PAGE> 9
[GRAPHIC] The Fund in Detail
PORTFOLIO MANAGEMENT TEAM -- The Fund is managed by a team of 21 investment
professionals who participate in the team's research process and stock
selection. The senior investment professionals in this group include Ronald
Pullen, Timothy J. Orchard, Juliet Marber, Makoto Kikuchi, and Masahiko
Tokutake. is primarily responsible for the day-to-day management of the
Fund's investment program.
securities whenever it sees an appropriate opportunity, without considering
potential tax consequences to shareholders.
The Fund will normally invest almost all of its assets in the above described
manner. The Fund therefore plans to borrow cash when needed to satisfy
redemption requests. (The Fund is permitted to borrow up to one-third of the
value of its total assets.)
There are many different investment strategies the Fund may use in seeking its
investment objective, and some that the Fund may not use. These strategies and
restrictions are explained in the Fund's Statement of Additional Information. If
you would like to learn more about how the Fund may invest, you should request
the Statement of Additional Information.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund.
As with any mutual fund, there can be no guarantee that the Fund will meet its
goals, or that the Fund's performance will be positive over any period of time.
There are two principal risks associated with an investment in the Fund. One is
that the equity markets will suffer a general decline. The other is that the
securities selected by the Fund will underperform the market. In addition,
because the Fund will invest a substantial part of its assets in foreign
securities, the Fund's securities may go up or down in value depending on
foreign exchange rates, foreign political and economic developments and U.S. and
foreign laws relating to foreign investment. In addition to these risks, certain
investment techniques that the Fund may use entail other risks:
- - LIQUIDITY, INFORMATION AND VALUATION RISKS. Certain securities, including
securities of companies in developing countries and securities of small
companies, may be illiquid or volatile, making it difficult or impossible to
sell them at the time and at the price that the Fund would like. Also,
important information about these companies, 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.
8 MERCURY JAPAN FUND
<PAGE> 10
[GRAPHIC] The Fund in Detail
- - OTHER FOREIGN SECURITY RISKS.
- The value of the Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.
- The costs of foreign securities transactions tend to be higher than in the
U.S.
- The Fund's foreign securities holdings may be adversely affected by foreign
government action.
- If the Fund purchases a bond issued by a foreign government, the government
may be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.
- Investors are exposed to the Japanese markets. This relatively narrow
investment focus could increase volatility and risk compared to a more
broadly diversified Fund.
- - DERIVATIVES. Derivatives involve certain risks, including many of the risks
described above. Other risks include the risk that:
- Changes in the value of the derivative used as a hedging instrument may not
match changes in the value of the instrument being hedged.
- The issuer or counterparty in a derivative transaction may not perform its
side of the contract.
- If the Fund sells a call option or purchases a short futures contract, it may
lose any gain in the security or index it would have received had it not
engaged in the option or futures transaction.
- If the Fund sells a put option, the Fund may lose much more money than it
received for selling the option.
- If the Fund decides not to exercise an option that it has purchased, it will
lose the entire premium that it paid to buy the option.
- If the Fund buys a long futures contract and securities decline in value, or
if the Fund buys a short futures contract and securities increase in value
the Fund may lose money on the futures contract.
MERCURY JAPAN FUND 9
<PAGE> 11
[GRAPHIC] The Fund in Detail
- 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 Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund 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 risks of leverage are described under "Borrowing."
- - DEBT SECURITIES. Debt securities, such as bonds, involve credit risk, which
is the risk that the borrower will not make timely payments of principal and
interest. These securities are also subject to interest rate risk, which is
the risk that the value of the security may fall when interest rates rise. 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.
- - BORROWING. The use of borrowing can increase the Fund's exposure to market
risk. That is, if the Fund borrows money to make more investments than it
otherwise could, and those investments go down in value, the Fund's losses
will be magnified. The Fund pays interest and other charges on borrowings.
These charges can reduce the Fund's returns.
- - 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 Fund to sell the
securities back to the issuer or a third party at a time that is
disadvantageous to the Fund.
10 MERCURY JAPAN FUND
<PAGE> 12
[GRAPHIC] The Fund in Detail
ADVISER'S HISTORICAL PERFORMANCE DATA
- --------------------------------------------------------------------------------
The following tables present the adviser's historical performance data for
accounts with similar (although not necessarily identical) objectives and
policies to the Fund's. These accounts have been managed by the adviser using
investment styles and strategies substantially similar to those to be used in
managing the Fund. THESE FIGURES DO NOT REPRESENT THE PERFORMANCE OF THE FUND.
The Fund is newly organized and does not yet have a performance record. The
Fund's actual performance may be higher or lower.
The figures presented were calculated in the following manner:
- - Figures reflect total return. This shows you how much an investment has
changed in value over the stated time period and includes both capital
appreciation and income. The term "annualized total return" shows that
cumulative total returns for a stated time period (i.e., 1, 3, 5 or 10 years)
have been averaged over the period.
- - The accounts presented are not United States mutual funds, and are not subject
to the same types of expenses that the Fund will pay. To reflect more
accurately the fees and expenses the Fund is expected to pay, the performance
information shown below reflects the gross performance expressed in U.S.
dollar terms of each included account, restated to reflect the fees and
expenses expected to be paid by each Class of the Fund. "Point of purchase"
figures reflect also the deduction of all sales charges (including initial or
deferred sales charges and 12b-1 fees), while the "NAV" figures do not. The
fees and expenses do not reflect any fee waivers or reimbursements that may
benefit the Fund. The figures shown are equal to or lower than the actual net
results of the accounts shown.
- - The performance of each of the accounts may have been influenced by the level
of the account's total assets. Had an account's assets been lower, its
performance might also have been lower.
- - The accounts presented were managed in several base currencies, not only
United States dollars, but were valued on a daily basis. The Fund will
calculate its net asset value daily in United States dollars. For purposes of
this presentation, the accounts' performance history was converted into United
States dollars on at least a quarterly basis using exchange rate movements to
approximate the equivalent dollar returns which might have been achieved. The
adviser manages accounts with similar objectives and policies to the Fund that
are not included in this presentation because of
MERCURY JAPAN FUND 11
<PAGE> 13
[GRAPHIC] The Fund in Detail
the difficulty of presenting performance on a consistent basis due to domicile
or fee structure differences.
TOTAL RETURNS
<TABLE>
<CAPTION>
POINT OF PURCHASE(1) NAV(2) INDEX
- --------------------------------------------------------------------------
<S> <C> <C>
COPY TO COME
- --------------------------------------------------------------------------
COPY TO COME
- --------------------------------------------------------------------------
COPY TO COME
- --------------------------------------------------------------------------
COPY TO COME
- --------------------------------------------------------------------------
</TABLE>
(1) The maximum sales charge has been deducted.
(2) Excludes all sales charges (including initial or deferred sales charges and
12b-1 fees).
The adviser's historical data covers approximately years and reflects the
performance of accounts. As of , 1998, the net assets managed under
these accounts totaled approximately .
12 MERCURY JAPAN FUND
<PAGE> 14
Your Account [GRAPHIC]
MERRILL LYNCH SELECT PRICING SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four classes of shares, each with its own sales charge and
expense structure. Each share class represents an ownership interest in the same
investment portfolio. The class of shares you should choose will be affected by
the size of your investment and how long you plan to hold your shares. Because
the selection of a mutual fund involves many considerations, a Merrill Lynch
Financial Consultant may be helpful, particularly when you decide which class
may be most cost effective for you.
For example, if you select Class A or D, you will pay a sales charge at the time
of purchase. If you buy Class D shares, you will pay an ongoing account
maintenance fee of [0.25%]. If you select Class B or C, you can invest the full
amount of your purchase price, but you will be subject to a sales charge payable
over time and possibly when you sell shares. You may be eligible for a sales
charge waiver. See below.
Class B and C shares pay a distribution fee of [0.75%] and an account
maintenance fee of [0.25%] on an ongoing basis. Because these fees are paid out
of the Fund's assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying an initial sales
charge.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, Inc., an
affiliate of Merrill Lynch.
MERCURY JAPAN FUND 13
<PAGE> 15
[GRAPHIC] Your Account
To better understand the Merrill Lynch Select Pricing System in this prospectus,
we have summarized the information below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AVAILABILITY LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH MERRILL LYNCH. THROUGH MERRILL LYNCH.
- CERTAIN RETIREMENT LIMITED AVAILABILITY LIMITED AVAILABILITY
PLANS THROUGH OTHER THROUGH OTHER
- PARTICIPANTS OF SECURITIES DEALERS. SECURITIES DEALERS.
MERRILL LYNCH
SPONSORED PROGRAMS
- CERTAIN AFFILIATES OF
MERRILL LYNCH.
- ------------------------------------------------------------------------------------------------------------
INITIAL SALES CHARGE? YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PRICE IS INVESTED IN PRICE IS INVESTED IN
CHARGES AVAILABLE FOR SHARES OF THE FUND. SHARES OF THE FUND.
LARGER INVESTMENTS.
- ------------------------------------------------------------------------------------------------------------
DEFERRED SALES NONE (EXCEPT FOR YES. PAYABLE (IF YOU 1% IF YOU REDEEM WITHIN
CHARGE? PURCHASES OVER $1 REDEEM WITHIN SIX YEARS ONE YEAR OF PURCHASE.
MILLION WHICH ARE OF PURCHASE).
REDEEMED WITHIN ONE
YEAR).
- ------------------------------------------------------------------------------------------------------------
ANNUAL EXPENSES? LOWEST ANNUAL EXPENSES HIGHER THAN CLASS A AND HIGHER THAN CLASS A AND
OF ALL CLASSES. D SHARES. D SHARES.
- ------------------------------------------------------------------------------------------------------------
ACCOUNT MAINTENANCE NONE. 0.25% ACCOUNT 0.25% ACCOUNT
AND DISTRIBUTION MAINTENANCE FEE MAINTENANCE FEE
FEES? 0.75% DISTRIBUTION FEE 0.75% DISTRIBUTION FEE
- ------------------------------------------------------------------------------------------------------------
CONVERSION TO CLASS D NO. YES, AUTOMATICALLY NO.
SHARES? AFTER YEARS.
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS D
<S> <C>
AVAILABILITY GENERALLY AVAILABLE
THROUGH MERRILL LYNCH.
LIMITED AVAILABILITY
THROUGH OTHER
SECURITIES DEALERS.
- ----------------------------------------------------------------------
INITIAL SALES CHARGE? YES. PAYABLE AT TIME OF
PURCHASE. LOWER SALES
CHARGES AVAILABLE FOR
LARGER INVESTMENTS.
- ----------------------------------------------------------------------------------------------
DEFERRED SALES NONE (EXCEPT FOR
CHARGE? PURCHASES OVER $1
MILLION WHICH ARE
REDEEMED WITHIN ONE
YEAR).
- ------------------------------------------------------------------------------------------------------------
ANNUAL EXPENSES? LOWER ANNUAL EXPENSES
THAN CLASS B OR CLASS C
BUT HIGHER THAN CLASS
A.
- ------------------------------------------------------------------------------------------------------------
ACCOUNT MAINTENANCE 0.25% ACCOUNT
AND DISTRIBUTION MAINTENANCE FEE
FEES? NO DISTRIBUTION FEE
- ------------------------------------------------------------------------------------------------------------
CONVERSION TO CLASS D NO.
SHARES?
- ------------------------------------------------------------------------------------------------------------
</TABLE>
14 MERCURY JAPAN FUND
<PAGE> 16
[GRAPHIC] Your Account
RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Merrill Lynch
Mutual Funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you aggregate all shares of Merrill Lynch Select Pricing System funds that
you buy within a 13 month period. Certain restrictions apply.
We have grouped Class A and Class D shares and Class B and Class C shares
together because they have many similarities.
CLASS A AND D -- INITIAL SALES CHARGE OPTIONS
If you select Class A or D, you will pay a sales charge at the time of purchase.
<TABLE>
<CAPTION>
AS A % OF AS A %* OF DEALER CONCESSION AS
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT A % OF PURCHASE PRICE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UP TO $24,999 5.25% 5.54% 5.00%
- --------------------------------------------------------------------------------------------
$25,000 TO $49,000 4.75% 4.99% 4.50%
- --------------------------------------------------------------------------------------------
$50,000 TO $99,000 4.00% 4.17% 3.75%
- --------------------------------------------------------------------------------------------
$100,000 TO $249,000 3.00% 3.09% 2.75%
- --------------------------------------------------------------------------------------------
$250,000 TO $999,000 2.00% 2.04% 1.80%
- --------------------------------------------------------------------------------------------
$1,000,000 AND OVER** 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent
** If you invest $1,000,000 or more in Class A or D shares, you will not pay an
initial sales charge. However, if you redeem your shares within one year
after purchase, you will be charged a deferred sales charge. This charge is
1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. In addition, a sales charge of .75% will be imposed on
purchases of $1,000,000 or more of Class A and D shares by certain Employer
Sponsored Retirement or Savings Plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced sales charge on purchases of Class A or D shares may apply for:
- - Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
- - Merrill Lynch Blueprint Program participants.
- - TMA Managed Trusts.
- - Employee Access Accounts.
- - Certain employer-sponsored retirement or savings plans.
- - Purchasers using proceeds from the sale of certain Merrill Lynch closed-end
funds under certain circumstances.
- - Certain investors, including directors of Merrill Lynch mutual funds and
Merrill Lynch employees.
- - Certain Merrill Lynch fee-based programs.
MERCURY JAPAN FUND 15
<PAGE> 17
[GRAPHIC] Your Account
Only certain investors are eligible to buy Class A shares, including existing
Class A shareholders of the Fund, certain retirement plans, participants in
certain Merrill Lynch sponsored programs and certain affiliates of Merrill
Lynch. Your Financial Consultant can help you determine whether you are eligible
to buy Class A shares.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy Class A shares, you should buy Class A and not Class D since
Class D shares are subject to an account maintenance fee, while Class A shares
are not.
Reinstatement Privilege. If you redeem Class A or D shares and within 30 days
buy new shares of the same class, you will not pay a sales charge on the new
purchase amount. The amount eligible for this "Reinstatement Privilege" may not
exceed the amount of your redemption proceeds. To exercise the privilege,
contact your Merrill Lynch Financial Consultant or the Fund's Transfer Agent at
1-800- - .
CLASS B AND C -- DEFERRED SALES CHARGE OPTIONS
You will not pay an initial sales charge when you buy Class B or C shares.
However, if you redeem your shares within six years after purchase, you may be
required to pay a deferred sales charge. You will also pay distribution fees of
[0.75%] and account maintenance fees of [0.25%] of your investment each year.
Merrill Lynch uses the money that it receives from the deferred sales charge and
the distribution fees to cover the costs of marketing, advertising and
compensating the Merrill Lynch Financial Consultant or other dealer who assists
you in making your decision to purchase Fund shares.
Both Class B and Class C deferred sales charges will be reduced for redemptions
made in connection with participation in certain Merrill Lynch fee-based
programs.
CLASS B.
If you redeem Class B shares within six years after purchase, you may be charged
a deferred sales charge. The amount of the charge gradually
16 MERCURY JAPAN FUND
<PAGE> 18
[GRAPHIC] Your Account
decreases as you hold your shares over time, according to the following
schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE SALES CHARGE*
- ----------------------------------------
<S> <C>
0 -1 4.00%
- ----------------------------------------
1 - 2 4.00%
- ----------------------------------------
2 - 3 3.00%
- ----------------------------------------
3 - 4 3.00%
- ----------------------------------------
4 - 5 2.00%
- ----------------------------------------
5 - 6 1.00%
- ----------------------------------------
6 AND AFTER 0.00%
- ----------------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired by
dividend or capital gain reinvestment are not subject to deferred sales
charges. Not all Merrill Lynch funds have identical deferred sales charge
schedules. In the event of an exchange between a Fund and another fund advised
by Merrill Lynch Asset Management, L.P., Fund Asset Management, L.P. or the
investment adviser, the higher charge will apply.
The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:
- - Certain post-retirement withdrawals from an IRA or other retirement plan if
you are over 59 1/2 years old.
- - Redemption by certain eligible 401(a) and 401(k) plans and group plans
participating in the Merrill Lynch Blueprint Program and certain retirement
plan rollovers.
- - Redemption in connection with participation in certain Merrill Lynch fee-
based programs.
- - Withdrawals resulting from shareholder death or disability as long as the
waiver request is made within one year of death or disability.
- - Withdrawal through the Systematic Withdrawal Plan of up to 10% of your account
value at the time the plan is established.
Your Class B shares convert automatically into Class D shares approximately
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.
MERCURY JAPAN FUND 17
<PAGE> 19
[GRAPHIC] Your Account
If you hold share certificates, they must be delivered to the Transfer Agent
before they can be converted. Check with the Transfer Agent or your Merrill
Lynch Financial Consultant for details.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase, compared to approximately eight years
for equity funds. In any event, the length of time that you hold the original
and exchanged Class B shares in both funds will count toward the conversion
schedule.
The conversion schedule may be modified in certain other cases as well.
CLASS C.
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged on shares that you acquire through reinvestment of Fund
dividends or distributions.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell and exchange shares through Merrill
Lynch or other securities dealers. You may also buy shares through the Transfer
Agent. To learn more about buying shares through the Transfer Agent, call
1-800- - . Because the selection of a mutual fund involves
many considerations, a Merrill Lynch Financial Consultant may be helpful,
particularly when you decide which class may be most cost effective for you.
18 MERCURY JAPAN FUND
<PAGE> 20
[GRAPHIC] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Please refer to the Merrill Lynch Select Pricing table on
appropriate for you page of this Prospectus. Be sure to read this Prospectus
carefully.
- ----------------------------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for the Fund is: - $1,000 for
investment regular accounts, and $50 for subsequent investment
- $500 for certain Merrill Lynch fee-based programs
- $100 for retirement plans
The minimums for initial investments may be waived or
reduced under certain circumstances.
-----------------------------------------------------------------------------------------------------
Have your dealer submit your purchase Any purchase orders received by Merrill Lynch from a
order securities dealer within thirty minutes after the close of
business on the New York Stock Exchange will be priced at
the net asset value determined that day.
Purchase orders received after that time will be priced at
the net asset value determined on the next day. The Fund may
reject any order to buy shares and may suspend the sale of
shares at any time. Merrill Lynch may charge a fee to
process a purchase. This fee is currently $5.35.
-----------------------------------------------------------------------------------------------------
Contact the Transfer Agent Instead of purchasing through a dealer, you can purchase
shares of the Fund by mailing a purchase order directly to
the Transfer Agent at the address set forth on the back
cover of this Prospectus. Shareholders with accounts
directly at the Transfer Agent have the same exchange
privileges as shareholders holding through Merrill Lynch or
another securities dealer.
- ----------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is:
INVESTMENT - $50 for regular and Merrill Lynch fee-based accounts
- $1 for retirement plans
The minimums for additional purchases may be waived under
certain circumstances.
-----------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends and capital gains are automatically reinvested
Automatic Dividend Reinvestment Plan. without a sales charge.
-----------------------------------------------------------------------------------------------------
Participate in the Automated You may invest a specific amount in the Fund on a periodic
Investment Plan basis either through your:
- Bank Account ($50 or more); or Merrill Lynch CMA(R) or
CBC(R) account ($100 or more)
- ----------------------------------------------------------------------------------------------------------------------------
TRANSFER SHARES TO Transfer to a participating If you wish to transfer proprietary mutual fund assets to
ANOTHER DEALER securities dealer another brokerage firm, you may, provided a firm-wide
agreement is in place. Assets transferred under this
agreement will retain all shareholder services. You may only
purchase additional shares of funds previously owned before
the transfer. All future trading of these assets must be
coordinated by the receiving firm.
-----------------------------------------------------------------------------------------------------
</TABLE>
MERCURY JAPAN FUND 19
<PAGE> 21
[GRAPHIC] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a non-participating If you are already a shareholder and want to transfer your
ANOTHER DEALER securities dealer shares to an account with a securities firm that cannot take
(CONTINUED) delivery, you must either:
- Transfer your shares to an account with the Transfer
Agent; or
- Redeem them.
- ----------------------------------------------------------------------------------------------------------------------------
SELL (REDEEM) Submit by phone or wire Contact your Merrill Lynch Financial Consultant or other
SHARES securities dealer.
To ensure that your redemption request will be priced at the
net asset value on the day of your request, you must submit
your request to your dealer before that day's close of
business on the New York Stock Exchange (generally 4:15
p.m.). The Fund accepts redemption requests from dealers on
any business day until thirty minutes after the close of
business on the Exchange (meaning that the request must be
received from the dealer by 4:45 p.m. New York time on most
days, and earlier on a few days). Any redemption request
received from a dealer after that time will be priced at the
close of business on the next business day.
Merrill Lynch may charge a fee to process a redemption of
shares. Merrill Lynch currently charges a fee of $5.35. No
processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject any order for redemption sent through a
dealer. In that event, you can redeem directly through the
Transfer Agent. This may result in delay, which could
adversely affect the price you receive for your shares.
-----------------------------------------------------------------------------------------------------
Redeem through the Transfer Agent You may redeem shares held at the Transfer Agent by writing
to the Transfer Agent at the address on the back cover of
this Prospectus. All shareholders on the account must sign
the letter and signatures must be guaranteed. If you hold
stock certificates, return the certificates with the letter.
The Transfer Agent will normally mail redemption proceeds
within seven days following receipt of a properly completed
request. If you make a redemption request before the Fund
has collected payment for the purchase of shares, the Fund
or the Transfer Agent may delay mailing your proceeds. This
delay usually will not exceed ten days.
- ----------------------------------------------------------------------------------------------------------------------------
REDEEM SHARES Participate in the Merrill Lynch If you have a Merrill Lynch CMA(R), or CBA(R) or Retirement
SYSTEMATICALLY Systematic Redemption Program Account you can arrange for systematic redemptions of a
fixed dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain conditions.
You must have dividends and other distributions reinvested.
For Class B and C shares you can withdraw up to 10% of your
account value at the time the Program is established without
incurring a deferred sales charge. Ask your Merrill Lynch
Financial Consultant for details.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
20 MERCURY JAPAN FUND
<PAGE> 22
[GRAPHIC] Your Account
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXCHANGE Select the fund into which you want You can exchange your shares of the Fund for shares of many
to exchange. Be sure to read the other Merrill Lynch mutual funds. You must have held the
fund's Prospectus. shares used in the exchange at least 15 calendar days
(including money funds) before you can exchange to another
fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class A
shares and wish to exchange into a fund in which you have no
Class A shares, you will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. Your time in both funds will also count when
determining the holding period for a conversion from Class B
to Class D.
If you exchange Class A or D shares for money market fund
shares, you will receive Class A shares of Summit Cash
Reserve Fund. Class B or C shares of the Fund will be
exchanged for Class B shares of Summit. Although there is
currently no limit on the number of exchanges that you can
make, the exchange privilege may be modified or terminated
at any time in the future.
</TABLE>
MERCURY JAPAN FUND 21
<PAGE> 23
[GRAPHIC] Your Account
NET ASSET VALUE PER SHARE -- the market value of a Fund's total assets after
deducting liabilities, divided by the number of shares outstanding.
MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including through an
exchange from other share classes. Sales charges on the shares being exchanged
may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class which may be subject to
distribution and account maintenance fees. This is a taxable event. You will be
subject to any applicable sales charges.
If you terminate participation in one of these programs, your shares may be
redeemed or automatically exchanged into another class of Fund shares or into a
money market fund. The class you receive may be the class you originally owned
when you entered the program, or in certain cases, a different class. If the
exchange is into Class B, the period before conversion to Class D may be
modified. Any redemption or exchange will be at net asset value. However, if you
participate in the program for less than a specified period, you may be charged
a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from a Merrill Lynch
Financial Consultant.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange.
(The Exchange generally closes at 4:00 p.m. New York time.) Many of the Fund's
investments are traded on foreign 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 Fund's net
asset value. Foreign securities sometimes trade on
22 MERCURY JAPAN FUND
<PAGE> 24
[GRAPHIC] Your Account
days that the New York Stock Exchange is closed. As a result, the net asset
value of the Fund's shares may change on days when you will not be able to
purchase or redeem your shares. If an event occurs after the close of a foreign
exchange that is likely to significantly affect the Fund's net asset value,
"fair value" pricing may be used. Securities and assets for which market
quotations are not readily available are also valued at fair value as determined
in good faith by or under the direction of the Board of Directors. The net asset
value used in determining your price is the one calculated after your purchase
or redemption order is received.
Generally, Class A shares will have the highest net asset value, because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or C shares. Also, dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
because Class A and Class D shares have lower expenses.
MERCURY JAPAN FUND 23
<PAGE> 25
More About the Fund [GRPAHIC]
DIVIDENDS -- Distributions of income to shareholders. Dividends may be
reinvested in the Fund as they are paid.
DISTRIBUTIONS -- Distributions of capital gains to shareholders. Distributions
may be reinvested in the Fund as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying or selling shares shortly before the Fund makes a distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax advisor.
MASTER/FEEDER STRUCTURE
- --------------------------------------------------------------------------------
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Fund seeks to achieve its investment objectives by
investing all its assets in the corresponding Portfolio of the Mercury Master
Trust. Investors in the Fund will acquire an indirect interest in the underlying
Portfolio.
Other "feeder" funds may also invest in the "master" Portfolio. This structure
may enable the Fund to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.
The Fund may withdraw from the Portfolio at any time and may invest all of its
assets in another pooled investment vehicle or retain an investment adviser to
manage the Fund's assets directly.
Smaller feeders may be harmed by the actions of larger feeders. For example, a
larger feeder could have more voting power than the Fund over the operations of
the Portfolio.
Whenever the Portfolio holds a vote of its feeders, the Fund will pass the vote
through to its own shareholders.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund's portfolio generally will be managed without considering the tax
impact on shareholders. The Fund will distribute any net investment income at
least annually, and any net realized long or short-term capital gains annually.
The Fund may also pay a special distribution at the end of the calendar year to
comply with federal tax requirements. If your account is with Merrill Lynch and
you would like to receive dividends or distributions in cash, contact your
Merrill Lynch Financial Consultant. If your account is with the Transfer Agent,
and you would like to receive dividends and distributions in cash, contact the
Transfer Agent.
You are subject to tax on dividends and distributions from the Fund whether you
receive them in cash or additional shares.
24 MERCURY JAPAN FUND
<PAGE> 26
[GRAPHIC] More About the Fund
If you redeem Fund shares or exchange them for shares of another fund, any gain
on the transaction may be subject to federal income tax.
The Fund intends to make distributions that may be taxed as ordinary income and
capital gains (which may be taxable at different rates depending on the length
of time the Fund holds its assets).
The Fund expects to make an election that will require you to include in income
your share of foreign withholding taxes paid by the Fund. You will be entitled
to treat these taxes as taxes paid by you, and therefore, deduct such taxes in
computing your taxable income or, in some cases, to use them as foreign tax
credits against the U.S. income taxes you otherwise owe.
If you are a non-resident alien or a foreign entity, the Fund's ordinary income
dividends (which include distributions of net short-term capital gains) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax advisor about the potential tax consequences to you of
an investment in the Fund under all applicable tax laws.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
Mercury Asset Management International Ltd. manages the underlying Portfolio's
investments under the overall supervision of the Board of Trustees of the
Portfolios. The investment adviser has the responsibility for making all
investment decisions for the Fund.
The senior investment professionals in the group that has managed the Fund's
portfolio since the Fund started operations include:
MERCURY JAPAN FUND 25
<PAGE> 27
[GRAPHIC] More About the Fund
Juliet Marber, Director of Mercury Asset Management International Ltd. She has
been employed as an investment professional by the investment adviser and its
affiliates since 1986.
Ronald Pullen, Managing Director of Mercury Asset Management International Ltd.
He has been employed as an investment professional by the investment adviser
since 1982.
Timothy J. Orchard, Associate Director and Fund Manager of Merrill Lynch
Mercury Asset Management (Tokyo). He has been employed as an investment
professional by the investment adviser since 1992.
Makoto Kikuchi, Assistant Director of Mercury Asset Management International
Ltd. He has been employed as an investment professional by the investment
adviser since 1994. Prior to 1994, he was employed as a fund manager at Nippon
Credit Bank.
Masahiko Tokutake, Director of Mercury Asset Management International Ltd. He
has been employed as an investment professional by the investment adviser since
1995. Prior to 1995, he was employed as Japanese equity fund manager at Daiichi
Life and as team leader of the Japanese equity research division of Daiichi
Life.
Mr. is the team leader.
Mercury and its affiliates manage portfolios with over $488 billion in assets
(as of , 1998) for individuals and institutions seeking investments
worldwide. This amount includes assets managed for its affiliates. The
management agreement between the Trust and the investment adviser gives the
investment adviser the responsibility for making all investment decisions for
the Portfolio.
The investment adviser is paid at the rate of 0. % of the Portfolio's average
daily net assets.
The investment adviser has hired Fund Asset Management, L.P., an affiliate, to
manage the Portfolio's daily cash assets. The Fund does not pay any incremental
fee for this service, although Mercury makes payments to Fund Asset Management,
L.P. See "What are the Fund's Fees and Expenses" under "Key Facts" for
information about the fees paid to the Merrill Lynch organization.
26 MERCURY JAPAN FUND
<PAGE> 28
[GRAPHIC] More About the Fund
The Fund does not have an investment adviser, since the Fund's assets will be
invested in its corresponding Portfolio. [Fund Asset Management, L.P. provides
administrative services to the Fund.]
YEAR 2000 ISSUES:
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the investment adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The investment adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
[The Fund's other service providers have told the [administrator] [investment
adviser] that they also expect to resolve the Year 2000 Problem, and the
[administrator] [investment adviser] will continue to monitor the situation as
the Year 2000 approaches.] However, if the problem has not been fully addressed,
the Fund could be negatively affected. The Year 2000 Problem could also have a
negative impact on the companies in which the Fund invests, and this could hurt
the Fund's investment returns.
MERCURY JAPAN FUND 27
<PAGE> 29
[GRAPHIC] More About the Fund
<TABLE>
<S> <C>
FUND
Mercury Japan Fund
[P.O. Box 9011
Princeton, New Jersey 08543-9011
(800- - )]
INVESTMENT ADVISER
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England
[ADMINISTRATOR AND] SUB-INVESTMENT ADVISER
Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
TRANSFER AGENT
Merrill Lynch Financial Data
Services, Inc. Mailing Address:
4800 Deer Lake Drive East P.O. Box 45289
Jacksonville, Florida 32246-6484 Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices: Mailing Address:
800 Scudders Mill Road P.O. Box 9081
Plainsboro, New Jersey 08536 Princeton, New Jersey 08543-9081
CUSTODIAN
[to come]
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
MERCURY JAPAN FUND
</TABLE>
<PAGE> 30
Additional Information [GRAPHIC]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the relevant market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings regardless of the number of Fund accounts you have. To receive separate
shareholder reports for each account, call your Financial Consultant or write to
the Transfer Agent at its mailing address. Include your name, address, tax
identification number and Merrill Lynch brokerage or mutual fund account number.
If you have any questions, please call your Merrill Lynch Financial Consultant
or the Transfer Agent at 1-800-MER-FUND.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information, dated , contains
further information about all aspects of the Fund and is incorporated by
reference (legally considered to be part of this Prospectus). You may request a
free copy by writing or calling the Fund at the address and telephone number
indicated above.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Station of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
The Fund's SEC file number is [NUMBER].
CODE #00000-0000
(C) Merrill Lynch Asset Management, L.P.
MERCURY JAPAN FUND
of Mercury Alpha Fund, Inc.
PROSPECTUS - XXXXXXX 00, 1998
<PAGE> 31
STATEMENT OF ADDITIONAL INFORMATION
MERCURY JAPAN FUND
of Mercury Alpha Fund, Inc.
[P.O. Box 9011, Princeton, New Jersey 08543-9011
Phone No. (609) 282-2800]
------------------------
Mercury Japan Fund (the "Fund") is a series of Mercury Alpha Fund, Inc.
(the "Corporation"). This Statement of Additional Information relates to Mercury
Japan Fund (the "Fund"). The Fund is a diversified mutual fund. The investment
objective of the Fund is long-term capital growth through investing in equity
securities located in Japan. The Fund will seek to achieve its investment
objective by investing all of its assets in Mercury Master Japan Portfolio (the
"Portfolio"), which is the portfolio of Mercury Master Trust (the "Trust") that
has the same investment objective as the Fund. The Fund's investment experience
will correspond directly to the investment experience of the Portfolio. There
can be no assurance that the investment objective of the Fund will be achieved.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund, dated , 1998
(the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
the Fund at [1-800-MER-FUND] or your Financial Consultant, or by writing to the
address listed above. If you do not have a Financial Consultant and would like
to locate one near you, you may call [1-800-MERRILL]. This Statement of
Additional Information incorporates by reference the Prospectus.
MERCURY ASSET MANAGEMENT INTERNATIONAL LTD. -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is , 1998.
<PAGE> 32
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified mutual fund. The investment objective of the Fund
is long-term capital growth through investing in equity securities located in
Japan.
The Fund will seek to achieve its investment objective by investing all of
its assets in the Portfolio, which is a portfolio of the Trust that has the same
investment objective as the Fund. The Fund's investment experience and results
will correspond directly to the investment experience of the Portfolio. Thus,
all investments will be made at the level of the Portfolio. For simplicity,
however, with respect to investment objective, policies and restrictions, this
Statement of Additional Information, like the Prospectus, uses the term "Fund"
to include the underlying Portfolio in which the Fund invests. Reference is made
to the discussion under "How the Fund Invests" and "Investment Risks" in the
Prospectus for information with respect to the Fund's and the Portfolio's
investment objective and policies. There can be no guarantee that the Fund's
investment objectives will be achieved.
For purposes of the Fund's investment objective, an issuer ordinarily will
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Mercury Asset Management International Ltd. ("Mercury
International" or the "Manager") will effect portfolio transactions without
regard to 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 foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund 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 Fund's outstanding voting securities.
The Fund'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 Manager 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 Fund 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. ADRs are receipts typically issued by an American 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
Fund 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.
2
<PAGE> 33
The Fund's investment objective and policies are described in "How the Fund
Invests" in the Prospectus. Certain types of securities in which the Fund may
invest and certain investment practices that the Fund may employ are discussed
more fully below.
Debt Securities. The Fund may hold convertible debt securities and
non-convertible securities and preferred securities. The Fund has established no
rating criteria for the debt securities in which it may invest. Therefore, the
Fund may invest in debt securities either (a) rated in one of the top four
rating categories by a nationally recognized statistical rating organization or
which, in the Manager's judgment, possess similar credit characteristics
("investment grade securities") or (b) rated below the top four rating
categories or that, in the Manager's judgment, possess similar credit
characteristics ("high yield securities"). The Manager considers ratings as one
of several factors in its independent credit analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. High yield securities tend to be more volatile
than higher rated fixed income securities and adverse economic events may have a
greater impact on the prices of high yield securities than on higher fixed rated
income securities. The issuer's ability to service its debt obligations also may
be adversely affected by specific issuer developments or the issuer's inability
to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holder of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit the issuer to repurchase such securities from the Fund. If a call
were exercised by an issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income for the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealer or prices for actual sales.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. To the extent the Fund holds
high yield securities, factors adversely affecting the market value of high
yield securities are likely adversely to affect the Fund's net asset value. In
addition, the Fund may incur additional expenses to the extent it is required to
seek recovery upon a default on a portfolio holding or participate in the
restructuring of the obligation.
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 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 Fund 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
3
<PAGE> 34
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 investment 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
Fund may determine that, notwithstanding otherwise favorable investment
criteria, it may not be practicable or appropriate to invest in a particular
country.
Most of the securities held by the Fund will not be registered 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 Fund 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 Fund are uninvested and no return is earned
thereon and could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund 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. There is generally less governmental
supervision and regulation of exchanges, brokers and issuers in non-U.S.
countries 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 Fund 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 Fund 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 Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including investment advisory fees)
and, indirectly, the expenses of such closed-end investment companies. The Fund
also may seek, at its own cost, to create its own investment entities under the
laws of certain countries.
Borrowing. The Fund may borrow from banks (as defined in the Investment
Company Act) in amounts up to 33 1/3% of its total assets (including the amount
borrowed), and may borrow up to an additional 5% of its total assets for
temporary purposes. The Fund 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.
Subject to these limits, the Fund may use borrowing to enable it to meet
redemptions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging increases the Fund's
exposure to capital risk, and borrowed funds are subject to interest costs that
will reduce net income. See "Investment Restrictions," below.
Other Special Considerations. The Fund may invest up to 15% of its total
assets in illiquid investments, which include securities for which there is no
readily available market and may invest more than 5% of its assets in securities
issued or guaranteed by certain non-U.S. governments.
4
<PAGE> 35
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio with a value not
exceeding 33 1/3% of its total assets to approved borrowers (banks, brokers and
other financial institutions) and receive collateral in cash or securities
issued or guaranteed by the United States Government. Such collateral is
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The purpose of such loans is to permit
the borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund, 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 Fund. Alternatively,
if securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loan premium to be received by the Fund for lending its
portfolio securities. In either event, the total yield on the Fund's portfolio
is increased by loans of its portfolio securities. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This insulates the Fund
from fluctuations in the market value of the underlying security during such
period, although, to the extent the repurchase agreement is not denominated in
U.S. dollars, the Fund's return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its total assets in repurchase agreements
maturing in more than seven days (together with other illiquid securities).
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
The Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening fluctuations of the market value
of such security and the accrued interest on the security. In such event, the
Fund would have rights against the seller for breach of contract with respect to
any losses arising from market fluctuations following the failure of the seller
to perform.
Warrants. The Fund may invest in warrants, which are securities
permitting, but not obligating, the warrant's holder to subscribe for other
securities. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holders to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date.
INVESTMENT RESTRICTIONS
The Corporation has adopted the following restrictions and policies
relating to the investment of the Fund's assets and its activities. The
fundamental restrictions set forth below may not be changed with respect to the
Fund without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than
5
<PAGE> 36
50% of the outstanding shares). Provided that none of the following restrictions
shall prevent the Fund from investing all of its assets in shares of another
registered investment company with the same investment objective (in a
master/feeder structure), the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its 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.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
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 Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Fund's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
The Trust has adopted investment restrictions substantially identical to
the foregoing, which are fundamental policies of the Trust and may not be
changed with respect to any Portfolio without the approval of the holders of a
majority of the interests of the Portfolio.
In addition, the Corporation has adopted non-fundamental restrictions that
may be changed by the Board of Directors. Like the fundamental restrictions,
none of the non-fundamental restrictions, including but not limited to
restriction (a) below, shall prevent the Fund from investing all of its assets
in shares of another registered investment company with the same investment
objective (in a master/feeder structure). Under the non-fundamental investment
restrictions, the Fund may not:
(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time
6
<PAGE> 37
the Fund's shares are owned by another investment company that is part of
the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently does
not intend to engage in short sales, except short sales "against the box."
(c) Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities that mature
within seven days or securities that the Directors of the Corporation have
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act and
determined to be liquid by the Directors are not subject to the limitations
set forth in this investment restriction.
The Trust has adopted investment restrictions substantially identical to
the foregoing, which are nonfundamental policies of the Trust and may be changed
with respect to any Portfolio by the Trustees.
The staff of the Commission has taken the position that purchased
over-the-counter ("OTC") options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Corporation and Trust have
adopted an investment policy pursuant to which neither the Portfolio nor the
Fund will purchase or sell OTC options [(including OTC options on futures
contracts)] if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding that are held by the Fund or Portfolio, the
market value of the underlying securities covered by OTC call options currently
outstanding that were sold by the Fund or Portfolio and margin deposits on the
Fund or Portfolio's existing OTC options on futures contracts exceeds 15% of the
total assets of the Fund or Portfolio taken at market value, together with all
other assets of the Fund or Portfolio that are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Fund or Portfolio
to a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund or Portfolio has the unconditional contractual
right to repurchase such OTC option from the dealer at a predetermined price,
then the Fund or 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 Fund or Portfolio and may be amended by the Trustees or the
Directors without the approval of the shareholders. However, the Directors or
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 and the Fund generally may not be
purchased from, sold or loaned to the Manager 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 Corporation and Trust, the Fund and
Portfolio are prohibited from engaging in certain transactions involving Merrill
Lynch or its affiliates, including the Manager, 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 the Fund and
Portfolio may purchase from an underwriting syndicate of which Merrill Lynch,
the Manager, or any of its affiliates is a member.
The non-fundamental investment restrictions set forth above contain an
exception that permits the Fund to purchase securities pursuant to the exercise
of subscription rights, subject to the condition that such purchase will not
result in the Fund ceasing to be a diversified investment company. Japanese
corporations frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially below the
market price of the shares. The failure to exercise such rights would result in
the
7
<PAGE> 38
Fund's interest in the issuing company being diluted. The market for such rights
is not well developed, and accordingly, the Fund may not always realize full
value on the sale of rights. Therefore, the exception applies in cases where the
limits set forth in the investment restrictions above would otherwise be
exceeded by exercising rights or have already been exceeded as a result of
fluctuations in the market value of the Fund's portfolio securities with the
result that the Fund would otherwise be forced either to sell securities at a
time when it might not otherwise have done so or to forego exercising the
rights.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors of the Corporation consist of individuals, of whom
are not "interested persons" of the Corporation as defined in the Investment
Company Act. The Directors are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the directors
of the investment companies by the Investment Company Act. Information about the
Directors and executive officers of the Corporation, 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 Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
[to be filed by amendment]
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of other
investment companies for which the Manager, Merrill Lynch Asset Management,
L.P. ("MLAM") or the Fund's sub-adviser, Fund Asset Management L.P. ("FAM"),
or their affiliates, acts as investment adviser.
As of the date of this Statement of Additional Information, the officers
and Directors of the Corporation as a group ( persons) owned an aggregate of
less than 1% of the outstanding shares of common stock of Merrill Lynch & Co.,
Inc. ("ML & Co.") and owned an aggregate of less than 1% of the outstanding
shares of the Corporation.
COMPENSATION OF DIRECTORS
Pursuant to the terms of the Administration Agreement with the Corporation,
the Corporation and the Trust expect to pay each Director not affiliated with
the Manager or FAM (each a "non-affiliated Director") a fee of $ per year
plus $ per meeting attended, together with such Director's actual out-of-
pocket expenses relating to attendance at meetings. The Corporation also expects
to compensate members of its Audit Committee, which consists of all of the
non-affiliated Directors, at the rate of $ annually, plus $ per
meeting attended.
The following table sets forth the aggregate compensation the Corporation
expects to pay to the non-affiliated Directors for the fiscal year ended
and the aggregate compensation paid by all investment companies
advised by Mercury International, MLAM, FAM, or other affiliates thereof
8
<PAGE> 39
("MLAM/Mercury-Advised Funds") to the non-affiliated Directors for the calendar
year ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
PENSION OR RETIREMENT FUND AND
AGGREGATE COMPENSATION BENEFITS ACCRUED AS MLAM/MERCURY-ADVISED
NAME OF DIRECTOR FROM FUND PART OF FUND EXPENSES FUNDS PAID TO DIRECTORS(1)
---------------- ---------------------- --------------------- --------------------------
<S> <C> <C> <C>
</TABLE>
- ---------------
(1) In addition to the Corporation, the Directors served on other
MLAM/Mercury-Advised Funds as follows:
The Directors of the Corporation may be eligible for reduced sales charges on
purchases of Class A shares. See "Reduced Initial Sales Charges -- Purchase
Privileges of Certain Persons."
ADMINISTRATION ARRANGEMENTS
The Corporation has entered into administration agreements with FAM as
Administrator (the "Administration Agreement"). The Administrator receives for
its services to the Fund monthly compensation at the annual rate of % of
the average daily net assets of the Fund.
The Administration Agreement obligates the Administrator to provide certain
administrative services to the Corporation and the Fund and to pay all
compensation of and furnish office space for officers and employees of the
Corporation. The Administrator is also obligated to pay the fees of those
Directors [and Trustees] who are affiliated persons of the Administrator,
Mercury International or any of their affiliates to the extent they are not paid
by the Manager under the Management Agreement. The Fund pays all other expenses
incurred in its operation, including, among other things, taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the Custodian, any
Sub-custodian and Transfer Agent, expenses of redemption of shares, Commission
fees, expenses of registering or filing the shares under federal, state or
non-U.S. laws, fees and expenses of non-affiliated Directors, 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 Corporation or the Fund.
Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor") will pay the
promotional expenses of the Fund incurred in connection with the offering of
their shares. Accounting services are provided to the Fund by the Administrator,
and the Fund reimburses the Administrator for its costs in connection with such
services on a semiannual basis.
Duration and Termination. Unless earlier terminated as described below,
the Administration Agreement will remain in effect for two years from the date
of its commencement. Thereafter, it will remain in effect from year to year with
respect to the Fund if approved annually (a) by the Board of Directors and (b)
by a majority of the Directors who are not parties to such contract or
interested persons (as defined in the Investment Company Act) of any such party.
Such contract is not assignable and may be terminated with respect to the Fund
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund invests all of its assets in shares of the Portfolio. Accordingly,
the Fund does not invest directly in portfolio securities and does not require
investment advisory services. All portfolio management occurs at the level of
the Trust. The Trust has entered into a management agreement with Mercury
International as
9
<PAGE> 40
Manager (the "Management Agreement"). As discussed in "More About the
Fund -- Management of the Fund" in the Prospectus, the Manager receives for its
services to the Portfolio monthly compensation at the annual rate of 0.__% of
the average daily net assets of the Portfolio.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust. The Manager is also
obligated to pay the fees of all Trustees [and Directors] who are affiliated
persons of the Manager or any of its affiliates that are not paid by the
Administrator under the Administration Agreement. The Portfolio pays all other
expenses incurred in the operation of the Portfolio, including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and statements
of additional information (except to the extent paid by the Distributor),
charges of the Custodian, any Sub-custodian and Transfer Agent, expenses of
redemption of shares, Commission fees, expenses of registering the shares under
federal, state or non-U.S. laws, fees and expenses of unaffiliated 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. The Distributor will pay the promotional expenses of the Trust
incurred in connection with the offering of its shares.
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 Manager 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 Manager 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 Manager 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.
Mercury International is located at 33 King William Street, London EC4R
9AS, England. Mercury International's immediate 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 Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with FAM, pursuant to which the Manager pays FAM a fee for providing
investment advisory services to the Manager with respect to the Trust in an
amount to be determined from time to time by the Manager and FAM but in no event
in excess of the amount that the Manager actually receives for providing
services to the Trust pursuant to the Management Agreement.
FAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
FAM, an affiliate of MLAM, 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. are "controlling persons" of FAM as defined under the Investment
Company Act because of their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management and Subadvisory Agreement will each remain in effect for two
years from the date of their commencement. Thereafter, they will remain in
effect from year to year if approved annually (a) by the Board of Trustees or by
a majority of the outstanding shares of the Portfolio and (b) by a majority of
the Trustees who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated with respect to the Portfolio without penalty
on 60 days' written notice at the option of either party thereto or by the vote
of the shareholders of the Portfolio.
10
<PAGE> 41
CODE OF ETHICS
The Board of Trustees of the Trust and the Board of Directors of the
Corporation have each adopted a Code of Ethics under Rule 17j-1 of the
Investment Company Act that incorporates the Code of Ethics of the Manager
(together the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Trust within periods of trading by the
Trust in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PURCHASE OF SHARES
Reference is made to "Your Account -- How to Buy, Sell and Exchange Shares"
in the Prospectus for certain information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees (also known as service fees) and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which the account maintenance and/or distribution fees
are paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager and its affiliates,
including MLAM and FAM. Funds advised by MLAM, FAM, Mercury International or an
affiliate that use the Merrill Lynch Select Pricing(SM) System are referred to
herein as "MLAM/Mercury-advised mutual funds."
MLFD, an affiliate of the Manager and of Merrill Lynch, with offices at 800
Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: P. O. Box
9081, Princeton, New Jersey 08543-9081) acts as Distributor for the Fund.
The Corporation has entered into a distribution agreement with the
Distributor in connection with the offering of shares of the Fund (the
"Distribution Agreement"). The Distribution Agreement obligates the Distributor
to pay certain expenses in connection with the offering of the shares of the
Fund. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination provisions
as the Management Agreement described above.
The Corporation reserves the right to suspend the offering of its shares at
any time.
11
<PAGE> 42
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD SALES LOAD AS DISCOUNT TO
AS PERCENTAGE* OF SELECTED DEALERS AS
PERCENTAGE OF THE NET AMOUNT PERCENTAGE OF THE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
------------------ -------------- -------------- -------------------
<S> <C> <C> <C>
Less than $25,000................................. [5.25]% [5.54]% [5.00]%
$25,000 but less than $50,000..................... [4.75] [4.99] [4.50]
$50,000 but less than $100,000.................... [4.00] [4.17] [3.75]
$100,000 but less than $250,000................... [3.00] [3.09] [2.75]
$250,000 but less than $1,000,000................. [2.00] [2.04] [1.80]
$1,000,000 and over**............................. [0.00] [0.00] [0.00]
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** [The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a
contingent deferred sales charge ("CDSC") of 1.0% if the shares are redeemed
within one year after purchase. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A and Class D shares by certain Employer
Sponsored Retirement or Savings Plans.]
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer Sponsored Retirement or Savings Plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM/Mercury-advised mutual funds. Also eligible to purchase Class A
shares at net asset value are participants in certain investment programs
including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM/Mercury-advised investment companies,
including the Corporation. Certain persons who acquired shares of certain MLAM
or FAM advised closed-end funds in their initial offerings and who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A and Class D shares of the
Fund if certain conditions set forth below in "Purchase Privileges of Certain
Persons" are met (for closed-end funds that commenced operations prior to
October 21, 1994). In addition, Class A shares of the Fund and certain other
12
<PAGE> 43
MLAM/Mercury-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund")
who wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such fund in shares of the
Fund and certain other MLAM/Mercury-advised mutual funds.
Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the Merrill Lynch High Income Municipal Bond Fund,
Inc. ("High Income Fund") or the Merrill Lynch Municipal Strategy Fund, Inc.
("Municipal Strategy Fund") may purchase Class A shares at net asset value
rather than Class D shares provided that (i) the shares to be purchased are held
in the same account as the Class A shares that the shareholder already owns, and
(ii) all other requirements pertaining to the reinvestment privilege are met.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his or her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
No initial sales charges are imposed upon Class A and Class D shares issued
as a result of the automatic reinvestment of dividends or capital gains
distributions.
Rights of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM/Mercury-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM/Mercury-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to the Letter of Intent. The Letter of Intent
is available only to investors whose accounts are maintained at the Fund's
Transfer Agent, Merrill Lynch Financial Data Services, Inc. The Letter of Intent
is not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intent may be included under a subsequent Letter of Intent executed
within 90 days of such purchase if the Distributor is informed in writing of
this intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM/Mercury-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intent, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to
13
<PAGE> 44
the amount covered by such Letter will be applied only to new purchases. If the
total amount of shares does not equal the amount stated in the Letter of Intent
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the execution of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intent must
be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to that further reduced percentage
sales charge but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intent will
be deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market mutual fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intent from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions and trade associations. Investors placing
orders to purchase Class A or Class D shares of the Fund through Blueprint will
acquire the Class A or Class D shares at net asset value plus a sales charge
calculated in accordance with the Blueprint sales charge schedule (i.e., up to
$300 at 4.25%, $300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01 or more at
the standard sales charge rates disclosed in the Prospectus). In addition, Class
A or Class D shares of the Fund are being offered at net asset value plus a
sales charge of 1/2 of 1% for corporate or group IRA programs placing orders to
purchase their Class A or Class D shares through Blueprint. Services, including
the exchange privilege, available to Class A and Class D investors through
Blueprint, however, may differ from those available to other investors in Class
A or Class D shares. Orders for purchases and redemptions of Class A or Class D
shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan.
Class A and Class D shares are offered at net asset value, with a waiver of
the front-end sales charge, to participants in Blueprint through the Merrill
Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from
Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The
IRA Rollover Program is available to custodian rollover assets from Employee
Sponsored Retirement and Savings Plans (as defined below) whose Trustee and/or
Plan Sponsor has entered into a Merrill Lynch Directed IRA Rollover Program
Service Agreement. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
Purchase Privileges of Certain Persons. Directors of the Corporation and
Trustees of the Trust, members of the Boards of other investment companies
advised by MLAM or its affiliates, directors and employees of ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, Mercury International, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.), and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value. Under such programs, the Fund
realizes economies of scale by providing incentives to a large group of such
individuals to invest. Furthermore,
14
<PAGE> 45
the individuals who qualify for these programs are already familiar with the
Fund, and therefore providing these investment opportunities to such qualified
individuals does not increase the expenditures of sales-related expenses.
Employees and directors or trustees wishing to purchase shares of the Fund
must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant from another investment firm within six months prior to the date of
purchase by such investor, if the following conditions are satisfied. First, the
investor must advise Merrill Lynch that he or she will purchase Class D shares
of the Fund with proceeds from a redemption of a mutual fund that was sponsored
by the financial consultant's previous firm and was subject to a sales charge
either at the time of purchase or on a deferred basis. Second, the investor must
also establish that such redemption must have been made within 60 days prior to
the investment in the Fund, and the proceeds from the redemption must have been
maintained in the interim in cash or a money market fund.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied. First, the investor must advise Merrill Lynch that he or she will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds that have been outstanding for a period of no less
than six months; and second, the investor must also establish that such purchase
of Class D shares must be made within 60 days after the redemption and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after
notice. Class D shares may also be offered at net asset value in connection with
the acquisition of assets of other investment companies.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other MLAM/Mercury-advised mutual funds ("Eligible Class A shares") are offered
at net asset value to shareholders of certain closed-end funds advised by MLAM
or FAM who purchased such closed-end fund shares prior to October 21, 1994 and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM/Mercury-advised
mutual funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible Class
A or Class D Shares. Second, the closed-end fund shares must have either been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares
15
<PAGE> 46
pursuant to this option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM/Mercury-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
DISTRIBUTION PLANS
Reference is made to "Your Account -- Merrill Lynch Select Pricing System"
in the Prospectus for certain information with respect to separate distribution
plans for Class B, Class C, and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act of the Fund (each a "Distribution Plan") with respect to
the account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
The Distribution Plan for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the
16
<PAGE> 47
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plan for Class B and Class C shares each provides that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are design to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
The payments under the Distribution Plans are subject to the provisions of
Rule 12b-1 under the Investment Company Act, and are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors of the Corporation for their consideration in
connection with their deliberations as to the continuance of the Class B and
Class C Distribution Plans. This information is presented annually as of
December 31 of each year on a "fully allocated accrual" basis and quarterly on a
"direct expense and revenue/cash" basis. On the fully allocated basis, revenues
consist of the account maintenance fees, the distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees, the
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Corporation will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares to Class D shares as set forth under "How to
Buy, Sell and Exchange Shares" in the Prospectus.
In their consideration of each Distribution Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and each related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors") shall be committed to the discretion
of the Independent Directors then in office. In approving each Distribution Plan
in accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
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<PAGE> 48
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell and Exchange Shares" in the
Prospectus for certain information as to the redemption and purchase of Fund
shares.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the net asset value of the Fund's shares at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests delivered other than by mail
should be delivered to Merrill Lynch Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. Redemption requests should
not be sent to the Fund. A redemption request requires the signature(s) of all
persons in whose name(s) the shares are registered, signed exactly as (his)
(her) (their) name(s) appear(s) on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments,
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<PAGE> 49
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the net asset value of such shares at
such time.
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, less any applicable CDSC,
provided that the request for repurchase is received by the dealer prior to the
close of business on the NYSE (generally 4:00 P.M., New York time) on the day
received and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price. These repurchase arrangements are for
the convenience of shareholders and do not involve a charge by the Fund (other
than any applicable CDSC). Securities firms that do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares. Repurchases directly through the Fund's Transfer Agent are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by the Fund, however, may redeem shares
as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders of the Fund who have redeemed their Class A and Class D shares
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares of the Fund, as the case may be, at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
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<PAGE> 50
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM/Mercury-advised mutual funds.
As discussed in the Prospectus under "Your Account -- Merrill Lynch Select
Pricing System -- Deferred Sales Charge Options -- Class B and C," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
instances, including in connection with certain post-retirement withdrawals from
an IRA or other retirement plan or following the death or disability of a Class
B shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
life (or life expectancy) or any redemption resulting from the tax-free return
of an excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Internal Revenue Code of
1986, as amended (the "Code")) of a Class B shareholder (including one who owns
the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability.
The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans. The CDSC also is waived for any Class
B shares that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption and for any Class B shares
that were acquired and held at the time of the redemption in an Employee Access
Account(SM) available through employers providing eligible 401(k) plans. The
Class B CDSC is also waived for any Class B shares that are purchased by a
Merrill Lynch rollover IRA that was funded by MLAM Private Portfolio Group and
held in such account at the time of redemption. The terms of the CDSC may be
modified in connection with certain fee-based programs. See "Shareholder
Services -- Fee Based Programs."
In determining whether a Class B CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore it will be assumed that the redemption is first of
shares held for over six years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the six-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Class C shares are subject only to a one-year 1% CDSC. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own
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<PAGE> 51
funds. The combination of the CDSC and the ongoing distribution fee facilitates
the ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase.
Merrill Lynch Blueprint (SM) Program. Class B shares are offered to
certain participants in Blueprint. Blueprint is directed to small investors,
group IRAs and participants in certain affinity groups such as trade
associations, credit unions and benefit plans. Class B shares of the Fund are
offered through Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through Blueprint. Services,
including the exchange privilege, available to Class B investors through
Blueprint, however, may differ from those available to other Class B investors.
Orders for purchases and redemptions of Class B shares of the Fund may be
grouped for execution purposes, which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares. As discussed in the
Prospectus under "Your Account -- Merrill Lynch Select Pricing
System -- Deferred Sales Charge Options -- Class B and C," Class B shares of
equity MLAM/Mercury-advised mutual funds convert automatically to Class D shares
approximately eight years after purchase (the "Conversion Period"). Class B
shares of taxable and tax-exempt fixed income MLAM/Mercury-advised mutual funds
will convert approximately ten years after initial purchase. [HOW CONFORM TO
DIFFERENT CDSC ON MERCURY FUNDS?]
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM/Mercury-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM/Mercury-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM/Mercury-advised
mutual funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Fee-Based Programs" below.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because the Fund will invest exclusively in shares of the Portfolio, it is
expected that all transactions in portfolio securities will be entered into by
the Portfolio. The Manager is responsible for making the Portfolio's portfolio
decisions, placing the Portfolio's brokerage business, evaluating the
reasonableness of brokerage commissions and negotiating the amount of any
commissions paid subject to a policy established by the Trust's Trustees and
officers. The Trust has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. Orders for
transactions in portfolio securities are placed for the Trust with a number of
brokers and dealers, including Merrill Lynch. In placing orders, it is the
policy of the Trust to obtain the most favorable net results, taking into
account various factors, including price, commissions, if any, size of the
transaction and difficulty of execution. Where applicable, the Manager surveys a
number of brokers and dealers in connection with proposed portfolio transactions
and selects the broker or dealer that offers the Trust the best price and
execution or other services that are of benefit to the Trust. Securities firms
also may receive brokerage commissions on transactions including covered call
options written by the Trust and the sale of underlying securities upon the
exercise of such options. In addition, consistent with the NASD Conduct Rules
and policies established by the Trustees, the Manager may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Trust.
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<PAGE> 52
Brokers who provide supplemental investment research to the Manager 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 Manager under the Management Agreement. If in the judgment of the Manager
the Trust will be benefited by supplemental research services, the Manager is
authorized to pay brokerage commissions to a broker furnishing such services in
excess of commissions that another broker may have charged for effecting the
same transaction. The expenses of the Manager will not necessarily be reduced as
a result of the receipt of such supplemental information, and the Manager may
use such information in servicing its other accounts.
The Trust invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as
principal in purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Trust, including
Merrill Lynch, will not serve as the Trust's dealer in such transactions.
However, affiliated persons of the Trust may serve as its broker in
over-the-counter transactions conducted on an agency basis.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Trust on the floor of
any U.S. national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Trust at
least annually setting forth the compensation it has received in connection with
such transactions.
The Trustees of the Trust have considered the possibility of recapturing
for the benefit of the Trust brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Trust to the Manager.
After considering all factors deemed relevant, the Trustees made a determination
not to seek such recapture. The Trustees will reconsider this matter from time
to time.
The portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of purchases
or sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. The portfolio turnover rate is generally anticipated to be under 100%.
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus concerning
the determination of net asset value.
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
on each day the NYSE is open for trading (a "Pricing Day"). The close of
business on the NYSE is generally 4:00 p.m., New York time. The Fund also will
determine its net asset value on any day in which there is sufficient trading in
the underlying Portfolio's portfolio securities that the net asset value might
be affected materially, but only if on any such day the Fund is required to sell
or redeem shares. 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, Presidents' Day, Martin
Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset value is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the
Administrator and the Distributor, and the advisory fees payable indirectly by
the Portfolio to the Manager, are accrued daily.
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<PAGE> 53
The principal assets of the Fund will normally be its interest of the
underlying Portfolio, which will be valued at its net asset value. Net asset
value is computed by dividing the value of the securities held by the Portfolio
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the management
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares generally
will be lower than the per share net asset value of Class A shares, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares, and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares. It is expected, however, that the per share net asset
value of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities, including ADRs, EDRs or GDRs, that are traded on
stock exchanges are valued at the last sale price (regular way) on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Securities traded in the OTC market
are valued at the last available bid price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and on
a stock exchange are valued according to the broadest and most representative
market. When the Portfolio writes a call option, the amount of the premium
received is recorded on the books of the Portfolio as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by the Portfolio are valued at
their last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees of the Trust. Such valuations and procedures
will be reviewed periodically by the Board of Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Trustees.
Each investor in the Trust may add to or reduce its investment in the
Portfolio on each Pricing Day. The value of each investor's (including the
Fund'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., New York 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 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
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<PAGE> 54
be applied to determine the value of the investor's interest in the Portfolio as
of 15 minutes after the close of business of the NYSE on the next Pricing Day of
the Portfolio.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in their shares. Full details as to each such
service and copies of the various plans described below can be obtained from the
Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders will receive
separate transaction confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends, and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request to be issued
certificates for his or her shares, and then must turn the certificates over to
the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. For investors who buy
shares of the Fund through Blueprint, no minimum charge to the investors' bank
account is required. Investors whose shares of the Fund are held within a CMA(R)
or CBA(R) account may arrange to have periodic investments made in the Fund, in
their CMA(R) or CBA(R) accounts or in certain related accounts in the amount of
$100 or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
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AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing or by telephone (1-800-MER-FUND)
to receive either their dividends or capital gains distributions, or both, in
cash, in which event payment will be mailed or direct deposited on or about the
payment date, except that in all circumstances dividends less than ten dollars
will be reinvested.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to
have their dividend and/or capital gains distributions reinvested in shares of
the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make withdrawals from an Investment Account of
Class A, Class B, Class C or Class D shares in the form of payments by check or
through automatic payment by direct deposit to such shareholder's bank account
on either a monthly or quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired shares of the Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with shares having a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as described herein on the 24th day of each month or the 24th day of
the last month of each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the shares will be redeemed at the close of business
on the following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment Account
are reinvested automatically in shares of the Fund. A shareholder's systematic
withdrawal plan may be terminated at any time, without a charge or penalty, by
the shareholder, the Fund, the Fund's Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. No Fund will knowingly accept purchase orders for shares of the
Fund from investors who maintain a systematic withdrawal plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly,
bi-monthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bi-monthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth
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Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Merrill Lynch Select
Pricing System -- Deferred Sales Charge Options -- Class B and C" in the
Prospectus. Where the systematic withdrawal plan is applied to Class B Shares,
upon conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. If an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her Financial
Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100. However, there is no minimum for purchases
through Blueprint's systematic investment plans.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participations in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisors with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM/Mercury-advised mutual funds. The exchange
privilege does not apply to any other funds that are not distributed by MLFD and
that also invest shares in the Trust's portfolios. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM/Mercury-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM/Mercury-advised mutual
fund, but does not hold Class A shares of the second fund in his or her account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM/Mercury-advised mutual fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares are exchangeable with shares of the same class of other MLAM/
Mercury-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other fund as more fully described
below. Class A, Class B, Class C and Class D shares also are exchangeable for
shares of Summit Cash Reserves Fund ("Summit"), a MLAM-advised money market fund
specifically designated for exchange by holders of Class A, Class B, Class C or
Class D shares. Class A and Class D shares will be exchanged for Class A shares
of Summit, and Class B and Class C shares will be exchanged for Class B shares
of Summit. Summit Class A
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<PAGE> 57
and Class B shares do not include any front-end sales charge or CDSC; however,
Class B shares pay a 12b-1 fee of 0.75%.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM/Mercury-advised
mutual fund, including Class A shares of Summit ("new Class A or Class D
shares") are transacted on the basis of relative net asset value per Class A or
Class D share, respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or Class D
shares and the sales charge payable at the time of the exchange on the new Class
A or Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such Class
A or Class D shares in the initial purchase and any subsequent exchange. Class A
or Class D shares issued pursuant to dividend reinvestment are sold on a no-
load basis in each of the funds offering Class A or Class D shares. For purposes
of the exchange privilege, dividend reinvestment Class A and Class D shares
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A and Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively (or, in the case of
Summit, Class B shares) ("new Class B or Class C shares"), of another
MLAM/Mercury-advised mutual fund on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales charge that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class B
or Class C shares. For example, an investor may exchange Class B shares of the
Fund for those of Special Value Fund, Inc. ("Special Value Fund") after having
held the Fund's Class B shares for two-and-a-half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Four
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption since
by "tacking" the two-and-a-half year holding period of the Fund's Class B shares
to the four year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Special Value Fund Class B shares
for more than six years.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. To
exercise the exchange privilege, shareholders should contact their Merrill Lynch
Financial Consultant, who will advise the Fund of the exchange. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege by
wire through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which
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<PAGE> 58
will be exchanged for Class A shares. Initial or deferred sales charges
otherwise due in connection with such exchanges may be waived or modified, as
may the Conversion Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of shares held therein
or the automatic exchange thereof to another class at net asset value, which may
be shares of a money market fund. In addition, upon termination of participation
in a Program, shares that have been held for less than specified periods within
such Program may be subject to a fee based upon the current value of such
shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in the
Program's client agreement and from Merrill Lynch Investor Services at (800)
MER-FUND (637-3863).
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid at least annually. All
net realized capital gains, if any, will be distributed to the Fund's
shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. See "Shareholder
Services -- Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information concerning the manner in which dividends and distributions may
be reinvested automatically in shares of the Fund. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders, as discussed below,
whether they are reinvested in shares of the Fund or received in cash. The per
share dividends and distributions on Class B and Class C shares will be lower
than the per share dividends and distributions on Class A and Class D shares as
a result of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares; similarly, the
per share dividends and distributions on Class D shares will be lower than the
per share dividends and distributions on Class A shares as a result of the
account maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value." Within 60 days after the end of the Fund's
taxable year, each shareholder will receive a form summarizing the dividends and
distributions he or she received that year. It will also indicate whether those
distributions should be treated as ordinary income or long-term capital gains.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as the
Fund so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class A, Class B, Class C and Class D
shareholders ("shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income,
whether or not reinvested.
Any net capital gains (i.e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum
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capital gains rate for individuals is 28% with respect to assets held for more
than 12 months, but not more than 18 months, and 20% with respect to assets held
for more than 18 months. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
dividends or capital gains distributions, and also designating the amounts of
various categories of capital gain income in capital gain dividends. Because the
Fund invests in securities of foreign issuers, it is not anticipated that
dividends paid by the Fund will be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend or
distribution will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
of the Fund may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by the Fund. The Fund expects to be
eligible, and intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to include their
proportionate share of such withholding taxes in their U.S. income tax returns
as gross income, treat such proportionate share as taxes paid by them, and
deduct such proportionate share in computing their taxable incomes or,
alternatively, subject to certain limitations, restrictions, and holding period
requirements use them as foreign tax credits against their U.S. income taxes. No
deductions for foreign taxes, however, may be claimed by noncorporation
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding tax
on the income resulting from the Fund's election described in this paragraph but
may not be able to claim a credit or deduction against such U.S. tax for the
foreign taxes treated as having been paid by such shareholder. The Fund will
report annually to its shareholders the amount per share of such withholding
taxes. For this purpose, the Fund will allocate foreign taxes and foreign source
income among the Class A, Class B, Class C and Class D shareholders
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain or loss
treatment for such transactions. In general, however, Code Section 988 gains or
losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital gains.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption
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is provided under applicable treaty law. Non-resident shareholders are urged to
consult their own tax advisors concerning the applicability of the United States
withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital gain, taxable at the same rates as ordinary income
if the shares were held for not more than 12 months, capital gain taxable at the
maximum rate of 28% if such shares were held for more than 12, but not more than
18 months, and capital gain taxable at the maximum rate of 20% if such shares
were held for more than 18 months. In the case of a corporation, any such
capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary income, if such shares were held for more than 12 months. Any
such loss will be treated as long-term capital loss if such shares were held for
more than 12 months. A loss recognized on the sale or exchange of shares held
for six months or less, however, will be treated as long-term capital loss to
the extent of any long-term capital gains distribution with respect to such
shares.
Generally, any loss realized on a sale or exchange of shares of the Fund
will be disallowed if other shares of the Fund are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
Each Portfolio may purchase or sell options and futures and foreign
currency options and futures, and related options on such futures. Options and
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless a special election is made,
gain or loss from transactions in Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts. Similarly, Code
Section 1091, which deals with "wash sales," may cause the Fund to postpone
recognition of certain losses for tax purposes; and Code Section 1258, which
deals with "conversion transactions," may apply to recharacterize certain
capital gains as ordinary income for tax purposes. Code Section 1259, which
deals with "constructive sales" of appreciated financial positions (e.g.,
stock), may treat the Fund as having recognized income before the time that such
income is economically recognized by the Fund.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not "regulated futures contracts" and from unlisted
options will be treated as ordinary income or loss
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under Code Section 988. In certain circumstances, the Trust may elect capital
gain or loss treatment for such transactions. In general, however, Code Section
988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing each
shareholder's basis in the Fund shares.
Prior to the commencement of operations, the Fund shall have received a
private letter ruling from the Internal Revenue Service ("IRS") or an opinion of
counsel, to the effect that, because each Portfolio is classified as a
partnership for tax purposes, the Fund will be entitled to look to the
underlying assets of the Portfolio in which it has invested for purposes of
satisfying various requirements of the Code applicable to RICs. If any of the
facts upon which such ruling is premised change in any material respect (e.g.,
if the Trust were required to register its interests under the Securities Act)
and the Trust is unable to obtain a private letter ruling from the IRS or an
opinion of counsel indicating that each Portfolio will continue to be classified
as a partnership, then the Board of Directors of the Corporation will determine,
in its discretion, the appropriate course of action for the Fund. One possible
course of action would be to withdraw the Fund's investments from the Portfolio
and to retain an investment adviser to manage the Fund's assets in accordance
with the investment policies applicable to the Fund. See "Investment Objectives
and Policies."
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and the Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions and gains on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.
Shareholders are urged to consult their own tax advisors regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return is based on the Fund's historical
performance and is not intended to indicate future performance. Average annual
total return is determined separately for Class A, Class B, Class C and Class D
shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data
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<PAGE> 62
since the average rates of return reflect compounding of return; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones
Industrial Average, the MSCI ex North America, the MSCI Europe, the MSCI Japan,
TSE 1st Section (TOPIX) or other published indices or to data contained in
publications such as Lipper Analytical Services, Inc., Morningstar Publications,
Inc. ("Morningstar"), other competing universes, Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine and CDA
Investment Technology, Inc. From time to time, the Fund may include its
Morningstar risk-adjusted performance rating in advertisements or supplemental
sales literature.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Corporation is a Maryland corporation incorporated on April 24, 1998.
It has an authorized capital of 2,800,000,000 shares of Common Stock, par value
$.0001 per share, divided into 100,000,000 shares of each of Class A, Class B,
Class C and Class D shares for each of its series.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights with respect to
matters relating to such distribution expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the Directors of the Corporation, in which
event the holders of the remaining shares are unable to elect any person as a
Director. No amendment may be made to the Articles of Incorporation without the
affirmative vote of a majority of the outstanding shares of the Corporation.
There normally will be no meeting of shareholders for the purpose of
electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by the shareholders, at which time
the Directors then in office will call a shareholders' meeting for the election
of Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Corporation will be required to
call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in account maintenance fees or of a change
in fundamental policies, objectives or restrictions. Except as set forth above,
the Directors shall continue to hold office and appoint successor Directors.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared and in net assets upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except
that, as noted above, Class D shares bear certain additional expenses. Shares
issued are fully-paid and non-assessable by the Corporation or Funds. Voting
rights for Directors are not cumulative.
Stock certificates are issued by the Transfer Agent only on specific
request. Certificates for fractional shares are not issued in any case.
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<PAGE> 63
The Trust consists of seven portfolios and is organized as a Delaware
Business Trust. Whenever the Fund is requested to vote on any matter relating to
the Portfolio, the Corporation will hold a meeting of the Fund's shareholders
and will cast its vote as instructed by the Fund's shareholders.
Mercury International provided the initial capital for the Corporation by
purchasing shares of the Fund ( total), for an aggregate of
$ . Such shares were acquired for investment and can only be disposed of
by redemption. To the extent the organizational expenses of the Corporation are
paid by the Corporation they will be expensed and immediately charged to net
asset value. See "Determination of Net Asset Value."
Prior to the offering of the Fund's shares, Mercury International will be
the Fund's sole shareholder and deemed a controlling person of the Fund.
COMPUTATION OF OFFERING PRICE PER SHARE
[to follow]
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
[to come]
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, which is a wholly-owned subsidiary of ML &
Co., acts as the Fund's Transfer Agent pursuant to a transfer agency, dividend
disbursing agency and shareholder servicing agency agreement (the "Transfer
Agency Agreement"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The Fund sends to its shareholders at least semi-annually reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year, shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Corporation has filed with the Commission,
Washington, D.C., under the Securities Act and the Investment Company Act, to
which reference is hereby made.
------------------------
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<PAGE> 64
APPENDIX A
INVESTMENT POLICIES INVOLVING THE USE OF INDEXED
SECURITIES, OPTIONS, FUTURES, SWAPS AND FOREIGN EXCHANGE
The Fund and the Portfolio are authorized to use certain derivative
instruments, including indexed and inverse securities, options, futures, and
swaps, and to purchase and sell foreign exchange, as described below. Such
instruments are referred to collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures transactions (as
defined below in "Risk Factors in Options, Futures and Currency Instruments"),
the Manager believes that, because a Fund will generally engage in these
transactions for hedging purposes, including anticipatory hedges (other than
options on securities that may be used to seek increased return), the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions. While a Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of Fund shares, each Fund's net asset value
will fluctuate. There can be no assurance that a Fund's hedging transactions
will be effective. Furthermore, a Fund will engage in hedging activities 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.
INDEXED AND INVERSE SECURITIES
The Fund may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return of which is
based inversely on the change in an index. For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices. Furthermore,
where such a security includes a contingent liability, in the event of such an
adverse movement, the Fund 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
Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits the Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
equity securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up-front payment (the
"option premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Fund will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.
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The Fund 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 Fund purchases a call option, in consideration for the option premium
the Fund acquires a right to purchase from another party specified securities at
the exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When the
Fund writes a call option, in return for an option premium the Fund is legally
obligated to sell specified securities owned by the Fund at the exercise price
on or before the expiration date, in the case of an option on securities, or to
pay to another party an amount based on any gain in a specified securities index
beyond a specified level on or before the expiration date, in the case of an
option on a securities index, however much the exercise price exceeds the market
price. The Fund may write call options to earn income, through the receipt of
option premiums. In the event the party to which the Fund has written an option
fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund 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 Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").
The Fund is also authorized to sell put or call options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will write only
call or put options that are "covered." A put option will be considered covered
if the Fund has segregated assets with respect to such
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option in the manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will be considered covered if the Fund owns
the securities it would be required to deliver upon exercise of the option (or,
in the case of an option on a securities index, securities that substantially
correlate with the performance of such index) or owns a call option, warrant or
convertible instrument that is immediately exercisable for, or convertible into,
such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices, on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value with the Futures Commission
Merchants (the "FCM") effecting the Fund's exchanges or in a third-party account
with the Fund's Custodian. Each day thereafter until the futures position is
closed, the Fund will pay additional margin representing any loss experienced as
a result of the futures position the prior day or be entitled to a payment
representing any profit experienced as a result of the futures position the
prior day. 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
the Fund and its shareholders. Even if a transaction is profitable, the Fund 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 Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future's contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
SWAPS
The Fund 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.
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Swap agreements may be used to obtain exposure to an equity or market without
owning or taking physical custody of securities.
The Fund will enter into a swap transaction only if, immediately following
the time the Fund enters into the transaction, the aggregate notional principal
amount of swap transactions to which the Fund is a party would not exceed 5% of
the Fund's net assets.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction at a future date or selling a currency in which the Fund has
received or anticipates receiving a dividend or distribution. The Fund may enter
into a foreign exchange transaction for purposes of hedging a portfolio position
by selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. The Fund may also hedge portfolio
positions through currency swaps, which are transactions in which one currency
is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may, 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 Fund will only enter into a
cross-hedge if the Manager 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.
No Fund will speculate in Currency Instruments. Accordingly, the Fund will
not hedge a currency in excess of the aggregate market value of the securities
that it owns (including receivables for unsettled securities sales), or has
committed to or anticipates purchasing, which are denominated in such currency.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements may not be accurately predicted and the Fund's hedging strategies may
be ineffective. To the extent that the Fund hedges against anticipated currency
movements that do not occur, the Fund may realize losses, and decrease its total
return, as the result of its hedging transactions. Furthermore, the Fund will
only engage in hedging activities from time to time and may not be engaging in
hedging activities when movements in currency exchange rates occur. It may not
be possible for the Fund to
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hedge against currency exchange rate movements, even if correctly anticipated,
in the event that (i) the currency exchange rate is so generally anticipated
that the Fund is not able to enter into a hedging transaction at an effective
price, or (ii) the currency exchange rate movement relates to a market with
respect to which Currency Instruments are not available (such as certain
developing markets) and it is not possible to engage in effective foreign
currency hedging.
RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS
Use of 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
Fund will experience a gain or loss that will not be completely offset by
movements in the value of the hedged instruments.
The Fund 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 Fund 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 Fund to potential losses that exceed the amount originally invested by the
Fund in such instruments. When the Fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transactions, but will not limit the Fund'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 Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager anticipates
the Fund can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
The Fund has therefore adopted an investment policy pursuant to which the Fund
will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transactions, the sum of the market value of
OTC options currently outstanding that are held by the Fund, the market value of
the securities underlying OTC call options currently outstanding that have been
sold by the Fund and margin deposits on the Fund's outstanding OTC options
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund that are deemed to be illiquid or are
otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a dealer in U.S. government securities recognized as a "primary dealer" by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a predetermined price, then
the Fund will treat as illiquid such amount of the underlying securities as
equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying security minus the
option's exercise price).
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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 Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty, the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will default by
engaging in transactions in Strategic Instruments traded in OTC markets only
with financial institutions that have a credit rating ________.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
No Fund may 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 ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
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.
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.
</TABLE>
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act, as
amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act, nor does it represent that
any specific
B-1
<PAGE> 71
note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries
- High rates of return on funds employed
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection
- Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
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<PAGE> 72
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
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.
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 "a"
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.
</TABLE>
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration 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 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.
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<PAGE> 73
<TABLE>
<S> <C>
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.
</TABLE>
Debt rated BB, B, CCC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
<TABLE>
<S> <C>
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 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.
</TABLE>
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.
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<PAGE> 74
<TABLE>
<S> <C>
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.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
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.
</TABLE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
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<PAGE> 75
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
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
B, balance, as predominantly speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. "BB"
indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely
have some quality and protection characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is
currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue in default
on debt instruments.
</TABLE>
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.
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<PAGE> 76
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C> <C>
1 -- Articles of Incorporation of Registrant.
2 -- By-Laws of Registrant.
3 -- Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
4 -- Not Applicable
5 -- Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.*
6 -- None
7 -- Custody Agreement between Registrant and [to come]*.
8(a) -- Administration Agreement between Registrant and Mercury
Asset Management International Ltd.*
(b) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill
Lynch Financial Data Services, Inc.*
(c) -- Form of License Agreement relating to Use of Name between
[to come] and Registrant.*
9 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman,
LLP, counsel for Registrant.*
10 -- Consent of Deloitte & Touche, LLP, independent auditors for
the Registrant.*
11 -- None.
12 -- [Certificate of Mercury Asset Management International
Ltd.]*
13 -- Account Maintenance Plan of the Registrant and Plan
Sub-Agreement.*
14 -- Not Applicable.
15 -- Rule 18f-3 Plan*
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Prior to the effective date of this Registration Statement, the Registrant
will sell shares of each Series of Registrant to Mercury Asset Management
International Ltd.
ITEM 25. INDEMNIFICATION.
Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws and Section 2-418 of the Maryland General
Corporation Law.
Article VI of the By-Laws provides that each officer and Director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall not
protect any such person against any liability to the Registrant or any
stockholder thereof to which such person 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. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination by special legal counsel in a written opinion or the vote of a
quorum of the Directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties
to the proceeding ("non-party independent Directors"), after review of the
facts, that such officer or Director is not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Each officer and Director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the Maryland General Corporation Law without a preliminary
determination as to his or her ultimate
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<PAGE> 77
entitlement to indemnification (except as set forth below); provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of nonparty
independent Directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his activities as officer or
Director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or Director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director 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 Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or Director of the Registrant.
[In Section 9 of the Distribution Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.]
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 78
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Set forth below is a list of each executive officer and partner of the
adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
, 1996 for his own account or in the capacity of director, officer,
partner or trustee.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------- ---------------------------------------
<S> <C> <C>
Peter Stormonth Darling................ Chairman Director of Deltec International S.A.;
Director of Scottish Equitable plc;
Director of Mercury European
Privatisation Trust plc; and Director
of Scottish Hydro Electric plc.
Carol Consuelo Brooke.................. Deputy Chairman Director of Mercury Asset Management
Ltd.
David Morris Fitzgerald Scott.......... Director Director of Corporation of St. Lawrence
College
Peter John Gibbs....................... Director Director of Mercury Asset Management
Ltd.; and Director of Mercury Asset
Management International Channel
Islands Ltd.
Charles Bowen Farquharson.............. Secretary Director of Mercury Asset Management
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.
Mr. Darling also serves as director of the following companies:
Mercury International Investment Trust Limited; Mercury Selected Trust
SICAV; Mercury Offshore Sterling Trust SICAV; MITSEC (Continental Europe) Ltd.;
MITSEC (Japan) Ltd.; MITSEC (North America) Ltd.; MITSEC (Pacific) Ltd.; The
Europe Fund Inc.; Scottish Equitable Life Assurance Society, Edinburgh Park,
Edinburgh, Midlothian, EH12 9SE; Mercury Keystone Investment Trust plc; Keysec
Ltd.; Mercury Asset Management Canada Ltd.; Greenwich Associates, 8 Greenwich
Office Park, Greenwich, CT 06831-5195, USA; Scottish Equitable Holdings Ltd.,
Edinburgh Park, Edinburgh, Midlothian, EH12 9SE; Sagitta Asset Management Ltd.,
Suite 4, Fourth Floor, Berkeley Square House, London, W1X 6HY; Sagitta
Investment Advisers Ltd., Suite 4, Fourth Floor, Berkeley Square House, London,
W1X 6HY; Mercury World Bond Fund; and DHW Limited, C/O Deltec Securities (UK)
Ltd., Brettenham House, London WC2E 7EN
Ms. Brooke also serves as director of the following companies:
Top Brand Fund International; Munich London Investment Management Ltd.;
Benenden School (Kent) Ltd., Cranbrook Kent, TN17 4AAD; and Mercury Asset
Management Pension Trustee Co. Ltd.
Mr. Farquharson also serves as director or officer of the following
companies:
Forum House Limited; 33 King William Street Ltd.; Mercury Asset Management
B.V.; Mercury Asset Management Dublin Limited; Mercury Asset Management Employee
Trust Co. Ltd.; Mercury Asset Management Finance Ltd.; Mercury Asset Management
Finance Limited; Mercury Asset Management Group Services Ltd.; Mercury Asset
Management Holdings Ltd.; Mercury Asset Management No. 1 Limited; Mercury Carry
Company Ltd.; Mercury Executor & Trustee Co. Ltd.; Mercury (Finance) Ltd.;
Mercury
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<PAGE> 79
Financial Services Ltd.; Mercury Holdings B.V.; Mercury Investment Management
Limited; Mercury Investment Trust Managers Ltd.; Mercury Life Limited; Mercury
Life Nominees Ltd.; Mercury Private Equity Holdings Ltd.; Mercury Rowan Mullens
Ltd.; Mercury Securities Limited; Mercury Private Equity MUST 3 Limited; NBK
Investment Management Limited; Seligman Trust Limited; and Wimco Nominees Ltd.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the following open-end 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
Corporate High Yield Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., 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
Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth
Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM), Merrill Lynch World Strategy Portfolio, Merrill
Lynch Basic Value Equity Portfolio, Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Senior
Floating Rate Fund, Inc. and Merrill Lynch Municipal Strategy Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9081, Princeton,
New Jersey 08543-9081, except that the address of
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<PAGE> 80
Messrs. Crook, Aldrich, Breen, Fatseas and Wasel is One Financial Center,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH THE DISTRIBUTOR WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.................................. President and Director Director
Arthur Zeikel................................... Director None
Philip L. Kirstein.............................. Director Director
William E. Aldrich.............................. Senior Vice President None
Robert W. Crook................................. Senior Vice President None
Kevin P. Boman.................................. Vice President None
Michael J. Brady................................ Vice President None
William M. Breen................................ Vice President None
Mark A. DeSario................................. Vice President None
James T. Fatseas................................ Vice President None
Debra W. Landsman-Yaros......................... Vice President None
Michelle T. Lau................................. Vice President None
Gerald M. Richard............................... Vice President and Treasurer Treasurer
Salvatore Venezia............................... Vice President None
William Wasel................................... Vice President None
Robert Harris................................... Secretary None
</TABLE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of:
(1) the registrant, Mercury Alpha Fund, Inc., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536;
(2) the transfer agent, Merrill Lynch Financial Data Services, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484;
(3) the custodian, , [address];
(4) the investment adviser, Mercury Asset Management International Ltd., 33
King William Street, London EC4R 9AS, England; and
(5) the sub-investment adviser [and administrator], Fund Asset Management,
L.P., 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
[TO BE CONFIRMED]
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Fund -- Management and Advisory Arrangements" in the
Statement of Additional Information constituting Part B of the Registration
Statement, the Registrant is not party to any Management-related service
contract.
ITEM 30. UNDERTAKINGS.
None.
C-5
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 4th day of June, 1998.
Mercury Japan Fund of
Mercury Alpha Fund, Inc.
Registrant
By: /s/ ROBERT E. PUTNEY, III
------------------------------------
Robert E. Putney, III, Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ROBERT E. PUTNEY, III President and Director June 4, 1998
- -------------------------------------------------- (Principal Executive Officer)
Robert E. Putney, III
/s/ TERRY K. GLENN Treasurer (Principal Financial June 4, 1998
- -------------------------------------------------- Accounting Officer) and
Terry K. Glenn Director
/s/ PHILIP L. KIRSTEIN Director June 4, 1998
- --------------------------------------------------
Philip L. Kirstein
</TABLE>
C-6
<PAGE> 82
SIGNATURE
The sole Trustee of Mercury Master Trust has caused this Registration
Statement of the Mercury Japan Fund of Mercury Alpha Fund, Inc. to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro and State of New Jersey on the 4th day of June, 1998.
MERCURY MASTER TRUST
By: /s/ ROBERT E. PUTNEY, III
------------------------------------
Robert E. Putney, III, Trustee
C-7
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<C> <S> <C>
(1) Articles of Incorporation of Registrant.....................
(2) By-Laws of Registrant.......................................
</TABLE>
C-8
<PAGE> 1
ARTICLES OF INCORPORATION
MERCURY ALPHA FUND, INC.
THE UNDERSIGNED, Judith L. Shandling, whose post office address is
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New York
10022, being at least eighteen years of age, does hereby act as an
incorporator, under and by virtue of the General Laws of the State of Maryland
authorizing the formation of corporations and with the intention of forming a
corporation.
ARTICLE I
NAME
The name of the corporation is Mercury Alpha Fund, Inc. (the
"Corporation").
ARTICLE II
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed, the
powers, rights and privileges that the Corporation shall be authorized to
exercise and enjoy, and the business or objects to be transacted, carried on
and promoted by it are as follows:
(1) To conduct and carry on business of an investment company of the
management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts
and on such terms and conditions, for such purposes and for such amount or kind
of consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the designation of,
convert, rename, redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its issued or unissued capital stock
of any class or series, as its Board of Directors may determine, in any manner
and to the
<PAGE> 2
extent now or hereafter permitted by the General Laws of the State of Maryland
and by these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental,
relative, conducive, appropriate or desirable for the accomplishment, carrying
out or attainment of all or any of the foregoing purposes or objects.
(6) The Corporation shall be authorized to exercise and enjoy all of
the powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing purposes, powers, rights and privileges, shall not
be deemed to exclude any powers, rights or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 300 E. Lombard
St. Baltimore, MD 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 300 E. Lombard Street,
Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Billion, Eight Hundred Million
(2,800,000,000) shares, of the par value of One Hundredth of One Cent ($.0001)
per share, and of the aggregate par value of Two Hundred and Eighty Thousand
Dollars ($280,000). The capital stock initially consists of seven series,
known as Mercury European Growth Fund, Mercury International Fund, Mercury
Japan Fund, Mercury Alpha Fund 4, Mercury Alpha Fund 5, Mercury Alpha Fund 6,
and Mercury Alpha Fund 7 (collectively, the "Series", and each, a "Series").
Each Series shall consist, until further changed, of Four Hundred Million
(400,000,000) shares. The shares of each Series shall consist, until further
changed, of four classes of shares designated Class A shares, Class B shares,
Class C shares and Class D shares (the "Classes"). Each Class of each Series
shall consist, until further changed, of One Hundred Million (100,000,000)
shares.
(2) Unless otherwise expressly provided in the charter of the
Corporation, the Class A, Class B, Class C and Class D shares of each Series
shall represent an equal proportionate interest in the assets belonging to
that Series (subject to the liabilities of that Series) and each share of a
particular Series shall have identical voting, dividend, liquidation and other
rights; provided, however, that notwithstanding anything in the charter of the
Corporation to the contrary:
2
<PAGE> 3
(i) The Class A, Class B, Class C and Class D shares may
be issued and sold subject to such different sales loads or
charges, whether initial, deferred or contingent, or any
combination thereof, as the Board of Directors may from time
to time establish in accordance with the Investment Company
Act of 1940, as amended, and other applicable law.
(ii) Liabilities of a Series which are determined by or
under the supervision of the Board of Directors to be
attributable to a particular Class of that Series may be
charged to that Class and appropriately reflected in the net
asset value of, or dividends payable on, the shares of that
Class of the Series.
(iii) The Class A, Class B, Class C and Class D shares of a
particular Series may have such different exchange and
conversion rights as the Board of Directors shall provide in
compliance with the Investment Company Act of 1940, as
amended.
(3) The Board of Directors may classify and reclassify any unissued
shares of capital stock, of any class or series, into one or more additional or
other classes or series as may be established from time to time by setting or
changing in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock and
pursuant to such classification or reclassification to increase or decrease the
number of authorized shares of any existing class or series.
(4) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, the holders of each class or series of capital stock shall be
entitled to dividends and distributions in such amounts and at such times as
may be determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series of capital
stock may vary among such classes and series. Dividends on a class or series
may be declared or paid only out of the net assets of that class or series.
Expenses related to the distribution of, and other identified expenses that
should properly be allocated to, the shares of a particular class or series of
capital stock may be charged to and borne solely by such class or series and
the bearing of expenses solely by a class or series of capital stock may be
appropriately reflected (in a manner determined by the Board of Directors) and
cause differences in the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the shares of each class or series of
capital stock.
(5) Unless otherwise expressly provided in the charter of the
Corporation, including those matters set forth in Article II, Sections (2) and
(4) hereof and including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to a vote of stockholders,
each holder of a share of capital stock of the Corporation shall be entitled to
one vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of all
classes and series shall vote together as a single
3
<PAGE> 4
class; provided, however, that (a) as to any matter with respect to which a
separate vote of any class or series is required by the Investment Company Act
of 1940, as amended, and in effect from time to time, or any rules, regulations
or orders issued thereunder, or by the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall apply in lieu
of a general vote of all classes and series as described above, (b) in the
event that the separate vote requirements referred to in (a) above apply with
respect to one or more classes or series, then, subject to paragraph (c) below,
the shares of all other classes and series not entitled to a separate class
vote shall vote as a single class, and (c) as to any matter which does not
affect the interest of a particular class or series, such class or series shall
not be entitled to any vote and only the holders of shares of the affected
classes and series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all classes
or series of capital stock of the Corporation (or of any class or series
entitled to vote thereon as a separate class or series) to take or authorize
any action, the Corporation is hereby authorized (subject to the requirements
of the Investment Company Act of 1940, as amended, and in effect from time to
time, and any rules, regulations and orders issued thereunder) to take such
action upon the concurrence of a majority of the votes entitled to be cast by
holders of capital stock of the Corporation (or a majority of the votes
entitled to be cast by holders of a class or series entitled to vote thereon as
a separate class or series).
(7) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, subject to compliance with the requirements of the Investment
Company Act of 1940, as amended, the Board of Directors shall have the
authority to provide that holders of shares of any class or series shall have
the right to convert or exchange said shares into shares of one or more other
classes or series in accordance with such requirements and procedures as may be
established by the Board of Directors.
(8) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation applicable to that
class or series.
(9) Any fractional shares shall carry proportionately all the rights
of a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends; provided, however, that the Corporation shall not
be required to issue share certificates for such fractional shares.
4
<PAGE> 5
(10) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall constitute a
quorum at any meeting of stockholders, except with respect to any matter which
requires approval by a separate vote of one or more classes of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast by each class entitled to vote
as a separate class shall constitute a quorum.
(11) All persons who shall acquire stock in the Corporation, of any
class or series, shall acquire the same subject to the provisions of the
charter and By-Laws of the Corporation. Any reference to "shares," "stock" or
"shares of stock" in these Articles of Incorporation shall be deemed to refer,
unless the context otherwise requires, to the shares of each separate class
and/or series. As used in the charter of the Corporation, the terms "charter"
and "Articles of Incorporation" shall mean and include the Articles of
Incorporation of the Corporation as amended, supplemented and restated from
time to time by Articles of Amendment, Articles Supplementary, Articles of
Restatement or otherwise.
(12) The Board of Directors may classify and reclassify any issued
shares of capital stock into one or more additional or other classes or series
as may be established from time to time by setting or changing in any one or
more respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely
affect the rights of holders of such issued shares. The Board's authority
pursuant to this paragraph shall include, but not be limited to, the power to
vary among all the holders of a particular class or series (a) the length of
time shares must be held prior to reclassification to shares of another class
or series (the "Holding Period(s)"), (b) the manner in which the time for such
Holding Period(s) is determined and (c) the class or series into which the
particular class or series is being reclassified; provided, however, that,
subject to the first sentence of this section, with respect to holders of the
Corporation's shares issued on or after the date of the Corporation's first
effective prospectus which sets forth Holding Period(s) (the "First Holding
Period Prospectus"), the Holding Period(s), the manner in which the time for
such Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at
the time such shares, which are the subject of the reclassification, were
issued.
(13)(a) Each series of capital stock of the Corporation shall relate
to a separate portfolio of investments. All shares of stock in each series
shall be identical except that there may be variations between the different
series as to the purchase price, determination of net asset value,
designations, preferences, conversion or other rights, voting powers,
restrictions, special and relative rights and limitations as to dividends and
on liquidation, qualifications or terms or conditions of redemption of such
shares of stock.
5
<PAGE> 6
(b) Each series of stock of the Corporation shall have the
following powers, preferences and voting or other special rights, and the
qualifications, restrictions and limitations thereof shall be as follows:
(i) All consideration received by the Corporation for the
issue or sale of stock of each series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds received thereon, including any proceeds derived from the sale,
exchange or liquidation thereof, and any assets, funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the series of stock with respect to which such assets,
payments or funds were received by the Corporation for all purposes, subject
only to the rights of creditors, and shall be so handled in the books of
account of the Corporation. Such assets, funds and payments, including any
proceeds derived from the sale, exchange or liquidation thereof, and any
assets, funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, are herein referred to as "assets belonging to"
such series. In the event that there are any income, earnings, profits, and
proceeds thereof, assets, funds or payments that are not readily identifiable
as belonging to any particular series, the Board of Directors of the
Corporation shall allocate them among any one or more of the series established
and designated from time to time in such manner and on such basis as the Board
of Directors, in their sole discretion, deem fair and equitable. Each
allocation by the Board of Directors shall be conclusive and binding on the
stockholders of the Corporation of all series for all purposes.
(ii) The assets belonging to each series of stock shall be
charged with the liabilities in respect of such series, and also shall be
charged with its share of the general liabilities of the Corporation, in
proportion to the asset value of the respective series determined in accordance
with the Articles of Incorporation of the Corporation. The determination of
the Board of Directors shall be conclusive as to the amount of liabilities,
including accrued expenses and reserves, as to the allocation of the same to a
given series, and as to whether the same or general assets of the Corporation
are allocable to one or more series.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three. The names of the directors who shall act until their
successors are duly elected and qualify are:
Terry K. Glenn
Philip K. Kirstein
Robert E. Putney, III
6
<PAGE> 7
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such limitations as may
be set forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder,
have any right to purchase or subscribe for any shares of the capital stock of
the Corporation or any other security of the Corporation which it may issue or
sell (whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation, of
any class or series, acquired by it after the issue thereof, or otherwise)
other than such right, if any, as the Board of Directors, in its discretion,
may determine.
(4) Each acting and former director and officer of the Corporation
shall be indemnified by the Corporation to the full extent permitted by the
General Laws of the State of Maryland, subject to the requirements of the
Investment Company Act of 1940, as amended. No amendment of these Articles of
Incorporation or repeal of any provision hereof shall limit or eliminate the
benefits provided to directors and officers under this provision in connection
with any act or omission that occurred prior to such amendment or repeal. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled.
(5) To the fullest extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended, no director or officer of the Corporation shall be personally
liable to the Corporation or its security holders for money damages. No
amendment of these Articles of Incorporation or repeal of any provision hereof
shall limit or eliminate the benefits provided to directors and officers under
this provision in connection with any act or omission that occurred prior to
such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law
which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940,
as amended.
(7) The Board of Directors of the Corporation from time to time may
change the Corporation's name, or change the name or other designation of any
class or series of its stock, without the vote or consent of the stockholders
of the Corporation, in any manner and to the extent now or hereafter permitted
by the General Laws of the State of Maryland and by these Articles of
Incorporation.
(8) Notwithstanding any other provision of these Articles of
Incorporation or the By-Laws of the Corporation, or the General Laws of the
State of Maryland, the Board of
7
<PAGE> 8
Directors of the Corporation may, upon the affirmative vote of the majority of
the entire Board of Directors and without the vote or consent of the
stockholders, dissolve the Corporation in the manner otherwise provided by the
laws of the State of Maryland.
ARTICLE VI
REDEMPTION
(1) Each holder of shares of capital stock of the Corporation
shall be entitled to require the Corporation to redeem all or any part of the
shares of capital stock of the Corporation standing in the name of such holder
on the books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of such shares as in effect from time to time as may be
determined by the Board of Directors of the Corporation in accordance with the
provisions hereof, subject to the right of the Board of Directors of the
Corporation to suspend the right of redemption of shares of capital stock of
the Corporation or postpone the date of payment of such redemption price in
accordance with provisions of applicable law.
(2) All shares of stock of the Corporation shall be redeemable at
the option of the Corporation. The Board of Directors may by resolution from
time to time authorize the Corporation to require the redemption of all or any
part of the outstanding shares of any class or series upon such terms and
conditions as the Board of Directors, in its discretion, shall deem advisable,
and upon the sending of written notice thereof to each holder whose shares are
to be redeemed.
(3) The redemption price of shares of capital stock of the
Corporation shall be the net asset value thereof as determined by the Board of
Directors of the Corporation from time to time in accordance with the
provisions of applicable law, less such redemption fee or other charge, if any,
as may be fixed by resolution of the Board of Directors of the Corporation.
Payment of the redemption price shall be made in cash by the Corporation at
such time and in such manner as may be determined from time to time by the
Board of Directors of the Corporation.
ARTICLE VII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
such reserves or charges shall have been created, shall have been paid or
discharged or shall be then or thereafter required to be paid or discharged),
as to the price of any
8
<PAGE> 9
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and
all holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Articles of Incorporation shall be
effective to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Investment Company Act of 1940, as
amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (b) protect or purport to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders 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.
ARTICLE VIII
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in any manner now
or hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, the undersigned incorporator of Mercury Alpha
Fund, Inc. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge, the matters and facts set forth therein are true in all
material respects under penalties for perjury.
Dated this 23rd day of April, 1998
/s/ Judith L. Shandling
----------------------------------
Judith L. Shandling
9
<PAGE> 1
BY-LAWS
OF
MERCURY ALPHA FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of Mercury Alpha
Fund, Inc. (the "Corporation") shall be in the City of Baltimore, State of
Maryland.
Section 2. Principal Executive Office. The principal executive
office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Section 3. Other Offices. The Corporation may have such other
offices in such places as the Board of Directors may from time to time
determine.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. So long as the Corporation is registered
as an investment company under the Investment Company Act of 1940, as amended
(such term to include the rules and regulations promulgated under the
Investment Company Act of 1940, as amended, unless otherwise specified or the
context otherwise requires), annual meetings of the stockholders shall not be
held, except where required to be held by the Investment Company Act of 1940,
as amended, or by the Maryland General Corporation Law or when called by the
Board of Directors or by an officer or officers authorized to take such action
by the Board of Directors. If in any calendar year the Corporation is required
or elects to hold an annual meeting, the meeting shall be held on such day, not
a Saturday, Sunday or legal holiday, as the Board of Directors or the officer
or officers calling the meeting may prescribe. At each such annual meeting,
the stockholders shall elect a Board of Directors and transact such other
business as may properly come before the meeting. The provisions of these
By-Laws which contemplate the holding of an annual meeting of stockholders
shall be suspended during any calendar year in which no annual meeting of
stockholders is held.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by
a majority of the Board of Directors, the President, or on the written request
of the holders of at least 10% of the outstanding shares of capital stock of
the Corporation entitled to vote at such meeting if they
<PAGE> 2
comply with the applicable requirements of the Maryland General Corporation
Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be
held at such place within the United States as the Board of Directors may from
time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the
place, date and time of the holding of each stockholders' meeting and, if the
meeting is a special meeting, the purpose or purposes of the special meeting,
shall be given personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder at his address as it appears on the
records of the Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 5. Quorum. At all meetings of the stockholders, the holders
of shares of stock of the Corporation entitled to cast one-third of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more series or classes of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate series or class shall constitute a quorum. In
the absence of a quorum no business may be transacted, except that the holders
of a majority of the shares of stock present in person or by proxy and entitled
to vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally
called. The absence from any meeting, in person or by proxy, of holders of the
number of shares of stock of the Corporation in excess of a majority thereof
which may be required by the laws of the State of Maryland, the Investment
Company Act of 1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter shall not
prevent action at such meeting upon any other matter or matters which may
properly come before the meeting, if there shall be present thereat, in person
or by proxy, holders of the number of shares of stock of the Corporation
required for action in respect of such other matter or matters.
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Section 6. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, shall act
as chairman of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall act as
secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings
of the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have
been so fixed, then at the later of (i) the close of business on the day on
which notice of the meeting is mailed or (ii) the thirtieth day before the
meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
any corporate action to be taken by vote of the stockholders (other than the
election of directors, which shall be by plurality vote) may be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable,
any such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a
record date for the purpose of determining stockholders entitled to vote at any
meeting of the stockholders. The record date, which may not be prior to the
close of business on the day the record date is fixed, shall be not more than
ninety nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
stockholders,
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appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may, and on the request of
any Stockholder entitled to vote thereto shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, may be required to
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his ability. The
inspectors may be empowered to determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as inspector of
an election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in the
Articles of Incorporation, the business and affairs of the Corporation shall be
managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law or by the
Articles of Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number
of directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease.
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Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be
elected annually at a meeting of stockholders held for that purpose; provided,
however, that if no meeting of the stockholders of the Corporation is required
to be held in a particular year pursuant to Section 1 of Article II of these
By-Laws, directors shall be elected at the next meeting held for that purpose.
The term of office of each director shall be from the time of his election and
qualification until the election of directors next succeeding his election and
until his successor shall have been elected and shall have qualified, or until
his death, or until he shall have resigned or until December 31 of the year in
which he shall have reached seventy-two years of age, or until he shall have
been removed as hereinafter provided in these By-Laws, or as otherwise provided
by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at
any time by giving written notice of his resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may
be removed by the stockholders by a vote of a majority of the votes entitled to
be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising
from death, resignation, removal, an increase in the number of directors or any
other cause, may be filled by a vote of the majority of the Board of Directors
then in office even though such majority is less than a quorum, provided that
no vacancies shall be filled by action of the remaining directors, if after
the filling of said vacancy or vacancies, less than two-thirds of the directors
then holding office shall have been elected by the stockholders of the
Corporation. In the event that at any time there is a vacancy in any office of
a director which vacancy may not be filled by the remaining directors, a
special meeting of the stockholders shall be held as promptly as possible and
in any event within sixty days, for the purpose of filling said vacancy or
vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at
such place as the Board may from time to time determine or as shall be
specified in the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be
held without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
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Section 10. Telephone Meetings. Members of the Board of Directors or
of any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special
meeting of the Board shall be given by the Secretary as hereinafter provided,
in which notice shall be stated the time and place of the meeting. Notice of
each such meeting shall be delivered to each director, either personally or by
telephone or any standard form of telecommunication, at least twenty-four hours
before the time at which such meeting is to be held, or by first-class mail,
postage prepaid, addressed to him at his residence or usual place of business,
at least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special
meeting need not be given to any director who shall, either before or after the
meeting, sign a written waiver of notice which is filed with the records of the
meeting or who shall attend such meeting. Except as otherwise specifically
required by these By-Laws, a notice or waiver of notice of any meeting need not
state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of
the members of the entire Board shall be present in person at any meeting of
the Board in order to constitute a quorum for the transaction of business at
such meeting, and except as otherwise expressly required by statute, the
Articles of Incorporation, these By-Laws, the Investment Company Act of 1940,
as amended, or other applicable statute, the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board. In the absence of a quorum at any meeting of the Board, a majority of
the directors present thereat may adjourn such meeting to another time and
place until a quorum shall be present thereat. Notice of the time and place of
any such adjourned meeting shall be given to the directors who were not present
at the time of the adjournment and, unless such time and place were announced
at the meeting at which the adjournment was taken, to the other directors. At
any adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
called.
Section 14. Organization. The Board may, by resolution adopted by a
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his absence
or inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his absence or inability to act, any person appointed by the
Chairman) shall act as secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions
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of the Investment Company Act of 1940, as amended, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or
committee.
Section 16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board
of Directors to direct that the purchase, sale, retention and disposal of
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation,
as filed from time to time with the Securities and Exchange Commission and as
required by the Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the administration of its
day to day operations to an individual or corporate management company and/or
investment adviser pursuant to a written contract or contracts which have
obtained the requisite approvals, including the requisite approvals of
renewals thereof, of the Board of Directors and/or the stockholders of the
Corporation in accordance with the provisions of the Investment Company Act of
1940, as amended.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by resolution adopted
by a majority of the entire board, designate an Executive Committee consisting
of two or more of the directors of the corporation, which committee shall have
and may exercise all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles of
Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the Investment
Company Act of 1940, as amended, or the taking of any other action required to
be taken by the Board of Directors by the Investment
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Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the adoption of
new By-Laws;
(f) the amendment or repeal of any resolution of the Board which
by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of capital stock
of the Corporation; and
(h) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may
from time to time, by resolution adopted by a majority of the whole Board,
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the
Board of Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members
of any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The
Board may designate a chairman of any committee and such chairman or any two
members of any committee may fix the time and place of its meetings unless the
Board shall otherwise provide. In the absence or disqualification of any
member of any committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. The
Board shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member, or to dissolve any such committee. Nothing
herein shall be deemed to prevent the Board from appointing one or more
committees consisting in whole or in part of persons who are not directors of
the Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation, except as may be prescribed by the Board.
ARTICLE V
Officers, Agents and Employees
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Section 1. Number, Qualification, Election and Tenure. The officers
of the Corporation shall be a President, a Secretary and a Treasurer, each of
whom shall be elected by the Board of Directors. The Board of Directors may
elect or appoint one or more Vice Presidents and may also appoint such other
officers, agents and employees as it may deem necessary or proper. Any two or
more offices may be held by the same person, except the offices of President
and Vice President, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity. Such officers shall be elected by the
Board of Directors each year at a meeting of the Board of Directors, each to
hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices
for such terms as may be prescribed by the Board or by the appointing
authority.
Section 2. Resignations. Any officer of the Corporation may resign
at any time by giving written notice of resignation to the Board, the Chairman
of the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent
or employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
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Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he shall preside at all meetings of the stockholders and of the
Board Directors. He shall have, subject to the control of the Board of
Directors, general charge of the business and affairs of the Corporation. He
may employ and discharge employees and agents of the Corporation, except such
as shall be appointed by the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the President may
from time to time prescribe.
Section 9. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act of
1934, as amended) pursuant to a written agreement designating such bank or
trust company or member of a national securities exchange as custodian of the
property of the Corporation;
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking proper
vouchers therefor; and
(f) in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 10. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation (unless
the seal of the Corporation on such
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certificates shall be a facsimile, as hereinafter provided) and affix and
attest the seal to all other documents to be executed on behalf of the
Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or
any of them, of such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
Each officer and director of the Corporation shall be indemnified by
the Corporation to the full extent permitted under the Maryland General
Corporation Law, except that such indemnity shall not protect any such person
against any liability to the Corporation or any stockholder thereof to which
such person 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. Absent a court determination that an officer or
director seeking indemnification was not liable on the merits or guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, the decision by the Corporation
to indemnify such person must be based upon the reasonable determination by
special legal counsel in a written opinion or the vote of a majority of a
quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties
to the proceeding ("non-party independent directors"), after review of the
facts, that such officer or director is not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the Maryland General Corporation Law without a
preliminary determination as to his or her ultimate entitlement to
indemnification (except as set forth below); provided, however, that the person
seeking indemnification shall provide to the Corporation a written affirmation
of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written undertaking to
repay any such advance, if it should ultimately be determined that the standard
of conduct has not been met, and provided further that at least one of the
following additional conditions is met: (a) the person
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seeking indemnification shall provide a security in form and amount acceptable
to the Corporation for his undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to the
Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the General
Laws of the State of Maryland, from liability arising from his activities as
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation
or to its stockholders to which such officer or director 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 Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who is
not an officer or director of the Corporation.
ARTICLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing the
number of shares of stock of the Corporation owned by him, provided, however,
that certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the Chairman, President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and sealed with the seal of the Corporation. Any or all of the signatures or
the seal on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate shall be issued, it may be issued by the
Corporation with the same effect as if such officer, transfer agent or
registrar were still in office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. There shall be made available upon request of any
stockholder, in accordance with Maryland law, a record containing the number of
shares of stock issued during a specified period not to exceed twelve months
and the consideration received by the Corporation for each such share.
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Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
any certificates representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have been mutilated,
and the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate.
Anything herein to the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions.
The Board may fix, in advance, a date not more than ninety days preceding the
date fixed for the payment of any dividend or the making of any distribution or
the allotment of rights to subscribe for securities of the Corporation, or for
the delivery of evidences of rights or evidences of interests arising out of
any change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder
of the Corporation or his agent may inspect and copy during usual business
hours the Corporation's By-Laws,
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minutes of the proceedings of its stockholders, annual statements of its
affairs, and voting trust agreements on file at its principal office.
ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall be as determined by the Board of Directors from time to time.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of
the Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safe keeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every
arrangement entered into with any bank or other company for the safe keeping of
the securities and investments of the Corporation shall contain provisions
complying with the Investment Company Act of 1940, as amended, and the general
rules and regulations thereunder.
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as
the Board of Directors by resolution shall from time to time designate.
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Section 2. Sale or Transfer of Securities. Stock certificates, bonds
or other securities at any time owned by the Corporation may be held on behalf
of the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board
and, when so authorized to be held on behalf of the Corporation or sold,
transferred or otherwise disposed of, may be transferred from the name of the
Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors
and, if required by the provisions of the Investment Company Act of 1940, as
amended, ratified by the stockholders.
ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed to
each stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears
on the books of the Corporation. Such annual statement shall also be available
at the annual meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days after the end
of the fiscal year), be placed on file at the Corporation's principal office.
Each such report shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such
report shall also show the Corporation's income and expenses for the period
from the end of the Corporation's preceding fiscal year to the close of the
annual or quarterly period covered by the report and any other information
required by the Investment Company Act of 1940, as amended, and shall set forth
such other matters as the Board or such firm of independent public accountants
shall determine.
ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or repealed by
the Board of Directors. The stockholders shall have no power to make, amend,
alter or repeal By-Laws.
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