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[MERCURY ASSET MANAGEMENT LOGO]
Mercury Gold and Mining Fund
OF MERCURY ASSET MANAGEMENT FUNDS, INC.
[MERCURY GOLD AND MINING FUND ARTWORK]
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING INFORMATION
ABOUT RISKS. PLEASE READ IT BEFORE YOU INVEST
AND KEEP IT FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS - SEPTEMBER 10, 1999
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TABLE OF CONTENTS
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PAGE
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[FUND FACTS ICON]
FUND FACTS
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About the Mercury Gold and Mining Fund...................... 2
Fees and Expenses........................................... 5
[ABOUT THE DETAILS ICON]
ABOUT THE DETAILS
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How the Fund Invests........................................ 7
Investment Risks............................................ 9
Adviser's Historical Performance Data....................... 15
[ACCOUNT CHOICES ICON]
ACCOUNT CHOICES
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Pricing of Shares........................................... 21
How to Buy, Sell, Transfer and Exchange Shares.............. 26
How Shares are Priced....................................... 30
Fee-Based Programs.......................................... 31
Dividends and Taxes......................................... 31
[THE MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
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Management of the Fund...................................... 33
Master/Feeder Structure..................................... 34
Financial Highlights........................................ 36
[TO LEARN MORE ICON]
TO LEARN MORE
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
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MERCURY GOLD AND MINING FUND
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[FUND FACTS ICON] Fund Facts
IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.
COMMON STOCK -- units of ownership of a 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 SECURITIES -- corporate securities (usually preferred stock or
bonds) that are exchangeable for a fixed number of other securities (usually
common stock) at a set price or formula.
ABOUT THE MERCURY GOLD AND MINING FUND
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WHAT ARE THE FUND'S OBJECTIVES?
The Fund's main objective is long-term capital growth. In other words, the Fund
tries to choose investments that will increase 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
objective.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in stocks of gold mining companies and, to a lesser
extent, of companies engaged in other mining activities located throughout the
world. Fund management seeks stocks that it believes are undervalued or have
good prospects for earnings growth. The Fund may also invest directly in gold
bullion. The Fund has a policy to concentrate its investments in companies in
the mining and related manufacturing industries. Mining related manufacturing
industries may include, for example, primary production of aluminum or steel
foundaries. For simplicity, this Prospectus uses the term "mining" to include
exploring, mining, refining, processing, fabricating, distributing, dealing in
or owning a particular metal or mineral. A company's stock is considered to be
undervalued when its price is less than what Fund management believes it is
worth. A company whose earnings per share grow faster than inflation and the
economy in general usually has a higher stock price over time than a company
with slower earnings growth. The Fund's evaluation of the type, quantity and
quality of a company's ore reserves is an important factor in evaluating a
particular company's value and earnings prospects. The Fund may invest up to 10%
of its assets directly in gold bullion. The Fund allocates investments to
companies engaged in mining activities other than gold mining when Fund
management believes, based on an evaluation of global economic conditions and
the price of gold, that they present better prospects for growth than
investments in gold mining companies.
The Fund may purchase COMMON STOCK, PREFERRED STOCK, CONVERTIBLE SECURITIES and
other assets. The Fund will, under normal circumstances, invest at least 80% of
its total assets in equity securities of gold mining companies, equity
securities of companies engaged in other mining activities, and gold bullion.
The Fund expects that the majority of its investments will be in gold mining
companies. The Fund may invest in securities issued by companies of all sizes,
but will focus mainly on medium and large companies. Companies will be located
throughout the world in countries with developed capital markets and countries
with emerging capital markets.
2 MERCURY GOLD AND MINING FUND
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Fund Facts
FUND FACTS LOGO
The Fund invests all of its assets in a Portfolio of Mercury Asset Management
Master Trust that has the same objectives 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 in which the Fund invests.
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 your Fund shares may go up or down. If the value of the Fund's
investments goes down, you may lose money. The value changes in the Fund's
investments may occur because of changes in a particular stock market or
commodity market generally, as well as the gold market in particular. The Fund
is also subject to the risk that the stocks the Fund's adviser selects will
underperform the markets or other funds with similar investment objectives and
investment strategies. Unlike more broadly diversified mutual funds the Fund
will invest mainly in securities of gold mining companies, and to a lesser
extent in securities of companies engaged in other mining activities. This
concentration in gold and other mining securities will make the Fund more
vulnerable to the price fluctuations of metals and minerals generally and of
gold in particular. Historically, the prices of gold and gold mining securities
have been more volatile than prices of equity securities generally. In addition,
gold bullion does not generate income, and offers only the potential for capital
appreciation or depreciation.
In addition, because the Fund invests a large portion of its assets in non-U.S.
securities, the Fund is subject to additional risks. For example, the Fund's
securities may go up or down in value depending on foreign exchange rates,
political and economic developments and U.S. and foreign laws relating to
foreign investment. Non-U.S. securities may also be less liquid, more volatile
and harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is in an emerging capital market.
MERCURY GOLD AND MINING FUND 3
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[FUND FACTS ICON] Fund Facts
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
- Are investing with long-term goals in mind and are not looking for
current income.
- Want to diversify your portfolio with an investment that is likely
to change in value independent of trends in the stock market
generally.
- Can tolerate the increased price volatility and the increased risk
associated with investments concentrated in one industry and
investments in non-U.S. securities.
- Are prepared to receive taxable short-term capital gains.
4 MERCURY GOLD AND MINING FUND
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Fund Facts
FUND FACTS LOGO
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 -- these fees 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:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate dealers for
account maintenance activities.
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your 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. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.
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SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT)(a): CLASS I CLASS A CLASS B(b) CLASS C
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MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES (AS
A PERCENTAGE OF OFFERING PRICE) 5.25%(c) 5.25%(c) NONE NONE
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MAXIMUM DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LOWER) NONE(d) NONE(d) 4.00%(c) 1.00%(c)
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MAXIMUM SALES CHARGE (LOAD) IMPOSED ON DIVIDEND
REINVESTMENTS NONE NONE NONE NONE
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REDEMPTION FEE NONE NONE NONE NONE
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EXCHANGE FEE NONE NONE NONE NONE
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MAXIMUM ACCOUNT FEE NONE NONE NONE NONE
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)(e):
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MANAGEMENT FEE(f) 0.75% 0.75% 0.75% 0.75%
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DISTRIBUTION AND/OR SERVICE (12B-1) FEES(g) NONE 0.25% 1.00% 1.00%
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OTHER EXPENSES (INCLUDING TRANSFER AGENCY FEES)(h) 2.66% 2.70% 2.67% 2.65%
ADMINISTRATIVE FEES(i) 0.25% 0.25% 0.25% 0.25%
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TOTAL OTHER EXPENSES 2.91% 2.95% 2.92% 2.90%
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TOTAL ANNUAL FUND OPERATING EXPENSES 3.66% 3.95% 4.67% 4.65%
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FEE WAIVER AND/OR EXPENSE REIMBURSEMENT(j) 0.85% 0.89% 0.86% 0.84%
NET TOTAL OPERATING EXPENSES(k) 2.81% 3.06% 3.81% 3.81%
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(a) In addition, certain securities dealers may charge a fee to process a
purchase or sale of shares.
(b) Class B shares automatically convert to Class A shares about eight 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.
(e) The fees and expenses include the expenses of both the Fund and the
Portfolio it invests in.
(f) Paid by the Portfolio. The Investment Adviser pays the sub-adviser out of
this fee. The Investment Adviser or its affiliate provides accounting
services to the Portfolio at its cost.
(g) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other materials. If you hold Class B or C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes. Class B
and C shares pay a Distribution Fee of 0.75% and a Service (Account
Maintenance) Fee of 0.25%. Class A shares pay only a Service (Account
Maintenance) Fee of 0.25%.
MERCURY GOLD AND MINING FUND 5
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Fund Facts
FUND FACTS LOGO
Footnotes continued from previous page
(h) Expenses are based on estimated amounts through the end of the Portfolio's
and Fund's full fiscal year on an annualized basis. The Transfer Agent is an
affiliate of the Investment Adviser. The Fund pays the Transfer Agent a fee
for each shareholder account and reimburses it for out-of-pocket expenses.
The fee ranges from $11.00 to $23.00 per account (depending on the level of
services required), but is set at 0.10% for certain accounts that
participate in certain fee-based programs. For the period February 26, 1999
(commencement of operations) to May 31, 1999, the Fund paid the Transfer
Agent fees totaling $3,643. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
calendar year. The fee begins the month following the month the account is
closed and ends at the end of the calendar year.
(i) Paid by the Fund. The Administrator provides accounting services to the Fund
at its cost.
(j) The Investment Adviser and the Administrator have entered into contractual
arrangements with the Fund effective September 2, 1999 to waive fees and/or
reimburse expenses of either the Fund or the Portfolio as necessary to
assure that ordinary expenses incurred by each class of the Fund will not
exceed the following: Class I: 2.81%; Class A: 3.06%; Class B: 3.81%; and
Class C: 3.81%.
(k) The net total operating expenses reflect expenses actually incurred during
the Fund's first fiscal year restated to reflect the contractual fee waiver
and/or expense reimbursement currently in effect.
EXAMPLE
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
Expenses if you did redeem your shares:
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CLASS I CLASS A CLASS B CLASS C
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ONE YEAR $ 794 $ 818 $ 783 $ 483
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THREE YEARS $1,350 $1,420 $1,464 $1,164
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Expenses if you did not redeem your shares:
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CLASS I CLASS A CLASS B CLASS C
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ONE YEAR $ 794 $ 818 $ 383 $ 383
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THREE YEARS $1,350 $1,420 $1,164 $1,164
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6
MERCURY GOLD AND MINING FUND
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[ABOUT THE DETAILS ICON] About the Details
ABOUT THE PORTFOLIO MANAGEMENT TEAM -- The Fund is managed by members of a team
of 7 investment professionals who participate in the team's research process and
stock selection. The senior investment professionals in this group include David
Baker, Graham Birch, Geoff Campbell, and Trevor Steel. Trevor Steel is primarily
responsible for the day-to-day management of the Fund.
ABOUT THE INVESTMENT ADVISER -- Mercury Asset Management International Ltd. is
the Investment Adviser.
HOW THE FUND INVESTS
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The Fund's main objective is long-term capital growth. The Fund tries to achieve
its objective by investing primarily in a diversified portfolio of equity
securities of gold mining companies and, to a lesser extent, of companies
engaged in other mining activities, located throughout the world. The Fund may
also invest up to 10% of its assets directly in gold bullion. In selecting
securities, the Fund emphasizes those securities that Fund management believes
are undervalued or have good prospects for earnings growth.
The Fund will, under normal circumstances, invest at least 80% of its total
assets in equity securities of gold mining companies, equity securities of
companies engaged in other mining activities, and gold bullion. The Fund has a
policy to concentrate its investments in companies in the mining and related
manufacturing industries. The Fund will invest in companies engaged in non-gold
mining activities when Fund management believes, based on an evaluation of
global economic conditions and the price of gold, that they present better
prospects for growth than investments in gold mining companies.
Equity securities consist of:
- Common Stock
- Preferred Stock
- Securities Convertible into Common Stock
- Derivative securities such as asset-based securities, options
(including warrants) and futures, the value of which is based on a
common stock or group of common stocks
MERCURY GOLD AND MINING FUND 7
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[ABOUT THE DETAILS ICON] About the Details
A company's stock is considered to be undervalued when the stock's current price
is less than what Fund management believes a share of the company is worth. Fund
management feels a company's worth can be assessed by several factors, such as:
- financial resources
- value of assets (including the type, quantity and quality of a
company's ore reserves, and mineral exploration prospects)
- sales and earnings growth
- product development
- quality of management
- 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 a company with slower earnings growth. Current
income from dividends and interest will not be an important consideration in
selecting portfolio securities.
The Fund invests in securities of companies located throughout the world and
generally intends to invest a substantial amount of its assets in securities of
companies located in the Republic of South Africa. The Fund may invest without
limit in securities of companies located in countries with emerging capital
markets including the Republic of South Africa, the People's Republic of China,
Russia, Indonesia, Uzbekistan, Peru, Brazil, Mexico, Zimbabwe, Ghana, Mali,
Tanzania, the Philippines and Papua New Guinea. The Fund may also invest in
securities of companies located in countries with developed capital markets
including the United States, Canada, Japan, United Kingdom, Finland, France,
Germany, Switzerland, Ireland, Luxembourg, Spain and Australia. The Fund may
invest in debt securities that are issued together with a particular equity
security. The Fund may invest in derivatives to hedge (protect against price
movements) or to enable it to reallocate its investments more quickly than it
could by buying and selling the underlying assets. The Fund is not required to
hedge and may choose not to do so.
The Fund may invest in companies of any size, but tends to focus on medium and
large companies. The Fund has no stated minimum holding period for investments,
and will buy or sell securities and other assets whenever Fund management sees
an appropriate opportunity. The Fund does not consider potential tax
consequences to Fund shareholders when it sells assets.
The Fund may invest up to 10% of its assets in gold bullion when the Fund
believes it is undervalued relative to the price of securities of gold mining
companies. However, the Fund may have internal guidelines that limit its
investments in gold bullion to considerably less than 10% of the Fund's assets.
8 MERCURY GOLD AND MINING FUND
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[ABOUT THE DETAILS ICON] About the Details
The Fund will normally invest almost all of its assets as described above. The
Fund may, however, invest in short-term instruments, such as money market
securities and repurchase agreements, to meet redemptions. If the Fund
anticipates significant adverse changes in the price of gold, then the Fund's
investment in stocks of gold mining companies and gold bullion may be
temporarily reduced to below 50% of the Fund's total assets. In this case the
Fund may make substantial investments, for temporary defensive purposes, in
other mineral mining companies (non-gold), and may hold substantial amounts of
short-term investments, such as money market securities and repurchase
agreements. Short term investments and temporary defensive positions may limit
the potential for growth in the value of your shares and the Fund may,
therefore, not achieve its investment objective.
The Fund may use many different investment strategies in seeking its investment
objectives and it has certain investment restrictions. These strategies and
certain of the restrictions and policies governing the Fund's investments are
explained in the Fund's Statement of Additional Information. If you would like
to learn more about the Fund, request the Statement of Additional Information.
INVESTMENT RISKS
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This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals, or that the Fund's performance will be positive over any period
of time.
STOCK MARKET RISK
Stock market risk is the risk that the stock markets or commodity markets in
general, or the gold market in particular, will go down in value, including the
possibility that any of these markets will go down sharply and unpredictably.
SELECTION RISK
Selection risk is the risk that the investments that Fund management selects
will underperform the markets or other funds with similar investment objectives
and investment strategies.
SECTOR RISK
Sector risk is the risk that the Fund's concentration in gold and other mining
securities will expose the Fund more to the price fluctuations of mining
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[ABOUT THE DETAILS ICON] About the Details
securities, generally, or of gold in particular, than more broadly diversified
funds.
MINING RELATED SECURITIES AND GOLD BULLION.
- Investments in or relating to gold and other metals or minerals
are considered speculative.
- Historically, during periods of economic or financial instability
the securities of mining companies in general, and companies
engaged in precious (including gold) and industrial metals mining
in particular, have been subject to extreme fluctuations in market
price. Gold bullion has also been subject to extreme fluctuations
in market price.
- The earnings and general financial condition of mining companies
are highly dependent on the market prices of the underlying metals
or minerals, which have historically been extremely volatile.
- During periods of instability in the price of metals or minerals,
the liquidity of the Fund's portfolio securities may be severely
reduced; in other words, the Fund may not, during these periods,
be able to sell its securities at the time and price that the Fund
would like.
- Actions of large producers, sellers and holders of precious metals
(such as governments and central banks) may severely impact supply
of, or demand for, precious metals, and their actions in general
may have a significant impact on the prices of precious metals.
These actions can be affected by various economic, financial,
social and political factors which may be unpredictable.
- The Fund generally intends to invest a substantial amount of its
assets in securities of companies located in the Republic of South
Africa. This investment focus could increase volatility and risk
compared to a fund that invests a smaller percentage of its assets
in South Africa. In addition, South African companies are
generally more sensitive to movements in the price of gold than
similar companies in other countries.
- Gold bullion does not generate income and offers only the
potential for capital appreciation or depreciation.
10 MERCURY GOLD AND MINING FUND
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[ABOUT THE DETAILS ICON] About the Details
LIQUIDITY, INFORMATION AND VALUATION RISKS
Certain securities, including securities of companies in countries with emerging
capital markets, securities of small companies and "restricted securities," may
be illiquid or volatile, making it difficult or impossible to sell them at the
time and at the price that the Fund would like. Restricted securities have
contractual or legal restrictions on their resale and include "private
placement" securities that the Fund may buy directly from the issuer. Also,
important information about certain companies, securities or the markets in
which they trade, may be inaccurate or unavailable. It may be difficult to value
accurately these types of securities. Certain derivatives may be subject to
these risks as well.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
Certain European countries have entered into EMU in an effort to, among other
things, reduce barriers between countries and eliminate fluctuations in their
currencies. EMU has established a single European currency (the euro), which was
introduced on January 1, 1999 and has replaced the existing national currencies
of all initial EMU participants. The use of notes and coins of the relevant
national currencies will be phased out by July 1, 2002. Upon introduction of the
euro, certain securities (beginning with government and corporate bonds) were
redenominated in the euro. These securities trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Fund invests, the Fund could
be adversely affected:
- If the transition to euro, or EMU as a whole, does not continue to
proceed as planned.
- If a participating country withdraws from EMU.
OTHER FOREIGN SECURITY RISKS
- The value of the Fund's non-U.S. holdings (and hedging
transactions in foreign currencies) will be affected by changes in
currency exchange rates.
- The costs of non-U.S. securities transactions tend to be higher
than those of U.S. transactions.
- The Fund's non-U.S. securities holdings may be adversely affected
by U.S. or foreign government action.
MERCURY GOLD AND MINING FUND 11
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[ABOUT THE DETAILS ICON] About the Details
- International trade barriers or economic sanctions against certain
non-U.S. countries may adversely affect the Fund's non-U.S.
holdings.
- The Fund may be able to invest in certain small non-U.S. markets
only by investing in another fund that in turn invests in those
markets. It may cost the Fund more to buy shares of these funds
than it would to buy the non-U.S. securities directly.
- The foregoing risks are heightened when the investment is made in
a country that has an emerging capital market. The development of
a capital market depends on a number of factors, including a
country's success in making political, economic and social
reforms. If a country were to discontinue its process of reform,
or experience other destabilizing events, the Fund's investments
could be adversely affected. In addition, because of the small
size of the capital market in a country with an emerging capital
market or governmental restrictions on foreign investment, there
may be fewer investment opportunities available to the Fund than
in more developed markets. This could limit the Fund's ability to
diversify its holdings among issuers, industries and countries.
- 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.
- Non-U.S. markets have different clearance and settlement
procedures, and in certain markets settlements may be unable to
keep pace with the volume of securities transactions which may
cause delays. This means that the Fund's assets may be uninvested
and not earning returns. The Fund may miss investment
opportunities or be unable to dispose of a security because of
these delays.
BORROWING AND LEVERAGE
The use of borrowing can create leverage. Leverage increases the Fund's exposure
to risk by increasing its total investments. If the Fund borrows money to make
more investments than it otherwise could or to meet redemptions, and
12 MERCURY GOLD AND MINING FUND
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[ABOUT THE DETAILS ICON] About the Details
the Fund's investments go down in value, the Fund's losses will be magnified.
Borrowing will cost the Fund interest expense and other fees.
Certain securities that the Fund buys may create leverage, including, for
example, derivative securities. Like borrowing, these investments may increase
the Fund's exposure to risk.
DERIVATIVES
The Fund may also use instruments referred to as "Derivatives." Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as gold) or an index (a measure of value or rates, such as the S&P 500 or
the prime lending rate). Derivatives may allow the Fund to increase or decrease
its level of risk exposure more quickly and efficiently than transactions in
other types of instruments. Derivatives, however, are volatile and involve
significant risks, including many of the risks described above. Derivatives may
not always be available or cost efficient. If the Fund invests in derivatives,
the investments may not be effective as a hedge against price movements and can
limit potential for growth in Fund share value. Other risks include:
- Credit risk -- the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to the
Fund.
- Currency risk -- the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S.
dollar terms) of an investment.
- Leverage risk -- the risk associated with certain types of
investments or trading strategies that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount
originally invested.
- Liquidity risk -- the risk that certain securities may be
difficult or impossible to sell at the time that the seller would
like or at the price that the seller believes the security is
currently worth.
- Index risk -- If the derivative is linked to the performance of an
index, it will be subject to the risks associated with changes in
that index. If the index changes, the 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
MERCURY GOLD AND MINING FUND 13
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[ABOUT THE DETAILS ICON] About the Details
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 Fund may use the following types of derivative instruments: futures,
forwards, options, asset-based securities, indexed and inverse securities and
swaps.
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.
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.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
14 MERCURY GOLD AND MINING FUND
<PAGE> 16
[ABOUT THE DETAILS ICON] About the Details
ADVISER'S HISTORICAL PERFORMANCE DATA
- --------------------------------------------------------------------------------
The following tables present historical performance data for all accounts,
including the Fund, that have been managed by the Investment Adviser or another
Mercury investment adviser and that have substantially similar (although not
necessarily identical) objectives and policies to the Fund's. These accounts
have been managed using investment styles and strategies substantially similar
to those used in managing the Fund. THE COMPOSITE FIGURES DO NOT REPRESENT THE
PERFORMANCE OF THE FUND. The Financial Highlights table on p. 36 presents the
Fund's performance for periods after its inception. Past performance is no
guarantee of future results.
The composite figures shown in the tables presented below were calculated in the
following manner:
- Many of the accounts in the composite were managed by the
investment adviser's Mercury affiliates. All personnel of the
Investment Adviser and its Mercury affiliates are employed by a
single holding company. Portfolio managers perform management
services for accounts of various Mercury advisers, including the
Fund's Investment Adviser, depending on the nature of each
adviser's clients. The investment process, including the resources
available to the portfolio managers and the supervisory review, is
the same across advisers. As a practical matter, there is no
significant distinction between the process used in determining
the recommendations of the Investment Adviser and those of its
Mercury affiliates.
- Apart from the Fund, the accounts included in the composite are
not U.S. mutual funds, and are not subject to the same rules and
regulations under the Investment Company Act of 1940, as amended,
and the Internal Revenue Code of 1986, as amended (for example,
diversification and liquidity requirements and restrictions on
transactions with affiliates) as the Fund, or to the same types of
expenses that the Fund pays. These differences might have
adversely affected the composite performance figures shown below.
- The Fund calculates its performance using a formula specified by
the Securities and Exchange Commission. Unlike the Fund, some of
the other accounts in the historical composite did not value their
assets on a daily basis and therefore, the Securities and Exchange
Commission formula could not be used. For these
MERCURY GOLD AND MINING FUND 15
<PAGE> 17
[ABOUT THE DETAILS ICON] About the Details
accounts, the performance figures shown below have been calculated
using a somewhat different formula known as the "Modified Dietz
Method." Although both formulas produce a time weighted rate of
return, the use of the Securities and Exchange Commission formula
for all of the accounts in the composite might have adversely
affected the composite performance figures shown.
- The composite figures have been calculated by weighting the
performance of each included account by the level of the account's
total assets at the beginning of each monthly or quarterly period.
Accounts were added to the composite as of the first full quarter
under management and excluded at the end of the last full quarter
under management. Accordingly, the number of accounts included in
the composite vary by quarter, from one at the beginning of
December 31, 1991 to five in the most recent quarter ended June
30, 1999. The Fund is included in the composite for periods after
April 1, 1999 (beginning of the first full calendar quarter after
the Fund's commencement of operations).
- The performance of each of the accounts in the composite may have
been influenced by the level of the account's total assets. If an
account's assets had been different, its performance might have
been higher or lower.
- Some of the accounts presented were accounted for in various base
currencies other than U.S. dollars. The Fund calculates its net
asset value daily in U.S. dollars. For purposes of this
presentation, the non-U.S. dollar accounts' performance history
was converted into U.S. dollars on at least a quarterly basis
using exchange rate movements to approximate the equivalent U.S.
dollar returns which might have been achieved.
- The figures shown below represent the performance of the
composite's included accounts (including the Fund), converted,
where necessary, to U.S. dollars. Figures show total returns.
Total return shows you how much an investment has changed in value
over the stated time period and includes both capital appreciation
and income. The first table reflects average annual total returns.
This smooths out variations in annual performance by averaging
returns over the stated period. The second table
16 MERCURY GOLD AND MINING FUND
<PAGE> 18
[ABOUT THE DETAILS ICON] About the Details
shows actual total returns for each one year period. THE COMPOSITE
FIGURES ARE NOT THE PERFORMANCE OF THE FUND. The Financial
Highlights table on p. 36 presents the performance of the Fund for
periods after its inception on February 26, 1999.
- To provide you with additional information, the composite
performance figures are presented two different ways. The
"Gross of Fees and Charges" row reflects the composite's gross
performance -- that is, performance before any deductions for fees
or expenses. These figures are hypothetical and presented for
information only; they do not reflect actual performance of the
accounts because the accounts would have paid fees and expenses.
The first table (average annual total returns) also includes a
"Net of Fees and Charges" section, which reflects adjustments of
the gross performance to reflect the deduction of all of the fees
and expenses that the Fund and a shareholder may pay as shown in
the "Fees and Expenses" section at the beginning of the
Prospectus. The performance of the Fund is included in both the
net and gross figures. As described in the "Fees and Expenses"
section, the Investment Adviser and the Administrator have agreed
to waive their fees and/or reimburse ordinary expenses to the
extent necessary to keep fees and expenses below the levels shown
in the last line of the fee table. These capped fee and expense
figures were used to calculate the net performance shown below.
Like the gross figures, the net figures are hypothetical because
they do not reflect the actual fees and charges paid by the
included accounts. The net figures assume the shareholder bought
the shares at the beginning of the period and sold (redeemed) the
shares at the end of the period. To the extent the Fund's expenses
deviate from the "Net Total Operating Expenses" figures shown in
the "Fees and Expenses" section, the "Net of Fees and Charges"
figures will be inaccurate. The effect would be greater over
longer periods due to compounding. The "Net of Fees and Charges"
performance figures differ by class because the sales charges and
account maintenance fees differ for each class of shares. The net
figures shown -- that is, the performance results after all
applicable deductions -- are equal to or lower than the actual net
results of the included accounts.
MERCURY GOLD AND MINING FUND 17
<PAGE> 19
About the Details
ABOUT THE DETAILS ICON
- Both tables include figures for two benchmark indexes (MSCI All
Country Gold Mines Index and Financial Times Gold Mines Index) and
for the Lipper Gold Oriented Funds universe so that you can
compare the composite's performance to the performance of the
market as a whole. The MSCI All Country Gold Mines Index and the
Financial Times Gold Mines Index are unmanaged indexes and do not
reflect any fees or charges. The Lipper Gold Oriented Funds
Average reflects advisory fees and other fees and charges, but
does not reflect front-end or contingent deferred sales charges.
The MSCI All Country Gold Mines Index and the Financial Times Gold
Mines Index do not reflect the reinvestment of dividends or
distributions, while the composite and the Lipper Gold Oriented
Funds universe do. As a result, the index returns are lower
relative to the composite and Lipper returns than they would have
been if all of the figures had been calculated on the same basis.
- The Financial Highlights table on p. 36 presents the Fund's actual
performance for the periods indicated. The Fund's performance
reflects advisory fees, other fees and charges as well as
front-end or contingent deferred sales charges.
18
MERCURY GOLD AND MINING FUND
<PAGE> 20
About the Details
ABOUT THE DETAILS ICON
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
THE COMPOSITE FIGURES ARE NOT THE FUND'S PERFORMANCE.
(The composite figures show the performance of accounts, including the Fund,
managed by the Investment Adviser and its affiliates, see above.) The Financial
Highlights table on p. 36 presents the Fund's performance since its inception.
<TABLE>
<CAPTION>
FOR
FOR FOR FOR FOR FOR SIX-YEAR
ONE-YEAR TWO-YEAR THREE-YEAR FOUR-YEAR FIVE-YEAR PERIOD
PERIOD PERIOD PERIOD PERIOD PERIOD ENDED
ENDED ENDED ENDED ENDED ENDED JUNE
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, 30,
1999 1999 1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED:
- --------------------------------------------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- --------------------------------------------------------------------------------------------------------------------
CLASS I FEES AND CHARGES 10.5% (16.2)% (21.9)% (12.6)% (9.5)% (2.3)%
- --------------------------------------------------------------------------------------------------------------------
CLASS A FEES AND CHARGES 10.3 (16.4) (22.1) (12.9) (9.7) (2.5)
- --------------------------------------------------------------------------------------------------------------------
CLASS B FEES AND CHARGES 11.5 (16.4) (22.0) (13.0) (9.8) (2.5)
- --------------------------------------------------------------------------------------------------------------------
CLASS C FEES AND CHARGES 14.5 (14.7) (21.2) (12.3) (9.4) (2.4)
- --------------------------------------------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 20.0 (11.4) (18.2) (8.9) (5.9) 1.4
- --------------------------------------------------------------------------------------------------------------------
MSCI ALL COUNTRY GOLD MINES INDEX
(4): (5.8) (17.9) (22.9) (16.6) (13.3) (10.9)
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL TIMES GOLD MINES INDEX
(5) (10.9) (20.3) (24.0) (17.7) (14.3) (12.0)
- --------------------------------------------------------------------------------------------------------------------
LIPPER GOLD ORIENTED FUNDS AVERAGE
(DOES NOT INCLUDE SALES CHARGES)
(6): (4.7) (21.7) (22.7) (14.8) (12.3) (10.5)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR
FOR SEVEN AND
SEVEN-YEAR ONE-HALF YEAR
PERIOD PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999(1)
<S> <C> <C>
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED:
- --------------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- --------------------------------------------------------------------------------------------------------------------
CLASS I FEES AND CHARGES 8.7% 6.8%
- --------------------------------------------------------------------------------------------------------------------
CLASS A FEES AND CHARGES 8.4 6.6
- --------------------------------------------------------------------------------------------------------------------
CLASS B FEES AND CHARGES 8.4 6.5
- --------------------------------------------------------------------------------------------------------------------
CLASS C FEES AND CHARGES 8.4 6.5
- --------------------------------------------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 12.6 10.7
- --------------------------------------------------------------------------------------------------------------------
MSCI ALL COUNTRY GOLD MINES INDEX
(4): (3.2) (4.5)
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL TIMES GOLD MINES INDEX
(5) (5.1) (5.8)
- --------------------------------------------------------------------------------------------------------------------
LIPPER GOLD ORIENTED FUNDS AVERAGE
(DOES NOT INCLUDE SALES CHARGES)
(6): (4.7) (4.7)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Investment Adviser and its affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on
December 31, 1991.
(2) Reflects the reinvestment of dividends and distributions, and the deduction
of all fees and expenses that the Fund and a shareholder may pay (including
the maximum front-end sales charges paid when purchasing shares, or the
maximum deferred sales charge paid upon redeeming shares at the end of each
period shown). To the extent the Fund's expenses deviate from the figures
shown in the "Fees and Expenses" section at the beginning of the Prospectus,
the "Net of Fees and Charges" figures will be inaccurate. The effect would
be greater over longer periods due to compounding.
(3) Does not reflect the deduction of any fees, charges or expenses other than
certain brokerage commissions. These figures are hypothetical and presented
for information only; they do not reflect actual performance of the accounts
because the accounts would have paid fees and expenses.
(4) An unmanaged geographically diversified index of leading gold mining
companies located in both developed and developing countries. The Index
includes a relatively small number of companies, and therefore is more
concentrated than the composite. No sales charges, 12b-1 fees or advisory
fees, and no other expenses (e.g., custody or brokerage fees) are reflected
in the total returns of the Index. Index returns do not reflect reinvestment
of net dividends and distributions.
(5) An unmanaged geographically diversified index of leading gold mining
companies. The minimum qualification is a production of more than 300,000
ounces of gold a year and more than 75% of the revenue from mining gold. One
of the members of the Fund's portfolio management team is a member of the
committee that selects the companies included in this Index. The committee
has more than ten other members. The Financial Times Gold Mines Index
commenced in February 1992. Therefore, for the month of January, 1992 the
benchmark performance is for MSCI All Country Gold Mines Index. The Index
includes a relatively small number of companies, and therefore is more
concentrated than the composite. No sales charges, 12b-1 fees or advisory
fees, and no other expenses (e.g., custody or brokerage fees) are reflected
in the total returns of the Index. Index returns do not reflect reinvestment
of net dividends and distributions.
(6) An average of the performance of other U.S. investment companies that
concentrate at least 65% of their equity portfolio in shares of gold mines,
gold-oriented mining finance houses, gold coins, or bullion. The average
does not reflect front-end or contingent deferred sales charges that might
be paid by an investor in a fund included in the average, but does include
12b-1 fees, advisory fees and other expenses. The average also reflects
reinvestment of dividends and distributions.
MERCURY GOLD AND MINING FUND 19
<PAGE> 21
About the Details
ABOUT THE DETAILS ICON
TOTAL RETURNS ON AN ANNUAL BASIS
- --------------------------------------------------------------------------------
THE COMPOSITE FIGURES ARE NOT THE FUND'S PERFORMANCE.
(The composite figures show the performance of accounts, including the Fund,
managed by the investment adviser and its affiliates, see above.) The Financial
Highlights table on p. 36 presents the Fund's performance since its inception.
<TABLE>
<CAPTION>
FOR THE
SIX
MONTHS
ENDED
JUNE 30, FOR EACH YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995 1994 1993 1992(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMPOSITE OF SIMILAR
ACCOUNTS, RECALCULATED:
GROSS OF FEES AND CHARGES
(2): 8.2 1.8 (43.1) (0.1) (5.2) 25.7 303.8 (29.0)
- ----------------------------------------------------------------------------------------------------
MSCI ALL COUNTRY GOLD MINES
INDEX (3): (0.9) (11.7) (41.7) (5.5) (0.8) (11.2) 130.4 (27.5)
- ----------------------------------------------------------------------------------------------------
FINANCIAL TIMES GOLD MINES
INDEX (4) (4.5) (12.5) (42.0) (4.6) (3.2) (11.5) 123.2 (27.6)
- ----------------------------------------------------------------------------------------------------
LIPPER GOLD ORIENTED FUNDS
AVERAGE (DOES NOT INCLUDE
SALES CHARGES) (5): (2.7) (11.0) (42.5) 8.2 3.3 (12.4) 81.8 (14.6)
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The Investment Adviser and its affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on
December 31, 1991.
(2) Reflects the reinvestment of dividends and distributions. Does not reflect
the deduction of any fees, charges or expenses, other than certain brokerage
commissions. These figures are hypothetical and presented for information
only; they do not reflect actual performance of the accounts because the
accounts would have paid fees and expenses. If these fees and expenses were
included, the performance figures would be lower.
(3) An unmanaged geographically diversified index of leading gold mining
companies located in both developed and developing countries. The Index
includes a relatively small number of companies, and therefore is more
concentrated than the composite. No sales charges, 12b-1 fees or advisory
fees, and no other expenses (e.g., custody or brokerage fees) are reflected
in the total returns of the Index. Index returns do not reflect reinvestment
of net dividends and distributions.
(4) An unmanaged geographically diversified index of leading gold mining
companies. The minimum qualification is a production of more than 300,000
ounces of gold a year and more than 75% of the revenue from mining gold. One
of the members of the Fund's portfolio management team is a member of the
committee that selects the companies included in this Index. The committee
has more than ten other members. The Financial Times Gold Mines Index
commenced in February 1992. Therefore, for the month of January, 1992 the
benchmark performance is for MSCI All Country Gold Mines Index. The Index
includes a relatively small number of companies, and therefore is more
concentrated than the composite. No sales charges, 12b-1 fees or advisory
fees, and no other expenses (e.g., custody or brokerage fees) are reflected
in the total returns of the Index. Index returns do not reflect reinvestment
of net dividends and distributions.
(5) An average of the performance of other U.S. investment companies that
concentrate at least 65% of their equity portfolio in shares of gold mines,
gold-oriented mining finance houses, gold coins, or bullion. The average
does not reflect front-end or contingent deferred sales charges that might
be paid by an investor in a fund included in the average, but does include
12b-1 fees, advisory fees and other expenses. The average also reflects
reinvestment of dividends and distributions.
20
MERCURY GOLD AND MINING FUND
<PAGE> 22
[ACCOUNT CHOICES ICON] Account Choices
PRICING OF SHARES
- --------------------------------------------------------------------------------
The Fund offers four classes of shares, each with its own sales charge and
expense structure allowing you to invest in the way that best suits your needs.
Each share class represents an ownership interest in the same investment
portfolio. 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. Your financial
consultant can help you determine which pricing option is best suited to your
personal financial goals.
For example, if you select Class I or A shares you generally pay a sales charge
at the time of purchase. You may be eligible for a sales charge waiver. If you
buy Class A shares, you also pay an ongoing account maintenance fee of 0.25%.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.
MERCURY GOLD AND MINING FUND 21
<PAGE> 23
Account Choices
ACCOUNT CHOICES ICON
To better understand the pricing of the Fund's shares, we have summarized the
information below:
<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABILITY? LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: - THROUGH SELECTED THROUGH SELECTED THROUGH SELECTED
Current Class I SECURITIES DEALERS. SECURITIES DEALERS. SECURITIES DEALERS.
shareholders
-
Certain
Retirement
Plans
- Participants of
certain sponsored
programs - Certain
affiliates or customers
of selected
securities
dealers
- ---------------------------------------------------------------------------------------------------------------------------
INITIAL SALES CHARGE? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PURCHASE. LOWER SALES PRICE IS INVESTED IN PRICE IS INVESTED IN
CHARGES AVAILABLE FOR CHARGES AVAILABLE FOR SHARES OF THE FUND. SHARES OF THE FUND.
CERTAIN LARGER CERTAIN LARGER
INVESTMENTS. INVESTMENTS.
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED SALES NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR YES. PAYABLE IF YOU YES. PAYABLE IF YOU
CHARGE? PURCHASES OVER $1 PURCHASES OVER $1 REDEEM WITHIN SIX YEARS REDEEM WITHIN ONE YEAR
MILLION THAT ARE MILLION THAT ARE OF PURCHASE. OF PURCHASE.
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
- ---------------------------------------------------------------------------------------------------------------------------
ACCOUNT MAINTENANCE NO. 0.25% ACCOUNT 0.25% ACCOUNT 0.25% ACCOUNT
AND DISTRIBUTION MAINTENANCE FEE. NO MAINTENANCE FEE. 0.75% MAINTENANCE FEE. 0.75%
FEES? DISTRIBUTION FEE. DISTRIBUTION FEE. DISTRIBUTION FEE.
- ---------------------------------------------------------------------------------------------------------------------------
CONVERSION TO CLASS A NO. NO. YES, AUTOMATICALLY NO.
SHARES? AFTER APPROXIMATELY 8
YEARS.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
22 MERCURY GOLD AND MINING FUND
<PAGE> 24
Account Choices
ACCOUNT CHOICES ICON
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 Mercury mutual
funds.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Mercury mutual funds that you agree to buy within a
13 month period. Certain restrictions apply.
CLASS I AND A SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be shown in the last column.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $25,000 5.25% 5.54% 5.00%
- ---------------------------------------------------------------------------------------
$25,000 BUT LESS THAN
$50,000 4.75% 4.99% 4.50%
- ---------------------------------------------------------------------------------------
$50,000 BUT LESS THAN
$100,000 4.00% 4.17% 3.75%
- ---------------------------------------------------------------------------------------
$100,000 BUT LESS THAN
$250,000 3.00% 3.09% 2.75%
- ---------------------------------------------------------------------------------------
$250,000 BUT LESS THAN
$1,000,000 2.00% 2.04% 1.80%
- ---------------------------------------------------------------------------------------
$1,000,000 AND OVER** 0.00% 0.00% 0.00%
- ---------------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class I or A shares, you may not pay an
initial sales charge. However, if you redeem your shares within one year
after purchase, you may be charged a deferred sales charge. This charge is 1%
of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class I and A shares by certain employer sponsored
retirement or savings plans.
No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class I or A shares may apply
for:
- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
- Certain trusts managed by banks, thrifts or trust companies
including those affiliated with Mercury or its affiliates.
- Certain employer-sponsored retirement or savings plans.
MERCURY GOLD AND MINING FUND 23
<PAGE> 25
Account Choices
ACCOUNT CHOICES ICON
- Certain investors, including directors or trustees of mutual funds
sponsored by Mercury or its affiliates, employees of Mercury and
its affiliates and employees or customers of certain selected
dealers.
- Certain fee-based programs managed by Mercury or its affiliates.
- Certain fee-based programs managed by selected dealers that have
an agreement with Mercury.
- Purchases through certain financial advisers that meet and adhere
to standards established by Mercury.
- Purchases through certain accounts over which Mercury or an
affiliate exercises investment discretion.
Only certain investors are eligible to buy Class I shares, including existing
Class I shareholders of the Fund, certain retirement plans and participants in
certain programs sponsored by Mercury or its affiliates. Your financial
consultant can help you determine whether you are eligible to buy Class I shares
or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class I and Class A shares, you should buy Class I
shares since Class A shares are subject to a 0.25% account maintenance fee,
while Class I shares are not.
If you redeem Class I or Class A 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 financial
consultant or the Fund's Transfer Agent at 1-888-763-2260.
CLASS B AND C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that the Fund has adopted under Rule 12b-1 under the Investment Company Act
of 1940. The Distributor 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 financial consultant or other dealer who assists you in
your decision to purchase Fund shares.
24
MERCURY GOLD AND MINING FUND
<PAGE> 26
[ACCOUNT CHOICES ICON] Account Choices
CLASS B SHARES
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 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 a deferred sales
charge. Mercury funds may not all have identical deferred sales charge
schedules. In the event of an exchange for the shares of another Mercury fund,
the higher charge, if any, would apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old (certain legal
documentation may be required at the time of liquidation
establishing eligibility for qualified distribution).
- Redemption by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers.
- Redemption in connection with participation in certain fee-based
programs managed by Mercury or its affiliates.
- Redemption in connection with participation in certain fee-based
programs managed by selected dealers that have agreements with
Mercury.
- Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year after death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held (certain legal documentation
may be required at the time of liquidation establishing
eligibility for qualified distribution).
MERCURY GOLD AND MINING FUND 25
<PAGE> 27
[ACCOUNT CHOICES ICON] Account Choices
- Withdrawal through the Systematic Withdrawal Plan of up to 10% per
year of your account value at the time the plan is established.
Your Class B shares convert automatically into Class A shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class A
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B shares to Class A shares is not a taxable event for Federal income
tax purposes.
Different conversion schedules may apply to Class B shares of different Mercury
mutual funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. 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 SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through certain securities dealers. You may also buy shares through the Transfer
Agent. To learn more about buying shares through the Transfer Agent, call
1-888-763-2260. Because the selection of a mutual fund involves many
considerations, your financial consultant may help you with this decision. The
Fund does not issue share certificates.
26 MERCURY GOLD AND MINING FUND
<PAGE> 28
[ACCOUNT CHOICES ICON] Account Choices
<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 pricing of shares table on page 22. Be
appropriate for you sure to read this Prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived or
reduced under certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant The price of your shares is based on the next calculation of
or securities dealer submit net asset value after your order is placed. Any purchase
your purchase order orders placed prior to the close of business on the New York
Stock Exchange (generally, 4:00 p.m. Eastern time) 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 business day. The
Fund may reject any order to buy shares and may suspend the
sale of shares at any time. Certain securities dealers may
charge a fee to process a purchase. For example, the fee
charged by Merrill Lynch, Pierce, Fenner & Smith
Incorporated is currently $5.35. The fees charged by other
securities dealers may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent Instead of purchasing through a financial consultant or
securities dealer, you can purchase shares of the Fund by
calling the Transfer Agent to request an application and
mailing a purchase order directly to the Transfer Agent at
the address on the inside back cover of this Prospectus.
- ------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is $100 for
INVESTMENT all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may automatically invest a specific amount in the Fund
investment plan on a periodic basis through your securities dealer:
- The current minimum for such automatic investments is
$100. The minimum may be waived or revised under certain
circumstances.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERCURY GOLD AND MINING FUND 27
<PAGE> 29
[ACCOUNT CHOICES ICON] Account Choices
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating To transfer your shares of the Fund to another securities
ANOTHER SECURITIES securities dealer dealer, authorized dealer agreements must be in place
DEALER between the Distributor and the transferring securities
dealer and the Distributor and the receiving securities
dealer. Certain services may be available for the
transferred shares. All future trading of these shares must
be coordinated by the receiving securities dealer.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You cannot transfer your shares of the Fund to a securities
securities dealer dealer that does not have an authorized dealer agreement
with the Distributor.
You must either:
- Transfer your shares to an account with the Transfer
Agent; or
- Sell your shares, paying any applicable CDSC.
- ------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant The price of your shares is based on the next calculation of
or securities dealer submit net asset value after your order is placed. For your
your sales order redemption request to be priced at the net asset value on
the day of your request, you must submit your request to
your dealer prior to that day's close of business on the New
York Stock Exchange (the New York Stock Exchange generally
closes at 4:00 p.m. Eastern time). Any redemption request
placed after that time will be priced at the net asset value
at the close of business on the next business day. Dealers
must submit redemption requests to the Fund not more than
thirty minutes after the close of business on the New York
Stock Exchange on the day the request was received.
Certain securities dealers may charge a fee to process a
sale of shares. For example, the fee charged by Merrill
Lynch, Pierce, Fenner & Smith Incorporated is currently
$5.35. The fees charged by other securities dealers may be
higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this Prospectus. All shareholders on the account must
sign the letter and signatures must be guaranteed. Depending
on the type of account and/or type of distribution, certain
additional documentation may be required. The Transfer Agent
will normally mail sale proceeds within seven days following
receipt of a properly completed request. If you make a sales
order 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.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
28 MERCURY GOLD AND MINING FUND
<PAGE> 30
[ACCOUNT CHOICES ICON] Account Choices
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can generally arrange through your selected dealer for
SYSTEMATICALLY Systematic Withdrawal Plan systematic sales of shares 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 automatically reinvested. For Class B
and C shares your total annual withdrawals cannot be more
than 10% of the value of your shares at the time the Plan is
established. The deferred sales charge is waived for
systematic sales of shares. Ask your financial consultant
for details.
- ------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a Fund in which you
have no Class I shares and you are not eligible to buy Class
I shares, you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit. Class B or
Class C shares can be exchanged for Class B shares of
Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or Class A 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 or Class C 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 Class 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 A shares.
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 GOLD AND MINING FUND 29
<PAGE> 31
[ACCOUNT CHOICES ICON] Account Choices
NET ASSET VALUE -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
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, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the one calculated after your purchase or redemption
order is placed. Net asset value is generally calculated by valuing each
security or other asset at its closing price for the day. Many of the Fund's
investments are traded on non-U.S. securities exchanges that close many hours
before the New York Stock Exchange. Events that could affect securities prices
that occur between these times normally are not reflected in the Fund's net
asset value. Non-U.S. securities sometimes trade on days that the New York Stock
Exchange is closed. As a result, the Fund's net asset value may change on days
when you will not be able to purchase or redeem the Fund's shares. Securities
and assets for which market quotations are not readily available are generally
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees.
Generally, Class I shares will have the highest net asset value because that
class has the lowest expenses, and Class A shares will have a higher net asset
value than Class B or Class C shares. Also, dividends paid on Class I and Class
A shares will generally be higher than dividends paid on Class B and Class C
shares because Class I and Class A shares have lower expenses.
30
<PAGE> 32
[ACCOUNT CHOICES ICON] Account Choices
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Mercury or an
affiliate of Mercury, or by selected dealers that have an agreement with
Mercury, you may be able to buy Class I shares at net asset value, including
through 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 may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into Summit . The class you
receive may be the class you originally owned when you entered the program, or
in certain cases, a different class. If the exchange is into Class B shares, the
period before conversion to Class A shares may be modified. Any redemption or
exchange will be at net asset value. However, if you participate in the program
for less than a specified period, you may be charged a fee in accordance with
the terms of the program.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your financial
consultant or your selected dealer.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any net
realized long or short-term capital gains. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. DIVIDENDS may be reinvested automatically in shares of the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a securities dealer that has an agreement with the Fund, contact your
financial consultant about which option you would like. If your account is with
the Transfer Agent, and you would like to receive dividends in cash, contact the
Transfer Agent.
MERCURY GOLD AND MINING FUND 31
<PAGE> 33
[ACCOUNT CHOICES ICON] Account Choices
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital gains,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing you may want to
consult your tax advisor.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Fund
intends to pay dividends that will either be taxed as ordinary income or capital
gains. Capital gains dividends are generally taxed at different rates than
ordinary income dividends.
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 neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
By law, the Fund must withhold 31% of your distributions and redemption proceeds
if you have not provided a taxpayer identification number or social security
number or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal 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 of an
investment in the Fund under all applicable tax laws.
32 MERCURY GOLD AND MINING FUND
<PAGE> 34
<TABLE>
<S> <C>
THE The Management Team
MANAGEMENT
TEAM
ICON
</TABLE>
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
Mercury Asset Management Master Trust. The Investment Adviser and its affiliates
have the responsibility for making all investment decisions for the Fund.
The senior investment professionals in the group that have managed the Fund's
portfolio since the Fund started operations include:
David Baker, Director of Mercury Asset Management, has been employed as an
investment professional by the Investment Adviser or its Mercury affiliates
since 1992.
Graham Birch, Managing Director of Mercury Asset Management, has been employed
as an investment professional by the Investment Adviser or its Mercury
affiliates since 1993.
Geoff Campbell, Director of Mercury Asset Management, has been employed as an
investment professional by the Investment Adviser or its Mercury affiliates
since 1994. Mr. Campbell was employed at Ord Minnett and Fleming Martin from
1988 to 1994. Both of these firms are divisions of Robert Fleming.
Trevor Steel, Associate Director of Mercury Asset Management, has been employed
as an investment professional by the Investment Adviser or its Mercury
affiliates since 1991. Mr. Steel is primarily responsible for the day to day
management of the Fund.
Mercury and its affiliates manage portfolios with over $518 billion in assets
(as of July 1999) for individuals and institutions seeking investments
worldwide. This amount includes assets managed for its affiliates. The advisory
agreement between the Trust and the Investment Adviser gives the Investment
Adviser the responsibility for making all investment decisions.
The Investment Adviser is paid at the rate of 0.75% of the Portfolio's average
daily net assets.
Fund Asset Management, L.P., an affiliate of Mercury, may manage all or a
portion of the Fund's daily cash assets, to the extent not managed by Mercury.
The Fund does not pay any incremental fee for this service, although Mercury may
make payments to Fund Asset Management, L.P. See "Fees and Expenses" under "Fund
Facts" for information about the fees paid to Mercury Asset Management and its
affiliates.
MERCURY GOLD AND MINING FUND 33
<PAGE> 35
[This page intentionally left blank]
<PAGE> 36
[THE MANAGEMENT TEAM ICON] The Management Team
The Fund does not have an investment adviser, since the Fund's assets will be
invested in its corresponding Portfolio. Fund Asset Management, L.P. provides
administrative services to the Fund.
MASTER/FEEDER STRUCTURE
- --------------------------------------------------------------------------------
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Fund seeks to achieve its investment objectives by
investing all its assets in the corresponding Portfolio of the Mercury Asset
Management 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 feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than the Fund over
the operations of the Portfolio.
Whenever the Portfolio holds a vote of its feeder funds, the Fund will pass the
vote through to its own shareholders.
34 MERCURY GOLD AND MINING FUND
<PAGE> 37
[THE MANAGEMENT TEAM ICON] The Management Team
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by Fund management or other Fund service
providers do not properly address this problem before January 1, 2000. Fund
management expects to have addressed this problem before then, and does not
anticipate that the services it provides will be adversely affected. The Fund's
other service providers have told the administrator that they also expect to
resolve the Year 2000 Problem, and the administrator 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.
This negative impact may be greater for companies in non-U.S. markets, since
they may be less prepared for the Year 2000 Problem than domestic companies and
markets. If the companies in which the Fund invests have Year 2000 Problems, the
Fund's returns could be adversely affected.
MERCURY GOLD AND MINING FUND 35
<PAGE> 38
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
performance for the period February 26, 1999 (commencement of operations) to May
31, 1999. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would
have earned on an investment in the Fund (assuming reinvestment of all
dividends). This information has been audited by Deloitte & Touche LLP, whose
report, along with the Fund's financial statements, is included in the Fund's
annual reports to shareholders, which is available upon request.
MERCURY GOLD AND MINING FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 26, 1999+ TO MAY 31, 1999
INCREASE (DECREASE) IN NET ASSET VALUE: CLASS I CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS) -- NET --+++ --+++ (.02) (.02)
- ---------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS FROM THE PORTFOLIO -- NET .09 .08 .08 .08
- ---------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .09 .08 .06 .06
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.09 $10.08 $10.06 $10.06
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
BASED ON NET ASSET VALUE PER SHARE .90%# .80%# .60%# .60%#
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES, NET REIMBURSEMENT++ 3.32%* 3.62%* 4.33%* 4.31%*
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES++ 3.66%* 3.95%* 4.67%* 4.65%*
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS) -- NET .08%* (.06%)* (.87%)* (.90%)*
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (IN THOUSANDS) $5,263 $1,676 $4,643 $4,485
- ---------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER OF THE PORTFOLIO 32.95% 32.95% 32.95% 32.95%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
36 MERCURY GOLD AND MINING FUND
<PAGE> 39
[This page intentionally left blank]
<PAGE> 40
FUND
Mercury Gold and Mining Fund
of Mercury Asset Management Funds, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(888-763-2260)
INVESTMENT ADVISER
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England
ADMINISTRATOR AND SUB-ADVISER
Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
DISTRIBUTOR
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
MERCURY GOLD AND MINING FUND
<PAGE> 41
<TABLE>
<S> <C>
[TO LEARN To Learn More
MORE
ICON]
</TABLE>
Mercury Gold and Mining Fund
OF MERCURY ASSET MANAGEMENT FUNDS,
INC.
[MERCURY GOLD AND MINING FUND ARTWORK]
PROSPECTUS - SEPTEMBER 10, 1999
[MERCURY ASSET MANAGEMENT
LOGO]
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 1-888-763-2260.
If you hold your Fund shares through a brokerage account or directly at the
Transfer Agent, you may receive only one copy of each shareholder report and
certain other mailings regardless of the number of Fund accounts you have. If
you prefer to receive separate shareholder reports for each account (or if you
are receiving multiple copies and prefer to receive only one), call your
financial consultant or, if none, write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call your
financial consultant or the Transfer Agent at 1-888-763-2260.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing or calling the Fund
at Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida
32232-4062 or by calling 1-888-763-2260.
Contact your financial consultant or the Fund at the telephone number or address
indicated on the inside back cover of this Prospectus 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 Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS.
Investment Company Act File #811-08797.
CODE # 19038-0999
(C) Mercury Asset Management International Ltd.
<PAGE> 42
STATEMENT OF ADDITIONAL INFORMATION
MERCURY GOLD AND MINING FUND
of Mercury Asset Management Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
Phone No. (888) 763-2260
------------------------
Mercury Gold and Mining Fund (the "Fund") is a series of Mercury Asset
Management Funds, Inc. (the "Corporation" or "Mercury"). The Fund is an open-end
diversified investment company (commonly known as a mutual fund). The investment
objective of the Fund is long-term capital growth. The Fund seeks to achieve
this objective through investments primarily in a diversified portfolio of
equity securities of gold mining companies and, to a lesser extent, of companies
engaged in other mining activities, located throughout the world. The Fund may
also invest directly in gold bullion. The Fund seeks to achieve its investment
objective by investing all of its assets in Mercury Master Gold and Mining
Portfolio (the "Portfolio"), which is the portfolio of Mercury Asset Management
Master Trust (the "Trust") that has the same investment objective as the Fund.
The Fund's investment experience will correspond directly to the investment
experience of the Portfolio. There can be no assurance that the investment
objective of the Fund will be achieved.
The Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. This 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. The Fund's
distributor is Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc.
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund, dated September 10, 1999
(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 888-763-2260 or your financial consultant, or by writing to the
address listed above. The Prospectus is incorporated by reference to this
Statement of Additional Information, and this Statement of Additional
Information has been incorporated by reference to the Prospectus. The Fund's and
Portfolio's audited financial statements are incorporated in this Statement of
Additional Information by reference to its 1999 annual report to shareholders.
You may request a copy of the annual report at no charge by calling
1-888-763-2260 between 8:00 a.m. and 8:00 p.m. on any business day.
MERCURY ASSET MANAGEMENT INTERNATIONAL LTD. -- INVESTMENT ADVISER
MERCURY FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is
September 10, 1999.
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... 2
Investment Restrictions................................... 12
Management of the Fund...................................... 14
Directors and Officers.................................... 14
Compensation of Directors/Trustees........................ 15
Administration Arrangements............................... 16
Management and Advisory Arrangements...................... 16
Code of Ethics............................................ 17
Purchase of Shares.......................................... 18
Initial Sales Charge Alternatives -- Class I and Class A
Shares................................................. 18
Reduced Initial Sales Charges............................. 19
Distribution Plans........................................ 21
Limitations on the Payment of Deferred Sales Charges...... 23
Redemption of Shares........................................ 23
Redemption................................................ 24
Repurchase................................................ 24
Reinstatement Privilege -- Class I and Class A Shares..... 25
Deferred Sales Charges -- Class B and Class C Shares...... 25
Portfolio Transactions and Brokerage........................ 27
Determination of Net Asset Value............................ 28
Shareholder Services........................................ 30
Investment Account........................................ 30
Automatic Investment Plan................................. 30
Automatic Dividend Reinvestment Plan...................... 30
Systematic Withdrawal Plan................................ 31
Retirement Plans.......................................... 32
Exchange Privilege........................................ 32
Fee-Based Programs........................................ 33
Dividends and Taxes......................................... 33
Dividends................................................. 33
Taxes..................................................... 34
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions.................................. 35
Special Rules for Certain Foreign Currency Transactions... 36
Other Tax Matters......................................... 36
Performance Data............................................ 37
General Information......................................... 39
Description of Shares..................................... 39
Computation of Offering Price Per Share................... 39
Independent Auditors...................................... 40
Custodian................................................. 40
Transfer Agent............................................ 40
Legal Counsel............................................. 40
Reports to Shareholders................................... 40
Additional Information.................................... 40
Financial Statements........................................ 41
Appendix A.................................................. A-1
Appendix B.................................................. B-1
</TABLE>
<PAGE> 44
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long-term capital growth. This is a
fundamental policy and cannot be changed without shareholder approval. The Fund
tries to achieve its objective by investing primarily in a diversified portfolio
of equity securities of gold mining companies and, to a lesser extent, of
companies engaged in other mining activities located throughout the world. The
Fund may also invest directly in gold bullion. Reference is made to "How the
Fund Invests" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Portfolio, which is a portfolio of the Trust that has the same
investment objective as the Fund. The Fund's investment experience and results
will correspond directly to the investment experience of the Portfolio. Thus,
all investments are made at the level of the Portfolio. For simplicity, however,
with respect to investment objective, policies and restrictions, this Statement
of Additional Information, like the Prospectus, uses the term "Fund" to include
the underlying Portfolio in which the Fund invests. Reference is made to the
discussion under "How the Fund Invests" and "Investment Risks" in the Prospectus
for information with respect to the Fund's and the Portfolio's investment
objective and policies. There can be no guarantee that the Fund's investment
objective will be achieved.
The Fund attempts to achieve its investment policies by seeking to identify
securities of companies that, in management's opinion, are undervalued relative
to the value of the gold or other mining holdings of such companies in light of
current and anticipated economic or financial conditions. The Fund considers a
company to have substantial gold or other mining assets when, in management's
opinion, the company's holdings of the assets are of such magnitude, when
compared to capitalization, revenues or operating profits of the company that
changes in the economic value of the assets will affect the market price of the
equity securities of such company. Generally a company has substantial gold or
other mining assets when at least 50% of its non-current assets, capitalization,
gross revenues or operating profits of the company in the most recent or current
fiscal year are involved in or result from (directly or indirectly through
subsidiaries), exploring, mining, refining, processing, fabricating, dealing in
or owning gold and other mining assets. Examples of other mining assets include
other precious metals (e.g., silver and platinum), non-ferrous metals (e.g.,
copper and nickel) and industrial minerals (e.g., coal and iron ore). With the
exception of gold bullion, the Fund presently does not intend to invest directly
in metals and minerals assets or contracts related thereto.
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 "Investment Adviser") 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 non-U.S. 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 Investment Adviser does
not believe that these considerations will have any significant effect on its
portfolio strategy, although there can be no assurance in this regard.
The 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. However, they would generally be
2
<PAGE> 45
subject to the same risks as the securities into which they may be converted (as
more fully described in the Prospectus and below). ADRs are receipts typically
issued by a U.S. bank or trust company that evidence ownership of underlying
securities issued by a non-U.S. corporation. EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued
throughout the world that evidence a similar ownership arrangement. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the United States and Europe and are designed for use
throughout the world. The 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.
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.
Investing in Gold and Other Mining Industries. The Fund invests
principally in the equity securities of foreign and domestic companies engaged
in the exploration, mining, fabrication, processing or marketing and
distribution of gold. The Fund also invests in equity securities of foreign and
domestic companies engaged in these activities with respect to silver, platinum,
diamonds or other precious and rare metals, base metals and minerals. The Fund
may also invest up to 10% of its assets directly in gold bullion when the Fund
believes it is undervalued relative to the price of securities of gold mining
companies. However, the Fund may have internal guidelines that limit its
investments in gold bullion to considerably less than 10% of the Fund's assets.
The industry risks associated with an investment in the Fund include the sharp
price volatility of gold and other metals and of mining company shares.
Investments related to gold or other metals or minerals are considered
speculative and are affected by a host of worldwide economic, financial and
political factors. Prices of gold and other metals may fluctuate sharply over
short periods due to several factors: changes in inflation or expectations
regarding inflation in various countries; currency fluctuations; metal sales by
governments, central banks or international agencies; investment speculation;
changes in industrial and commercial demand; and government prohibitions or
restrictions on the private ownership of certain metals or minerals. Political
and economic conditions in gold-producing countries may also have a direct
effect on the mining and distribution of gold and, consequently, its price.
The Fund may invest, without limit, in securities of companies located in
countries with emerging capital markets including the Republic of South Africa,
the People's Republic of China, Russia, Indonesia, Uzbekistan, Peru, Brazil,
Mexico, Zimbabwe, Ghana, Mali, Tanzania, the Philippines and Papua New Guinea.
The Fund may also invest in securities of companies located in countries with
developed capital markets including the United States, Canada, Japan, United
Kingdom, Finland, France, Germany, Switzerland, Ireland, Luxembourg, Spain and
Australia.
Sales of gold by companies in Russia are largely unpredictable and often
relate to political and economic considerations rather than to market forces. In
South Africa, the activities of gold-mining companies are subject to policies
promulgated by the Ministry of Mines. The Reserve Bank of South Africa, as the
sole authorized agent for South African gold, influences the price and timing of
sales of South African gold. The South African government has also from time to
time imposed restrictions on the flow of international capital. Political and
social problems in South Africa may also pose certain risks. These include the
effect of social and political unrest on mining production and gold prices, as
well as the threat of nationalization or expropriation by the government of
South Africa.
The Fund also invests to a lesser extent in other precious metal shares,
base metal shares and other mining related shares, and may also invest directly
in gold bullion. To the extent that the Fund invests in bullion, it will only be
bought from and sold to banks (both U.S. and non-U.S.), and dealers who are
members of or affiliated with members of a regulated U.S. commodities exchange,
in accordance with applicable investment laws. Gold bullion will not be
purchased in any form that is not readily marketable. Coins will not be
purchased for their numismatic value and will not be considered for the Fund if
they cannot be bought or sold in an active market. Any bullion or coins
purchased by the Fund will be delivered to and stored with a
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<PAGE> 46
qualified custodian bank in the U.S. Investors should be aware that bullion and
coins do not generate income, offering only the potential for capital
appreciation or depreciation, and may subject the Fund to higher custody and
transaction costs than those normally associated with the ownership of
securities. However, in order to generate return, the Fund may lend its gold
bullion. The risks associated with lending gold bullion are the same as lending
securities as discussed below in "Securities Lending."
Asset-Based Securities. The Fund may invest in debt securities, preferred
stocks or convertible securities, the principal amount, redemption terms or
conversion terms of which are related to the market price of gold bullion or
some other natural resource asset. For the purposes of the Fund's investment
policies, these securities are referred to as "asset-based securities." The Fund
will only purchase asset-based securities that are rated or are issued by
issuers that have outstanding debt obligations rated investment grade (that is,
AAA, AA, A or BBB by Standard & Poor's ("Standard & Poor's") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's") or commercial paper rated A-1
by S&P or Prime-1 by Moody's) or in unrated securities of issuers that the
Investment Adviser has determined to be of similar creditworthiness. Obligations
ranked in the fourth highest rating category, while considered "investment
grade," may have certain speculative characteristics and may be more likely to
be downgraded than securities rated in the three highest rating categories. If
an asset-based security is backed by a bank letter of credit or other similar
facility, the Investment Adviser may take such backing into consideration in
determining the creditworthiness of the issuer. While the market prices for an
asset-based security and the related gold bullion or other natural resource
asset generally are expected to move in the same direction, there may not be
perfect correlation in the two price movements. Asset-based securities may not
be secured by a security interest in or claim on the gold bullion or other
underlying natural resource assets.
The Fund will not acquire asset-based securities for which no established
secondary trading market exists if at the time of acquisition more than 15% of
its net assets are invested in securities that are not readily marketable. The
Fund may invest in asset-based securities, without limit, when it has the option
to put such securities to the issuer or a stand-by bank or broker and receive
the principal amount or redemption price thereof less transaction costs on no
more than seven days' notice or when the Fund has the right to convert such
securities into a readily marketable security in which it could otherwise invest
upon not less than seven days' notice.
The asset-based securities in which the Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
The Fund's holdings of such securities therefore might not generate appreciable
current income, and the return from such securities primarily will be from any
profit on the sale, maturity or conversion thereof at a time when the price of
the related asset is higher than it was when the Fund purchased such securities.
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 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.
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce
4
<PAGE> 47
government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these European countries. The Treaty on European Union (the
"Maastricht Treaty") seeks to set out a framework for the European Economic and
Monetary Union ("EMU") among the countries that comprise the European Union
("EU"). Among other things, EMU establishes a single common European currency
(the "euro") that was introduced on January 1, 1999 and has replaced the
existing national currencies of all EMU participants. The use of notes and coins
of the relevant national currencies will be phased out by July 1, 2002. Upon
implementation of EMU, certain securities issued in participating EU countries
(beginning with government and corporate bonds) were or are being redenominated
in the euro, and thereafter, will be listed, traded, and make dividend and other
payments only in euros.
No assurance can be given that EMU will continue to proceed as planned,
that the changes planned for the EU can be successfully implemented, or that
these changes will result in the economic and monetary unity and stability
intended. There is a possibility that EMU will not be completed, or will be
completed but then partially or completely unwound. Because any participating
country may opt out of EMU within the first three years, it is also possible
that a significant participant could choose to abandon EMU, which would diminish
its credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating countries,
including sharp appreciation or depreciation of the participants' national
currencies and a significant increase in exchange rate volatility, a resurgence
in economic protectionism, an undermining of confidence in the European markets,
an undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause disruption of
the financial markets as securities that have been redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on the Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to Fund shareholders under foreign or, in certain
limited circumstances, U.S. tax laws.
Many of the securities held by the Fund will not be registered in the U.S.
with the Securities and Exchange Commission nor will the issuers thereof be
subject to the Commission's reporting requirements. Accordingly, there may be
less publicly available information about a non-U.S. company than about a U.S.
company, and non-U.S. companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject.
Non-U.S. financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many non-U.S. companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The non-U.S. markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the 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. In some countries there is less
governmental supervision and regulation of exchanges, brokers and issuers than
there is in the United States.
A number of 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
5
<PAGE> 48
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.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most
actively-traded securities. The Investment Company Act limits the Fund's ability
to invest in any equity security of an issuer that, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related activities"
as defined by the rules thereunder. These provisions may restrict the Fund's
investments in certain foreign banks and other financial institutions.
As described above, the Fund may invest outside the U.S. The securities and
commodities markets of many countries have at times in the past moved relatively
independently of one another due to different economic, financial, political and
social factors. When such lack of correlation or negative correlation in
movements of these securities and commodities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities and commodities markets may be
offset by changes in foreign currency exchange rates, where the different
markets are denominated in different currencies. Exchange rates frequently move
independently of securities and commodities markets in a particular country. As
a result, gains in a particular securities or commodities market may be affected
by changes in exchange rates.
Investment in Emerging Markets. The Fund has the ability to invest in the
securities of issuers domiciled in various countries with emerging capital
markets. Specifically, a country with an emerging capital market is any country
that the World Bank, the International Finance Corporation, the United Nations
or its authorities has determined to have a low or middle income economy.
Countries with emerging markets can be found in regions such as Asia, Latin
America, Eastern Europe and Africa. 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 also may consider
closed-end investment companies to be located in the country or countries in
which they primarily make their portfolio investments.
Investments in the securities of issuers domiciled in countries with
emerging capital markets involve certain additional risks not involved in
investment in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other non-U.S. or U.S.
governmental laws or restrictions applicable to such investments, (iv) national
policies that may limit the Fund's investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests,
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Such capital markets are emerging in a dynamic political and economic
environment brought about by events over recent years that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that these capital markets will continue to present
viable investment opportunities for the Fund. In the past, governments of such
nations have expropriated substantial amounts of private property, and most
claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such an event, it is
possible that the Fund could lose the entire value of its investments in the
affected markets.
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<PAGE> 49
Also, there may be less publicly available information about issuers in
emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject. In certain countries with emerging capital markets,
reporting standards vary widely. As a result, traditional investment
measurements used in the U.S., such as price/earnings ratios, may not be
applicable. Emerging market securities may be substantially less liquid and more
volatile than those of mature markets, and companies may be held by a limited
number of persons. This may adversely affect the timing and pricing of the
Fund's acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because
the Fund will need to use brokers and counterparties that are less well
capitalized and custody and registration of assets in some countries may be
unreliable.
In Russia, for example, registrars are not subject to effective government
supervision nor are they always independent from issuers. The possibility of
fraud, negligence, undue influence being exerted by the issuer or refusal to
recognize ownership exists, which along with other factors could result in the
registration being completely lost. Therefore, investors should be aware that
the Fund would absorb any loss resulting from these registration problems and
may have no successful claim for compensation. Some of these concerns may also
exist in other emerging capital markets.
Debt Securities. The Fund may hold convertible and non-convertible debt
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 unrated
but, in the Investment Adviser's judgment, possess similar credit
characteristics ("investment grade securities") or (b) rated below the top four
rating categories or unrated but, in the Investment Adviser's judgment, possess
similar credit characteristics ("high yield securities"). The Investment Adviser
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 debt issuers that are mining companies
may also experience financial stress as a result of low metal or mineral prices.
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 rated fixed 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
7
<PAGE> 50
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 to adversely 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.
Convertible Securities. Convertible securities entitle the holder to
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in non-convertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Fund are denominated in U.S. dollars, the underlying equity
securities may be quoted in the currency of the country where the issuer is
domiciled. With respect to a convertible security denominated in a currency
different from that of the underlying equity security, the conversion price may
be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security.
Apart from currency considerations, the value of a convertible security is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put
8
<PAGE> 51
option to the holder which entitles the holder to cause the security to be
redeemed by the issuer at a premium over the stated principal amount of the debt
security under certain circumstances.
Borrowing and Leverage. 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, and
may use borrowing to enable it to meet redemptions.
The use of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For example, leveraging
may exaggerate changes in the net asset value of Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses for the Fund which can
exceed the income from the assets purchased with the borrowings. To the extent
the income or capital appreciation derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay on the borrowings,
the Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such borrowed funds is not sufficient to cover the cost of borrowing, the
return to the Fund will be less than if leverage had not been used, and
therefore the amount available for distribution to shareholders as dividends and
other distributions will be reduced. In the latter case, the Investment Adviser
in its best judgment nevertheless may determine to maintain the Fund's leveraged
position if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are "restricted securities."
Restricted securities have contractual or legal restrictions on their resale and
include "private placement" securities that the Fund may buy directly from the
issuer. Restricted securities may be neither listed on an exchange nor traded in
other established markets. Privately placed securities may or may not be freely
transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market,
privately placed securities may be more difficult to value than publicly traded
securities and may be less liquid, or illiquid, and therefore may be subject to
the risks associated with illiquid securities, as described in the preceding
paragraph. Some restricted securities, however, may be liquid. In addition,
issuers whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded. If any privately placed securities held
by the Fund are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less-seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities.
Sovereign Debt. The Fund may invest more than 5% of its assets in debt
obligations ("sovereign debt") issued or guaranteed by non-U.S. governments or
their agencies and instrumentalities ("governmental entities"). Investment in
sovereign debt may involve a high degree of risk that the governmental entity
that
9
<PAGE> 52
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. In certain countries, governmental entities
may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal of interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which a governmental entity has defaulted may be collected in whole or in
part.
The sovereign debt instruments in which the Fund may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Fund may have difficulty disposing of certain
sovereign debt obligations because there may be a thin trading market for such
securities.
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government. 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. The Fund may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Fund
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This insulates the Fund
from fluctuations in the market value of the underlying security during such
period, although, to the extent the repurchase agreement is not denominated in
U.S. dollars, the Fund's return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its 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
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<PAGE> 53
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 holder to subscribe for other
securities. Buying a warrant does not make the Fund a shareholder of the
underlying stock. The warrant holder has no right to dividends or votes on the
underlying stock. A warrant does not carry any right to assets of the issuer,
and for this reason investment in warrants may be more speculative than other
equity-based investments.
When-Issued Securities and Forward Commitments. The Fund may purchase or
sell securities that it is entitled to receive on a when-issued basis. The Fund
may also purchase or sell securities through a forward commitment. These
transactions involve the purchase or sale of securities by the Fund at an
established price with payment and delivery taking place in the future. The Fund
enters into these transactions to obtain what is considered an advantageous
price to the Fund at the time of entering into the transaction. The Fund has not
established any limit on the percentage of its assets that may be committed in
connection with these transactions. When the Fund is purchasing securities in
these transactions, the Fund maintains a segregated account with its custodian
of cash, cash equivalents, U.S. Government securities or other liquid securities
in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of
the commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately issued.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous to
the Fund. The Fund will not enter into a standby commitment with a remaining
term in excess of 45 days and will limit its investment in such commitments so
that the aggregate purchase price of securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions on
resale that affect their marketability, will not exceed 15% of its net assets
taken at the time of the commitment. The Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities in an aggregate amount equal to the purchase price of
the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Other Special Considerations. If the Fund anticipates significant adverse
changes in the price of gold, then the Fund's investments in stocks of gold
mining companies and gold bullion may be temporarily reduced to below 50% of the
Fund's total assets. In this case the Fund may make substantial investments for
temporary
11
<PAGE> 54
defensive purposes, in other mineral mining companies (non-gold), and may hold
substantial amounts of short-term investments, such as money market securities
and repurchase agreements. Short-term investments and temporary defensive
positions may limit the potential for growth in the value of shares of the Fund.
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 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), except that the Fund
will invest more than 25% of its assets in issuers principally engaged in
the mining and related manufacturing industries.
3. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management.
4. Purchase 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
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<PAGE> 55
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 the 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 without shareholder approval. 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 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 net 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 (which are
restricted securities that can be resold to qualified institutional buyers,
but not to the general public) and determined to be liquid by the Directors
are not subject to the limitations set forth in this investment
restriction.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The 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
net 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
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<PAGE> 56
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 Investment Adviser or its affiliates or
any of their directors, general partners, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under the Investment
Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser and Fund Asset
Management, L.P. ("FAM" or the "Administrator"), the Fund and Portfolio are
prohibited from engaging in certain transactions involving Merrill Lynch, the
Investment Adviser, or any of its affiliates, except for brokerage transactions
permitted under the Investment Company Act involving only usual and customary
commissions or transactions pursuant to an exemptive order under the Investment
Company Act. See "Portfolio Transactions and Brokerage." Rule 10f-3 under the
Investment Company Act sets forth conditions under which the Fund and Portfolio
may purchase from an underwriting syndicate of which Merrill Lynch is a member.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors of the Corporation consist of six individuals, four of whom
are not "interested persons" of the Corporation as defined in the Investment
Company Act. The same individuals serve as Trustees of the Trust. The Directors
are responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act. Information about the 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.
JEFFREY M. PEEK (52) -- Director and President(1)(2) -- President of MLAM
and FAM since 1997; President and Director of Princeton Services, Inc. since
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since
1997; Co-Head of Merrill Lynch Investment Banking Division from March 1997 to
December 1997; Director of Merrill Lynch Global Securities Research and
Economics Division from 1995 to 1997; Head of Merrill Lynch Global Industries
Group from 1993 to 1995.
TERRY K. GLENN (58) -- Director and Executive Vice
President(1)(2) -- Executive Vice President of MLAM and FAM since 1983;
Executive Vice President and Director of Princeton Services, Inc. since 1993;
President of Princeton Funds Distributor, Inc. since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
DAVID O. BEIM (59) -- Director(2) -- 410 Uris Hall, Columbia University,
New York, New York 10027. Professor of Columbia University since 1991; Chairman
of Outward Bound USA since 1997; Chairman of Wave Hill, Inc. since 1980.
JAMES T. FLYNN (60) -- Director(2) -- 340 East 72nd Street, New York, New
York 10021. Chief Financial Officer of J.P. Morgan & Co. Inc. from 1990 to 1995
and an employee of J.P. Morgan in various capacities from 1967 to 1995.
W. CARL KESTER (47) -- Director(2) -- Harvard Business School, Morgan Hall
393, Soldiers Field, Boston, Massachusetts 02163. Industrial Bank of Japan
Professor of Finance, Senior Associate Dean and Chairman of the MBA Program of
Harvard University Graduate School of Business Administration since 1999; James
R. Williston Professor of Business Administration of Harvard University Graduate
School of Business from 1997 to 1999; MBA Class of 1958 Professor of Business
Administration of Harvard University Graduate School of Business Administration
from 1981 to 1997; Independent Consultant since 1978.
KAREN P. ROBARDS (49) -- Director(2) -- Robards & Company, 173 Riverside
Drive, New York, New York 10024. President of Robards & Company, a financial
advisory firm, for more than five years; Director of Enable Medical Corp. since
1996; Director of CineMuse Inc. since 1996; Director of the Cooke Center for
Learning and Development, a not-for-profit organization, since 1987.
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<PAGE> 57
PETER JOHN GIBBS (41) -- Senior Vice President(1)(2) -- 33 King William
Street, London, EC4R 9AS, England. Chairman and Chief Executive Officer of
Mercury International since 1998; Director of Mercury Asset Management Ltd.
since 1993; Director of Mercury Asset Management International Channel Islands
Ltd. since 1997.
DONALD C. BURKE (39) -- Treasurer and Vice President(1)(2) -- Senior Vice
President and Treasurer of MLAM and FAM since 1999; Senior Vice President and
Treasurer of Princeton Services, Inc. since 1999; Vice President of Princeton
Funds Distributor, Inc. since 1999; First Vice President of MLAM and FAM from
1997 to 1999; Director of Taxation of MLAM since 1990; Vice President of MLAM
and FAM from 1990 to 1997.
ROBERT E. PUTNEY, III (39) -- Secretary(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators, L.P. since 1997; Vice President of MLAM
from 1994 to 1997; Vice President of Princeton Administrators, L.P. from 1996 to
1997; Attorney with MLAM from 1991 to 1994.
- ---------------
(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 Investment Adviser, or the Fund's
sub-adviser and administrator, FAM, or their affiliates, acts as investment
adviser.
As of August 31, 1999, the officers and Directors of the Corporation as a
group (nine persons) owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
COMPENSATION OF DIRECTORS/TRUSTEES
The Corporation and the Trust pay each Director/Trustee not affiliated with
the Investment Adviser or FAM or with an affiliate of the Investment Adviser or
FAM (each a "non-affiliated Director/Trustee"), for service to the Fund and the
Portfolio, a fee of $3,000 per year plus $500 per in-person meeting attended,
together with such individual's actual out-of-pocket expenses relating to
attendance at meetings. The Corporation and the Trust also compensate members of
the Audit and Nominating Committee, which consists of all of the non-affiliated
Directors/Trustees, at the rate of $1,000 annually for service to the Fund and
Portfolio.
The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay to the non-affiliated Directors/Trustees for their
first full fiscal year and the aggregate compensation paid by all investment
companies advised by Mercury International, FAM, or their affiliates ("Mercury
and Affiliates-Advised Funds") to the non-affiliated Directors/Trustees for the
calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION FROM
BENEFITS ACCRUED AS FUND/PORTFOLIO AND
PART OF MERCURY AND AFFILIATES-
AGGREGATE COMPENSATION FUND/PORTFOLIO ADVISED FUNDS PAID TO
NAME OF DIRECTOR/TRUSTEE FROM FUND/PORTFOLIO EXPENSES DIRECTORS/TRUSTEES(1)
------------------------ ---------------------- --------------------- -----------------------
<S> <C> <C> <C>
David O. Beim.................... $6,000 None $10,000
James T. Flynn................... $6,000 None $49,000
W. Carl Kester................... $6,000 None $49,000
Karen P. Robards................. $6,000 None $10,000
</TABLE>
- ---------------
(1) In addition to the Corporation and the Trust, the Directors/Trustees serve
on other Mercury and Affiliates-Advised Funds as follows: Mr. Beim (1
registered investment company consisting of 2 portfolios); Mr. Flynn (3
registered investment companies consisting of 8 portfolios); Mr. Kester (3
registered investment companies consisting of 8 portfolios); and Ms. Robards
(1 registered investment company consisting of 2 portfolios).
The Directors of the Corporation and the Trustees of the Trust may be eligible
for reduced sales charges on purchases of Class I shares. See "Reduced Initial
Sales Charges -- Purchase Privileges of Certain Persons."
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<PAGE> 58
ADMINISTRATION ARRANGEMENTS
The Corporation on behalf of the Fund has entered into an administration
agreement with FAM as Administrator (the "Administration Agreement"). The
Administrator receives for its services to the Fund monthly compensation at the
annual rate of 0.25% of the average daily net assets of the Fund. For the period
February 26, 1999 (commencement of operations) to May 31, 1999, the Fund paid
the Administrator a fee of $9,626.
The Administration Agreement obligates the Administrator to provide certain
administrative services to the Corporation and the Fund and to pay, or cause its
affiliate to pay, for maintaining its staff and personnel and to provide office
space, facilities and necessary personnel for the Corporation. The Administrator
is also obligated to pay, or cause its affiliate to pay, the fees of those
Officers, Directors, and Trustees who are affiliated persons of the
Administrator or any of its affiliates. The Corporation pays, or causes to be
paid, all other expenses incurred in the operation of the Corporation and the
Fund (except to the extent paid by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc. ("MFD" or the "Distributor")), including,
among other things, taxes, expenses for legal and auditing services, costs of
printing proxies, shareholder reports and prospectuses and statements of
additional information, charges of the Custodian, any Sub-custodian and
Financial Data Services, Inc. (the "Transfer Agent"), expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under federal, state or non-U.S. laws, fees and actual
out-of-pocket expenses of Directors who are not affiliated persons of the
Administrator, or of an affiliate of the Administrator, accounting and pricing
costs (including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Corporation or the Fund. The
Distributor will pay certain of the expenses of the Fund incurred in connection
with the continuous offering of its shares. Accounting services are provided to
the Corporation and the Fund by the Administrator, and the Corporation
reimburses the Administrator for its costs in connection with such services.
Duration and Termination. Unless earlier terminated as described below,
the Administration Agreement will remain in effect for two years from its
effective date. Thereafter, it will remain in effect from year to year with
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 on behalf of the Portfolio has entered into an investment
advisory agreement with Mercury International as Investment Adviser (the
"Advisory Agreement"). As discussed in "The Management Team -- Management of the
Fund" in the Prospectus, the Investment Adviser receives for its services to the
Portfolio monthly compensation at the annual rate of 0.75% of the average daily
net assets of the Portfolio. For the period February 26, 1999 (commencement of
operations) to May 31, 1999, the Portfolio paid the Investment Adviser a fee of
$28,743.
The Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay, or cause an affiliate to pay, for
maintaining its staff and personnel and to provide office space, facilities and
necessary personnel for the Trust. The Investment Adviser is also obligated to
pay, or cause an affiliate to pay, the fees of all Officers, Trustees and
Directors who are affiliated persons of the Investment Adviser or any
sub-adviser or of an affiliate of the Investment Adviser or any sub-adviser. The
Trust pays, or causes to be paid, all other expenses incurred in the operation
of the Portfolio and the Trust (except to the extent paid by the Distributor),
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, shareholder reports, copies of the Registration
Statement, charges of the Custodian, any Sub-custodian and Transfer Agent,
expenses of portfolio transactions, expenses of redemption of shares, Commis-
16
<PAGE> 59
sion fees, expenses of registering the shares under federal, state or non-U.S.
laws, fees and actual out-of-pocket expenses of Trustees who are not affiliated
persons of the Investment Adviser or any sub-adviser, or of an affiliate of the
Investment Adviser or of any sub-adviser, accounting and pricing costs
(including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Trust or the Portfolio. The
Distributor will pay certain of the expenses of the Fund incurred in connection
with the continuous offering of its shares. Accounting services are provided to
the Trust by the Investment Adviser or an affiliate of the Investment Adviser,
and the Trust reimburses the Investment Adviser or an affiliate of the
Investment Adviser for its costs in connection with such services.
Securities held by the Portfolio, or other portfolios of the Trust, may
also be held by, or be appropriate investments for, other funds or investment
advisory clients for which the Investment Adviser or its affiliates act as an
adviser. Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
Mercury International is located at 33 King William Street, London EC4R
9AS, England. Mercury International's intermediate parent company is Mercury
Asset Management Group Ltd., a London-based holding company of a group engaged
in the provision of investment management and advisory services globally. The
ultimate parent of Mercury Asset Management Group Ltd. is ML & Co., a financial
services holding company. ML & Co. is a controlling person of Mercury
International as defined under the Investment Company Act because of its power
to exercise a controlling influence over its management or policies.
The Trust has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with FAM with respect to the Portfolio, pursuant to which FAM
provides investment advisory services with respect to all or a portion of the
Portfolio's daily cash assets. The Trust has agreed to use its reasonable best
efforts to cause the Investment Adviser to pay to FAM a fee in an amount to be
determined from time to time by the Investment Adviser and FAM but in no event
in excess of the amount that the Investment Adviser actually receives for
providing services to the Trust pursuant to the Advisory Agreement.
FAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
FAM, an affiliate of Mercury International, is a wholly owned subsidiary of ML &
Co., a financial services holding company and the parent of Merrill Lynch. ML &
Co. and Princeton Services, Inc., the partners of FAM, are "controlling persons"
of FAM as defined under the Investment Company Act because of their power to
exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Advisory Agreement and Sub-Advisory Agreement will each remain in effect for
two years from its effective date. Thereafter, they will remain in effect from
year to year if approved annually (a) by the Board of Trustees or by a majority
of the outstanding shares of the Portfolio and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such 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.
CODE OF ETHICS
The Board of Trustees of the Trust, the Board of Directors of the
Corporation, the Investment Adviser, and FAM have each adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act (together the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and FAM and, as described below, impose additional, more
onerous, restrictions on fund investment personnel. Among other substantive
restrictions, the Codes contain reporting and preclearance
17
<PAGE> 60
requirements for employees of the Investment Adviser and FAM and provide for
trading "blackout periods" that prohibit trading by decision making access
persons (those who recommend or determine which securities transactions the
Trust undertakes) of the Trust within periods of trading by the Trust in the
same (or equivalent) security.
PURCHASE OF SHARES
Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares.
The Fund issues four classes of shares: shares of Class I and Class A 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 I, Class A, Class B and Class C share of the Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights, except that Class A, Class B and Class C 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 A, Class B and Class C 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 A Distribution
Plan). Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
MFD, an affiliate of the Investment Adviser and of Merrill Lynch, with
offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: P. O. Box 9081, Princeton, New Jersey 08543-9081) acts as Distributor
for the Fund.
The 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 Advisory Agreement described above.
The Fund may reject any order to buy shares and may suspend the offering of
its shares at any time.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS I AND CLASS A SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class I shares should purchase Class I shares rather than Class A
shares because there is an account maintenance fee imposed on Class A shares.
Eligible Class I Investors. Class I shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class I shares. Investors that currently own Class I shares of the
Fund in a shareholder account are entitled to purchase additional Class I shares
of the Fund in that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class I shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by Mercury or any of its affiliates. Also
eligible to purchase Class I shares at net asset value are participants in
certain investment programs including certain managed accounts for which a trust
institution, thrift, or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases made through
certain financial advisers that meet and adhere to standards established by
Mercury. In addition, Class I shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees, to members of the Boards
of Mercury and Affiliates-Advised investment companies, including the
18
<PAGE> 61
Corporation, and to employees or customers of certain selected dealers. Class I
shares may also be offered at net asset value to certain accounts over which
Mercury or an affiliate exercises investment discretion.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
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.
Class I and Class A Sales Charge Information
<TABLE>
<CAPTION>
CLASS I SHARES
- -----------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
MAY 31 COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ------------------- ----------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
1999* $ 0 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES
- -----------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
MAY 31 COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ------------------- ----------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
1999* $84,598 $1,112 $83,486 $ 0
</TABLE>
- ---------------
* For the period February 26, 1999 (commencement of operations) to May 31, 1999.
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 I and Class
A shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
REDUCED INITIAL SALES CHARGES
No initial sales charges are imposed upon Class I and Class A 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 Mercury 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 I or Class A shares of the Fund or any
other Mercury mutual funds made within a 13-month period
19
<PAGE> 62
starting with the first purchase pursuant to the Letter of Intent. The Letter of
Intent is available only to investors whose accounts are established and
maintained at the Fund's Transfer Agent. The Letter of Intent is not available
to employee benefit plans for which affiliates of Mercury International provide
plan participant record-keeping services. The Letter of Intent is not a binding
obligation to purchase any amount of Class I or Class A 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 I and Class A shares
of the Fund and of other Mercury 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 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 I or Class A shares
purchased at the reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class I or Class A 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 the Summit Cash
Reserves Fund ("Summit") into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intent from the Fund.
Purchase Privileges of Certain Persons. Directors of the Corporation and
Trustees of the Trust, members of the Boards of other investment companies
advised by Mercury International or its affiliates, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries," when used herein with
respect to ML & Co., includes Mercury International, FAM and certain other
entities directly or indirectly wholly owned and controlled by ML & Co.),
employees or customers of certain selected dealers, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I
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, 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.
Class A shares of the Fund are offered at net asset value to an investor
who is a former shareholder of The United Kingdom Fund Inc. if the following
conditions are satisfied: first, the investor must purchase Class A shares of
the Fund through a Merrill Lynch Financial Consultant or the Transfer Agent with
proceeds of the liquidation of The United Kingdom Fund Inc.; and second, such
purchase of Class A shares must be made within 60 days after payment of such
proceeds by The United Kingdom Fund Inc.
Class I and Class A shares are also offered at net asset value to certain
accounts over which Mercury or an affiliate exercises investment discretion.
Employees and directors or trustees wishing to purchase shares of the Fund
must satisfy the Fund's suitability standards.
Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A 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
20
<PAGE> 63
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 A 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 Objectives 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 I or Class A shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan and/or the aggregate amount invested by the plan in
specified investments. 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 A shares approximately ten years after the plan
purchases the first share of any Mercury mutual fund. Minimum purchase
requirements may be waived or varied for such plans. For additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements, call your plan administrator or your selected
dealer.
Purchases Through Certain Financial Advisers. Reduced sales charges may be
applicable for purchases of Class I or Class A shares of the Fund through
certain financial advisers that meet and adhere to standards established by
Mercury from time to time.
DISTRIBUTION PLANS
Reference is made to "Account Choices -- Pricing of Shares" in the
Prospectus for certain information with respect to separate distribution plans
for Class A, Class B, and Class C 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 each of the Class A, Class B and Class C shares
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and selected
dealers (pursuant to sub-agreements) in connection with account maintenance
activities.
The Distribution Plan for each of the Class B and Class C shares 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 selected
dealers (pursuant to sub-agreements) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. 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 I and Class A
shares of the Fund in that the ongoing distribution fees and deferred sales
charges provide for the financing of the distribution of the Fund's Class B and
Class C shares.
21
<PAGE> 64
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 selected dealers in
connection with the Class A, Class B and Class C 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 A shares as set forth under "How to
Buy, Sell, Transfer 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
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.
As of May 31, 1999, direct cash expenses for the period since the
commencement of operations of Class B shares exceeded direct cash revenues by
$50,726 (1.09% of Class B net assets at that date). As of May 31, 1999, direct
cash expenses for the period since the commencement of operations of Class C
shares exceeded direct cash revenues by $1,676 (.04% of Class C net assets at
that date). For the calendar year ending December 31, 1999 and thereafter, fully
allocated accrual data with respect to Class B and Class C shares will be
available.
For the period February 26, 1999 (commencement of operations) to May 31,
1999, the Fund paid the Distributor $1,120 pursuant to the Class A Distribution
Plan (based on average daily net assets subject to such Class A Distribution
Plan of approximately $1.8 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class A shares. For
the period February 26, 1999 (commencement of operations) to May 31, 1999, the
Fund paid the Distributor $10,646 pursuant to the Class
22
<PAGE> 65
B Distribution Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $4.2 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. For the period
February 26, 1999 (commencement of operations) to May 31, 1999, the Fund paid
the Distributor $10,356 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $4.1 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares.
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).
The following table sets forth comparative information as of May 31, 1999
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MAY 31, 1999
---------------------------------------------------------------------------------------------------
(IN THOUSANDS) ANNUAL
DISTRIBUTION
ALLOWABLE MAXIMUM AMOUNTS FEE AT
ELIGIBLE INTEREST ON AMOUNT PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID PAYABLE TO PAID TO UNPAID ASSET
SALES(1) SALES CHARGES BALANCE(2) DISTRIBUTOR(3) DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ------------- ----------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES.............. $4,856 $304 $5 $309 $ 9 $300 $35
CLASS C SHARES.............. $4,674 $301 $5 $306 $10 $296 $34
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B and Class C shares sold since
February 26, 1999 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See "What
are the Fund's fees and expenses?" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in certain fee-based programs managed
by Mercury or its affiliates. The CDSC is booked as a contingent obligation
that may be payable if the shareholder terminates participation in certain
fee-based programs managed by Mercury or its affiliates.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the redemption
and purchase of Fund shares.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
23
<PAGE> 66
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 held with the Transfer Agent may do
so by tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Redemption requests
delivered other than by mail should be delivered to 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. 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, 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., Eastern 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. Certain
securities dealers may charge a processing fee to confirm a repurchase of
shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees
charged by other securities dealers may be higher or lower. Repurchases directly
through the Fund's Transfer Agent, on accounts held at the Transfer Agent, are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection
24
<PAGE> 67
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 I AND CLASS A SHARES
Shareholders of the Fund who have redeemed their Class I and Class A shares
have a privilege to reinstate their accounts by purchasing Class I or Class A
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 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.
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 Mercury mutual funds.
As discussed in the Prospectus under "Account Choices -- Pricing of
Shares -- Class B and C Shares -- Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an IRA or other retirement plan
or redemption of Class B shares in certain circumstances following the death of
a Class B shareholder. In the case of such withdrawal, the reduction or waiver
applies to: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan on
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
life (or life expectancy) or any redemption resulting from the tax-free return
of an excess contribution to an IRA (certain legal documentation may be required
at the time of liquidation establishing eligibility for qualified distribution);
or (b) any partial or complete redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability or, if later, reasonably
promptly following completion of probate or in connection with involuntary
termination of an account in which Fund shares are held (certain legal
documentation may be required at the time of liquidation establishing
eligibility for qualified distribution).
The charge may also be reduced or waived in other instances, such as: (c)
redemptions by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers; (d) redemptions in connection with participation in certain
fee-based programs managed by the Investment Adviser or its affiliates; (e)
redemptions in connection with participation in certain fee-based programs
managed by selected dealers that have agreements with Mercury; or (f)
withdrawals through the Systematic Withdrawal Plan of up to 10% per year of your
account value at the time the plan is established.
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 be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of shares being redeemed and 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.
25
<PAGE> 68
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 participation in certain fee-based programs, involuntary
termination of an account in which Fund shares are held, and withdrawals through
the Systematic Withdrawal Plan.
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
selected dealers 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 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.
Conversion of Class B Shares to Class A Shares. As discussed in the
Prospectus under "Account Choices -- Pricing of Shares -- Class B and C
Shares -- Deferred Sales Charge Options," Class B shares of equity Mercury
mutual funds convert automatically to Class A shares approximately eight years
after purchase (the "Conversion Period"). Automatic conversion of Class B shares
into Class A shares will occur at least once each month (on the "Conversion
Date") on the basis of the relative net asset value of the shares of the two
classes on the Conversion Date, without the imposition of any sales load, fee or
other charge.
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 Mercury 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 Mercury mutual funds and the Class B Retirement Plan was
established), all Class B shares of all Mercury mutual funds held in that Class
B Retirement Plan will be converted into Class A shares of the appropriate
funds. Subsequent to such conversion, that Class B Retirement Plan will be sold
Class A 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 "Shareholder
Services -- Fee-Based Programs" below.
26
<PAGE> 69
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
- ----------------------------------------------------
FOR THE FISCAL YEAR CDSCs RECEIVED CDSCs PAID TO
ENDED MAY 31 BY DISTRIBUTOR MERRILL LYNCH
- ------------------- -------------- -------------
<S> <C> <C>
1999** $1,435 $1,435
</TABLE>
- ---------------
* Additional Class B CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- ----------------------------------------------------
FOR THE FISCAL YEAR CDSCs RECEIVED CDSCs PAID TO
ENDED MAY 31 BY DISTRIBUTOR MERRILL LYNCH
- ------------------- -------------- -------------
<S> <C> <C>
1999** $1,942 $1,942
</TABLE>
- ---------------
** For the period February 26, 1999 (commencement of operations) to May 31,
1999.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the ongoing distribution fee are paid to the Distributor and are used
in whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services to
the Fund in connection with the sale of the Class B and Class C shares, such as
the payment of compensation to financial consultants for selling Class B and
Class C shares, from the dealers' own funds. The combination of the CDSC and the
ongoing distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. See "Distribution Plans" above. Imposition of the CDSC and the
distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales
Charges" above.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because the Fund will invest exclusively in shares of the Portfolio, it is
expected that all transactions in portfolio securities will be entered into by
the Portfolio. The Investment Adviser is responsible for making the Portfolio's
portfolio decisions, placing the Portfolio's brokerage business, evaluating the
reasonableness of brokerage commissions and negotiating the amount of any
commissions paid subject to a policy established by the Trust's Trustees and
officers. The Trust has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. Orders for
transactions in portfolio securities are placed for the Trust with a number of
brokers and dealers, including affiliates of the Investment Adviser. In placing
orders, it is the policy of the Trust to obtain the most favorable net results,
taking into account various factors, including price, commissions, if any, size
of the transaction and difficulty of execution. Where applicable, the Investment
Adviser surveys a number of brokers and dealers in connection with proposed
portfolio transactions and selects the broker or dealer that offers the Trust
the best price and execution or other services that are of benefit to the Trust.
Securities firms also may receive brokerage commissions on transactions
including covered call options written by the Trust and the sale of underlying
securities upon the exercise of such options. In addition, consistent with the
NASD Conduct Rules and policies established by the Trustees, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Trust.
Brokers who provide supplemental investment research to the Investment
Adviser may receive orders for transactions by the Trust. Such supplemental
research services ordinarily consist of assessments and analyses of the business
or prospects of a company, industry or economic sector. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Investment Adviser under the Advisory Agreement. If in the judgment of
the Investment Adviser the Trust will be benefited by supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to a
broker furnishing such services in excess of commissions that another broker may
have charged for effecting the same transaction. The expenses of the Investment
Adviser will not necessarily be reduced as a result of the
27
<PAGE> 70
receipt of such supplemental information, and the Investment Adviser may use
such information in servicing its other accounts.
For the period February 26, 1999 (commencement of operations) to May 31,
1999, the Portfolio paid brokerage commissions of $77,420. For the period
February 26, 1999 to May 31, 1999, the following table shows the amount of
brokerage commissions paid by the Portfolio to Merrill Lynch, the percentage of
the Portfolio's brokerage commissions paid to Merrill Lynch, the percentage of
the Portfolio's aggregate dollar amount of transactions involving the payment of
commissions effected through Merrill Lynch and aggregate brokerage commissions
paid by the Portfolio:
<TABLE>
<S> <C>
Aggregate brokerage commissions paid to Merrill Lynch....... 0
% of Portfolio's aggregate brokerage commissions paid to
Merrill Lynch............................................. 0
% of Portfolio's aggregate dollar amount of transactions
effected through the broker............................... 0
Aggregate brokerage commissions paid........................ $77,420
</TABLE>
The Trust invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as
principal in 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 Investment
Adviser. After considering all factors deemed relevant, the Trustees made a
determination not to seek such recapture. The Trustees will reconsider this
matter from time to time.
The portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of purchases
or sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. The portfolio turnover rate is generally anticipated to be under 100%.
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 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., Eastern 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, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset
28
<PAGE> 71
value is computed by dividing the value of the securities held by the Fund plus
any cash or other assets (including any futures position and gold bullion
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
Investment Adviser, are accrued daily.
The principal assets of the Fund will normally be its interest in 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 A, Class B and Class C shares generally
will be lower than the per share net asset value of Class I 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 A 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 for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Trustees as the primary market. Long positions in securities traded
in the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market. Short positions in securities traded on the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. When the Portfolio writes an option, the amount of the premium
received is recorded on the books of the Portfolio as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last 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. Gold bullion will be
valued at the last sale price on the Commodity Exchange, Inc. 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.
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 after the close of business
on the NYSE by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, that represents that investor's share of the
aggregate interests in the Portfolio. The close of business on the NYSE is
generally 4:00 p.m., Eastern time. Any additions or withdrawals to be effected
on that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
29
<PAGE> 72
investment in the Portfolio as of the time of determination on such day plus or
minus, as the case may be, the amount of any additions to or withdrawals from
the investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
such time on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio 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 your selected dealer.
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 with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
The Fund does not issue share certificates. Shareholders considering
transferring their Class I or Class A shares from a selected dealer to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class I or Class A
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 I or Class A shares. Shareholders interested in
transferring their Class B or Class C shares from a selected dealer 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. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from a
selected dealer 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 a selected dealer for those shares.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if an eligible Class I investor as described in the
Prospectus) or Class A, Class B or Class C 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. You
may also add to your account by automatically investing a specific amount in the
Fund on a periodic basis through your selected dealer. The current minimum for
such automatic additional investments is $100. This minimum may be waived or
revised under certain circumstances.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Dividends and distributions from the Fund may be taken in cash or
automatically reinvested in shares of the Fund at net asset value without a
sales charge. You should consult with your financial consultant about
30
<PAGE> 73
which option you would like. If you choose the reinvestment option, 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
(1-888-763-2260), if the shareholder's account is maintained with the Transfer
Agent, 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 their selected dealer in writing if
the shareholder's account is maintained with a selected dealer or notify the
Transfer Agent in writing or by telephone (1-888-763-2260), if the account is
maintained with the Transfer Agent, 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 PLAN
A shareholder may elect to make withdrawals from an Investment Account of
Class I, Class A, Class B or Class C 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. With respect to shareholders who hold accounts
directly at the Transfer Agent, 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. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value determined as described herein on the first, second,
third or fourth Monday of each month, or the first, second, third or fourth
Monday 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. The Fund will not 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.
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 "Pricing of
Shares -- Class B and C Shares -- Deferred Sales Charge Options" in the
Prospectus. Where the systematic withdrawal plan is applied
31
<PAGE> 74
to Class B shares, upon conversion of the last Class B shares in an account to
Class A shares, a shareholder must make a new election to join the systematic
withdrawal program with respect to the Class A 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
The minimum initial purchase to establish a retirement plan is $100.
Capital gains and income received in retirement plans 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 other Mercury mutual funds and Summit. The exchange privilege
does not apply to any other funds. Under the Fund's pricing system, Class I
shareholders may exchange Class I shares of the Fund for Class I shares of a
second Mercury mutual fund. If the Class I shareholder wants to exchange Class I
shares for shares of a second fund, but does not hold Class I shares of the
second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class I shares of the second fund, the shareholder
will receive Class A shares of the second fund as a result of the exchange.
Class A shares also may be exchanged for Class I shares of a second Mercury
mutual fund at any time as long as, at the time of the exchange, the shareholder
is eligible to acquire Class I shares of any Mercury mutual fund. Class A, Class
B and Class C shares are exchangeable with shares of the same class of other
Mercury 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
I, Class A, Class B and Class C shares also are exchangeable for shares of
Summit, a money market fund specifically designated for exchange by holders of
Class I, Class A, Class B or Class C shares. Class I and Class A 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 and Class B shares do not
include any front-end sales charge or CDSC; however, Summit Class B shares pay a
12b-1 distribution fee of 0.75% and are subject to a CDSC payable as if the
shareholder still held shares of the Mercury fund used to acquire the Summit
Class B shares.
Exchanges of Class I or Class A shares outstanding ("outstanding Class I or
Class A shares") for Class I or Class A shares of another Mercury mutual fund,
or for Class A shares of Summit ("new Class I or Class A shares") are transacted
on the basis of relative net asset value per Class I or Class A share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class I or Class A shares and the
sales charge payable at the time of the exchange on the new Class I or Class A
shares. With respect to outstanding Class I or Class A 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 I or
Class A shares in the initial purchase and any subsequent exchange. Class I or
Class A shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class I or Class A shares. For purposes of
the exchange privilege, dividend reinvestment Class I and Class A shares shall
be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class I or Class A shares on which the dividend was paid.
Based on this formula, Class I and Class A shares of the Fund generally may be
exchanged into the Class I and Class A shares, respectively, of the other 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 Mercury
mutual fund or of Summit 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
32
<PAGE> 75
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
another Mercury fund ("new Mercury Fund") after having held the Fund's Class B
shares for two-and-a-half years. The 3% 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 new Mercury 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 new Mercury Fund Class B shares, the investor will be deemed to have
held the new Mercury 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 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 fee-based programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit the
purchase of Class I shares at net asset value. Under specified circumstances,
participants in certain Programs may deposit other classes of shares, which will
be exchanged for Class I 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 certain Programs may result in the redemption of shares held
therein or the automatic exchange thereof to another class at net asset value.
In addition, upon termination of participation in certain Programs, 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,
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 certain specific Programs offered through
particular selected dealers (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 the shareholder's selected
dealer.
DIVIDENDS AND TAXES
DIVIDENDS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid at least annually. All
net realized capital gains, if any, will be distributed to the Fund's
shareholders annually. From time to time, the Fund may declare a special
dividend at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. See "Shareholder
Services Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends may be
33
<PAGE> 76
reinvested automatically in shares of the Fund. Shareholders may elect in
writing to receive any such dividends in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class I and Class A shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends on Class A shares will be lower than the per share dividends on
Class I shares as a result of the account maintenance fees applicable with
respect to the Class A shares. See "Determination of Net Asset Value." Within 60
days after the end of the Fund's taxable year, each shareholder will receive
notification summarizing the dividends he or she received that year. This
notification will also indicate whether those dividends 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 I, Class A, Class B and Class C
shareholders ("shareholders"). The Fund intends to distribute substantially all
of such income. To qualify for this treatment, the Fund must, among other
things, (a) derive at least 90% of its gross income (without offset for losses
from the sale or other disposition of securities or foreign currencies) from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of securities or foreign currencies and certain
financial futures, options and forward contracts (the "Income Test"); and (b)
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the value of its assets is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount no greater than 5% of its assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income,
whether or not reinvested.
Distributions made from net capital gains (i.e., the excess of net capital
gains from the sale of assets held for more than 12 months over net short-term
capital losses, and including such gains from certain transactions in futures
and options) ("capital gain dividends") to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 20% with respect to assets held for more
than 12 months. The maximum capital gains rate for corporate shareholders
currently is the same as the maximum corporate tax rate for ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income and capital gain dividends. A portion of the dividends paid by
the Fund out of dividends paid by certain corporations located in the U.S. may
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 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 countries other than the United States. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If more than 50% of the value of the Fund's assets at the
close of a taxable year consists of stock or securities in non-U.S.
corporations, shareholders of the Fund may be able to claim U.S. foreign tax
credits with respect to foreign taxes paid by the Fund, 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
34
<PAGE> 77
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 noncorporate
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 I, Class A, Class B and Class C shareholders.
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 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 A shares. A shareholder's basis in
the Class A 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 A 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 and capital gain taxable at
the maximum rate of 20% if such shares were held for more than 12 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any 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 shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any long term capital gains dividends
with respect to such shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring shares of the Fund, then loss recognized on the exchange will be
reduced (or any gain increased) to the extent the sales charge paid the Fund
reduces any sales charge that would have been owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales charge will
be treated as an amount paid for the new shares.
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 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, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options and futures and foreign
currency options and futures, and related options on such futures. Options and
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. Unless such contract is a forward foreign
exchange contract, or is a non-equity option or a regulated futures contract for
a
35
<PAGE> 78
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from transactions in Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of dividends to
shareholders. The mark-to-market rule outlined above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from such contracts as
capital. In this case, gain or loss realized in connection with a forward
foreign exchange contract that is a Section 1256 contract will be characterized
as 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 sales of securities and 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 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.
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.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain countries in which the Fund intends to invest. No such
regulations have been issued.
OTHER TAX MATTERS
The Fund has received a private letter ruling from the Internal Revenue
Service ("IRS") 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 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
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<PAGE> 79
the Fund's investment 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 are 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 I, Class A, Class B and Class C
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 I and Class A
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 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 I or
Class A 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, among other things,
the Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite
Index, the Dow Jones Industrial Average, the Financial Times Gold Mines Index,
the MSCI All Country Gold Index, the Johannesburg Stock Exchange All Gold Index,
the Australian Gold Index, Toronto Gold Index and the Philadelphia Gold and
Silver Index, 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. When comparing
37
<PAGE> 80
its performance to a market index, the Fund may refer to various statistical
measures derived from the historical performance of the Fund and the index, such
as standard deviation and beta. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. From time to time, the Fund may include its
Morningstar risk-adjusted performance rating in advertisements or supplemental
sales literature. The Fund may from time to time quote in advertisement or other
materials other applicable measures of performance and may also make references
to awards that may be given to the Investment Adviser.
Set forth below is total return information for Class I, Class A, Class B,
and Class C shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS I SHARES CLASS A SHARES
--------------------------------------- ---------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... (16.50)% $ 956.00 (16.84)% $ 955.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... 0.90 % $1,009.00 0.80 % $1,008.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... (4.40)% $ 956.00 (4.49)% $ 955.10
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
--------------------------------------- ---------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... (12.96)% $ 966.00 (1.59)% $ 996.00
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... 0.60 % $1,006.00 0.60 % $1,006.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1999) to May 31, 1999.... (3.40)% $ 966.00 (0.40)% $ 996.00
</TABLE>
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<PAGE> 81
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Corporation is a Maryland corporation incorporated on April 24, 1998.
It has an authorized capital of 11,000,000,000 shares of Common Stock, par value
$.0001 per share, of which the Fund is authorized to issue 100,000,000 shares of
each of Class I, Class A, Class B and Class C.
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 the 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 A 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 would be unable to elect any person as
a Director.
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 for
any expenses which may be attributable to only one class. Shares issued are
fully-paid and non-assessable by the Corporation or the Fund. Voting rights for
Directors are not cumulative.
The Trust consists of twenty-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.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class I, Class A, Class B and Class C shares of the
Fund based on the Fund's net assets and number of shares outstanding as of May
31, 1999 is calculated as set forth below:
<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Assets............................ $5,262,552 $1,676,101 $4,642,726 $4,485,521
========== ========== ========== ==========
Number of Shares Outstanding.......... 521,671 166,251 461,407 445,783
========== ========== ========== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ $ 10.09 $ 10.08 $ 10.06 $ 10.06
Sales Charge (for Class I and Class A
Shares: 5.25% of Offering Price
(5.54% of net amount invested))*.... 0.56 0.56 ** **
---------- ---------- ---------- ----------
Offering Price........................ $ 10.65 $ 10.64 $ 10.06 $ 10.06
========== ========== ========== ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Account Choices -- Class B and Class
C Shares -- Deferred Sales Charge Options" in the Prospectus and "Redemption
of Shares -- Deferred Sales Charges -- Class B and Class C Shares" herein.
39
<PAGE> 82
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, acts as the custodian of the Fund's assets. Under its contract with the
Fund, the Custodian is authorized to establish separate accounts in foreign
currencies and to cause foreign securities owned by the Fund to be held in its
offices outside the United States and with certain foreign banks and securities
depositories. The custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, 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
Swidler Berlin Shereff Friedman, 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.
40
<PAGE> 83
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of a class of the Fund's shares as of August 31, 1999:
<TABLE>
<CAPTION>
NAME/ADDRESS CLASS
- ------------------------------------------------------------ ------------------
<S> <C>
SAND SPRINGS HOME 5.5% OF CLASS A
ATTN JOE A WILLIAMS, PRES
PO BOX 278
SAND SPRINGS OK 74063
GEORGE H GEE III 5.5% OF CLASS A
PO BOX 574
BLAKELY GA 31723
</TABLE>
FINANCIAL STATEMENTS
The Fund's and Portfolio's audited financial statements are incorporated in
the Statement of Additional Information by reference to its 1999 annual report
to shareholders. You may request a copy of the annual report at no charge by
calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. on any business day.
41
<PAGE> 84
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<PAGE> 85
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 currency, as described below. Such
instruments are referred to collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures transactions (as
defined below in "Risk Factors in Options, Futures and Currency Instruments"),
the Investment Adviser believes that, because the Fund will generally engage in
these transactions, if at all, for hedging purposes, including anticipatory
hedges (other than options on securities that may be used to seek increased
return), the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will engage in
hedging activities, if at all, only from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets, interest
rates or currency exchange rates occur. The Fund is not required to enter into
hedging transactions and may choose not to do so.
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 upfront payment (the
"option premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Fund will
A-1
<PAGE> 86
lose the option premium and will consequently realize a lower return on the
portfolio holdings than would have been realized without the purchase of the
put.
The Fund is also authorized to purchase call options on securities 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.
A-2
<PAGE> 87
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 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 futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under regulations
of the Commodity Futures Trading Commission. The Fund will only engage in
futures and options transactions from time to time. The Fund is under no
obligation to use such transactions and may choose not to do so.
A-3
<PAGE> 88
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. 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 Investment Adviser believes that (i) there is a demonstrably
high correlation between the currency in which the cross- hedge is denominated
and the currency being hedged, and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly more
cost-effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities that it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which are denominated in such
currency.
A-4
<PAGE> 89
Risk Factors in Hedging Foreign Currency. 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 hedge against currency exchange rate movements, even
if correctly anticipated, in the event that (i) the currency exchange rate
movement is so generally anticipated that the Fund is not able to enter into a
hedging transaction at an effective price, or (ii) the currency exchange rate
movement relates to a market with respect to which Currency Instruments are not
available or in which their availability is limited (such as certain emerging
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 Investment Adviser
anticipates the Fund can receive on each business day at least two independent
bids or offers, unless a quotation from only one dealer is available, in which
case that dealer's quotation may be used.
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
A-5
<PAGE> 90
that a counterparty will default by engaging in transactions in Strategic
Instruments traded in OTC markets only with financial institutions that have a
credit rating of AA- or better from Standard & Poor's, or Aa3 or better from
Moody's, or AA or better of Fitch.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
A-6
<PAGE> 91
APPENDIX B
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC.'S CORPORATE DEBT 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 of
1933, as amended (the "Securities Act").
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act, nor does it represent that
any specific
B-1
<PAGE> 92
note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries
- High rates of return on funds employed
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection
- Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation
- Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<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.
</TABLE>
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<PAGE> 93
<TABLE>
<S> <C>
a An issue that is rated "a" is considered to be an
upper-medium grade preferred stock. While risks are judged
to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue that is rated "baa" is considered to be medium
grade, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
ba An issue that is rated "ba" is considered to have
speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in
this class.
b An issue that is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue that is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payment.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment
standing.
</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 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.
<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.
</TABLE>
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<PAGE> 94
<TABLE>
<S> <C>
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 is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
<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.
<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.
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<PAGE> 95
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.
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.
</TABLE>
B-5
<PAGE> 96
<TABLE>
<S> <C>
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.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
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<PAGE> 97
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
</TABLE>
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
<TABLE>
<S> <C>
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive" indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
</TABLE>
RATINGS OUTLOOK: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any
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<PAGE> 98
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time
by adverse economic changes. However, business and financial
alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments.
DD Such bonds are extremely speculative and should be valued on
D the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
</TABLE>
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned
"F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
</TABLE>
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CODE # 19039-0999
(C) Mercury Asset Management International Ltd.
