|
497 (c)
333-32242
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.
PAGE | |
FUND FACTS | |
About the Mercury Select Growth Fund | 3 |
Fees and Expenses | 6 |
ABOUT THE DETAILS | |
How the Fund Invests | 9 |
Investment Risks | 10 |
ACCOUNT CHOICES | |
Pricing of Shares | 12 |
How to Buy, Sell, Transfer and Exchange Shares | 18 |
Fee-Based Programs | 22 |
THE MANAGEMENT TEAM | |
Management of the Fund | 25 |
Master/Feeder Structure | 26 |
Financial Highlights | 28 |
TO LEARN MORE | |
Shareholder Reports | Back Cover |
Statement of Additional Information | Back Cover |
MERCURY SELECT GROWTH FUND
The investment objective of the Fund is to seek capital appreciation. 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.
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.
Very Large Cap Companies companies whose total market capitalization is at least $10 billion.
Common Stock securities representing shares of ownership of a corporation.
Preferred Stock class of stock that often pays dividends at a specified rate and has preference over common stock in dividend payments and liquidation of assets. Preferred stock may also be convertible into common stock.
Warrants rights to acquire common stock at a specified price.
The Fund invests primarily in a diversified portfolio of common stocks and other equity securities of very large cap companies that are traded in the U.S. securities markets that Fund management believes have strong earnings growth potential. The Fund may also purchase securities of mid and large cap U.S. companies (companies whose total market capitalization is at least $1 billion and $5 billion, respectively) that Fund management believes offer strong earnings growth potential. The Fund's subadviser believes earnings expectations drive stock prices. The Fund seeks to invest in companies with strong earnings growth potential, and to sell those with deteriorating earnings prospects. 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 prospects for a company's industry or market sector is an important factor in evaluating a particular company's earnings prospects.
The Fund's subadviser believes forecasts for market timing and sector rotation are unreliable and introduce an unacceptable level of risk. Therefore, the Fund attempts to keep the portfolio fully invested under normal conditions. The Fund will attempt to invest in all sectors included in the Russell Top 200 Growth Index, the Fund's benchmark index, but may be over- or under-weighted in certain sectors. This allows the Fund management's stock selection process to be the primary determinant of performance. The Fund may purchase common stock, preferred stock, warrants and other instruments.
The Fund invests all of its assets in a Portfolio of Mercury Asset Management Master Trust that has the same goals as the Fund. All investments will be made at the level of the Portfolio. This structure is sometimes called a "master/feeder" structure. The Fund's investment results will correspond directly to the investment results of the underlying Portfolio it invests in. For simplicity, this Prospectus uses the term "Fund" to include the underlying Portfolio in which the Fund invests.
We cannot guarantee that the Fund will achieve its objective.
MERCURY SELECT GROWTH FUND | 3 |
As with any equity fund, the value of the Fund's investments and therefore, the value of Fund shares may fluctuate. These changes may occur because the U.S. stock market is rising or falling. At other times, the value of the Fund's investments in particular companies may be affected by competitive pressures, unexpectedly low earnings and other company-specific factors. The Fund is also subject to the risk that the stocks the Fund's subadviser selects will underperform the stock markets or other funds with similar investment objectives and investment strategies. If the value of the Fund's investments goes down, you may lose money.
In addition, due to its investment strategy, the Fund may buy and sell securities frequently. This may result in higher transaction costs which could reduce the Fund's overall performance, and may result in additional capital gains tax liabilities for shareholders.
The Fund may be an appropriate investment for you if you:
4 | MERCURY SELECT GROWTH FUND |
From its inception on February 1, 1997 until its reorganization in June, 2000, the Fund operated as the Turner Large Cap Growth Equity Fund, a portfolio of the TIP Funds, whose investment adviser is currently the Fund's subadviser.
The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund. Of course, the Fund's past performance does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class I shares from year to year for its first two complete calendar years. Prior to its reorganization in June, 2000, the Class I shares were shares of the Turner Large Cap Growth Equity Fund.
What is an Index?
An index measures the market price of a specific group of securities in a particular market of securities in a market sector. You cannot invest directly in an index. An index does not have an investment adviser and does not pay any commissions or expenses. If an index had expenses, its performance would be lower. The Russell Top 200 Growth Index is a widely-recognized, capitalization-weighted (companies with larger market capitalizations have more influence than those with smaller market capitalization) index of the 200 largest U.S. companies with higher growth rates and price-to-book ratios. The S&P 500 Index is a widely-recognized, market value-weighted index of 500 stocks designed to mimic the overall equity market's industry weightings.
GRAPHIC OMITTED
1998 -- 45.22%
1999* -- 55.71%
During the period shown in the bar chart, the highest return for a quarter was 41.30% (quarter ended December 31, 1999) and the lowest return for a quarter was -8.19% (quarter ended September 30, 1998). For the quarter ended March 31, 2000, the Fund's return was 14.1%.
* For its services to the Fund as it was operated during fiscal year ending September 30, 1999, the Subadviser received no advisory fees, and waived/reimbursed expenses of 0.66%. For fiscal year 1999, the Subadviser earned .75% of the Fund's average daily net assets, but because of the waiver/reimbursement arrangements, no fee was paid. If the Subadviser had not waived its fee and reimbursed the Fund, the performance figures shown above would have been lower.
The table below compares the average annual total returns for the Fund's Class I shares for the periods ended December 31, 1999, to those of the Russell Top 200 Growth Index and the S&P 500 Index.
1 Year | Since Inception (2/1/97) | ||||
---|---|---|---|---|---|
Class I shares | 55.71% | 44.24% | |||
Russell Top 200 Growth Index | 29.68% | 33.65% | |||
S&P 500 Index | 21.05% | 25.83% | |||
MERCURY SELECT GROWTH FUND | 5 |
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed below are some of the main types of expenses, which the Fund 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, securities dealers and other financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees fees used to compensate securities dealers and other financial intermediaries for personal services to beneficial shareholders and/or account maintenance activities.
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.
Shareholder Fees (fees paid
directly from your investment)(a): | Class I | Class A | Class B(b) | Class C |
---|---|---|---|---|
Maximum Sales Charge (Load)
imposed on purchases (as a percentage of offering price) | 5.25%(c) | 5.25%(c) | None | None |
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) |
Maximum Sales Charge (Load)
imposed on Dividend Reinvestments | None | None | None | None |
Redemption Fee | None | None | None | None |
Exchange Fee | None | None | None | None |
Annual Fund Operating Expenses (expenses that are deducted from the Fund's total assets)(e): | ||||
Management Fee(f) | 0.50% | 0.50% | 0.50% | 0.50% |
Distribution and/or Service (12b-1) Fees(g) | None | 0.35% | 1.00% | 1.00% |
Other Expenses (including transfer agency fees)(h) | 1.09% | 1.09% | 1.09% | 1.09% |
Administrative Fees(i) | 0.25% | 0.25% | 0.25% | 0.25% |
Total Other Expenses | 1.34% | 1.34% | 1.34% | 1.34% |
Total Annual Fund Operating Expenses | 1.84% | 2.19% | 2.84% | 2.84% |
Fee Waiver and/or Expense Reimbursement(j) | - .59% | - .59% | - .59% | - .59% |
Net Total Operating Expenses(k) | 1.25% | 1.60% | 2.25% | 2.25% |
6 | MERCURY SELECT GROWTH FUND |
MERCURY SELECT GROWTH FUND | 7 |
Examples
These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund's operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in 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:
Class I | Class A | Class B | Class C | |
---|---|---|---|---|
One Year | 646 | 679 | 628 | 328 |
Three Years | 1,021 | 1,123 | 1,128 | 828 |
Five Years | 1,425 | 1,598 | 1,661 | 1,461 |
Ten Years | 2,576 | 2,932 | 3,037 | 3,203 |
Expenses if you did not redeem your shares:
Class I | Class A | Class B | Class C | |
---|---|---|---|---|
One Year | 646 | 679 | 228 | 228 |
Three Years | 1,021 | 1,123 | 828 | 828 |
Five Years | 1,425 | 1,598 | 1,461 | 1,461 |
Ten Years | 2,576 | 2,932 | 3,037 | 3,203 |
* Assumes conversion to Class A shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above. Expenses used for the example include the fee waiver/expense reimbursement described in note (j) only for one year.
8 | MERCURY SELECT GROWTH FUND |
About the Portfolio Management Team The Fund is managed by a team of investment professionals who participate in the team's research process and stock selection. The senior investment professionals in this group include Robert Turner, John Hammerschmidt and Mark Turner. Robert Turner, the lead manager of the Fund, is primarily responsible for the day-to-day management of the Fund's portfolio.
About the Investment Adviser and the Subadviser Mercury Asset Management US, a division of Fund Asset Management, L.P., is the Fund's Investment Adviser. Turner Investment Partners, Inc. is the Fund's Subadviser.
The Fund's objective is capital appreciation. The Fund tries to achieve its objective by investing primarily in a diversified portfolio of common stocks and other equity securities of companies that are traded in the U.S. securities markets that, at the time of purchase, have market capitalizations of at least $10 billion and that the Fund's management believes to have strong earnings growth potential. The Fund may also purchase securities of mid and large cap U.S. companies (companies whose total market capitalization is at least $1 billion and $5 billion, respectively) that Fund management believes offer strong earnings growth potential. The Fund seeks to purchase securities that are well diversified across economic sectors. The Russell Top 200 Growth Index is the Fund's current benchmark. Of course, there is no guarantee that the Fund will achieve its investment goal.
The Fund will, under normal circumstances, invest at least 65% of its total assets in equity securities of very large cap companies that are traded in the U.S. securities markets, including common stock, preferred stock, warrants and other instruments. The Fund will only purchase securities that are traded on registered exchanges or the over-the-counter market in the United States. The Fund generally invests no more than 2% of its assets in any single issue. However, if a security comprises between 1% and 5% of the Russell Top 200 Growth Index, the Fund may devote a percentage of its assets to that security up to two times its weighting in the Index, and for any security that comprise more than 5% of the Index, up to 1 1/2 times its Index weighting.
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 prospects for a company's industry or market sector is an important factor in evaluating a particular company's earnings prospects. Current income from dividends and interest will not be an important consideration in selecting portfolio securities.
The Fund has no stated minimum holding period for investments, and will buy or sell securities whenever Fund management sees an appropriate opportunity. For example, the Fund may sell shares of a company when the company's earnings prospects deteriorate or when the Fund's subadviser identifies another company with stronger earnings growth prospects.
The Fund does not consider potential tax consequences to Fund shareholders when it sells securities. Because the Fund has the flexibility to take
MERCURY SELECT GROWTH FUND | 9 |
advantage of short term investment opportunities, it may experience relatively high portfolio turnover during certain periods. This may result in higher transaction costs and reduce the Fund's overall performance, and may result in additional capital gains tax liabilities for shareholders.
American Depositary Receipts securities typically issued by a U.S. financial institution called a depositary, that evidence ownership interests in a security or pool of securities issued by a foreign issuer and deposited with the depositary.
The Fund may also make the following additional investments. The Fund may invest up to 10% of its total assets in American Depositary Receipts, or "ADRs". 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 securities. The Fund is not required to hedge and may choose not to do so.
The Fund will normally invest almost all of its assets as described above. The Fund may, however, invest up to 100% of its assets in short-term obligations (such as money market instruments, including U.S. Government securities, bank obligations, high quality commercial paper and repurchase agreements involving the foregoing securities), cash and shares of money market investment companies that would not ordinarily be consistent with the Fund's objectives when it is advisable to do so (during unusual economic or market conditions, or for temporary defensive purposes). In addition, the Fund may invest in such instruments to enable it to meet redemptions. The Fund will do so only if management believes that the risk of loss from its usual investments outweighs the opportunity for gains. 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 different investment strategies and it has certain investment restrictions, all of which are explained in the Fund's Statement of Additional Information.
This section contains a summary discussion of the principal risks of investing in the Fund. This section also discusses derivatives risk, an additional risk of investing in the Fund. As with any mutual fund, there can be no guarantee that the Fund will meet its goal, or that the Fund's performance will be positive over any period of time.
10 | MERCURY SELECT GROWTH FUND |
Market risk is the risk that the U.S. stock market in which the Fund invests will go down in value, including the possibility that the U.S. stock market will go down sharply and unpredictably. Selection risk is the risk that the investments that Fund management selects will underperform the stock markets or other funds with similar investment objectives and investment strategies. The Fund is subject to the risk that its principal market segment, very large capitalization growth stocks, may underperform compared to other market segments or to the equity markets as a whole.
The Fund may use derivatives such as futures, options, indexed securities, inverse securities and swaps for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.
If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information.
MERCURY SELECT GROWTH FUND | 11 |
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 or other financial intermediary can help you determine which pricing option is best suited to your personal financial goals.
For example, if you select Class I or Class A shares, you generally pay a sales charge at the time of purchase. You may be eligible for a sales charge reduction or waiver. If you buy Class A shares, you also pay ongoing distribution and account maintenance fees of 0.35%, 0.25% of which are for account maintenance fees.
Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Investment Adviser, the Distributor or their affiliates may make payments out of their own resources to securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.
If you select Class B or Class 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%. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares.
The Fund's shares are distributed by Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc.
12 | MERCURY SELECT GROWTH FUND |
To better understand the pricing of the Fund's shares, we have summarized the information below:
Class I | Class A | Class B | Class C | |
---|---|---|---|---|
Availability? | Limited to certain investors
including: º Current Class I shareholders º Certain Retirement Plans º Participants in certain sponsored programs º Certain affiliates of selected securities dealers and other financial intermediaries | Generally available through selected securities dealers and other financial intermediaries. | Generally available through selected securities dealers and other financial intermediaries. | Generally available through selected securities dealers and other financial intermediaries. |
Initial Sales Charge? | Yes. Payable at time of purchase. Lower sales charges
available for certain larger
investments. | Yes. Payable at time of purchase. Lower sales charges available for certain larger investments. | No. Entire purchase price is invested in shares of the Fund. | No. Entire purchase price is invested in shares of the Fund |
Deferred Sales Charge? | No. (May be charged for purchases
over
$1 million that are redeemed within one year.) | No. (May be charged for purchases over $1 million that are redeemed within one year.) | Yes. Payable if you redeem within six years of purchase. | Yes. Payable if you redeem within one year of purchase. |
Account Maintenance and Distribution Fees? | No. | 0.35% Distribution and Account Maintenance Fees. | 0.25%
Account Maintenance Fee.
0.75% Distribution Fee. | 0.25%
Account Maintenance Fee.
0.75% Distribution Fee. |
Conversion to Class A shares? | No. | No. | Yes, automatically after approximately 8 years. | No. |
MERCURY SELECT GROWTH FUND | 13 |
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.
Your Investment | As a %
of Offering Price | As a %
of Your Investment* | Dealer
Compensation as a % of Offering Price |
---|---|---|---|
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% |
* 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. In that case, the Investment Adviser compensates the selling dealer or other financial intermediary from its own funds. 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 Class 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.
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.
A reduced or waived sales charge on a purchase of Class I or Class A shares may apply for:
14 | MERCURY SELECT GROWTH FUND |
In addition, a waived sales charge on a purchase of Class I shares will apply to current beneficial shareholders who were also beneficial shareholders of the Fund as of the opening of business of the Fund on Monday, June 19, 2000.
Only certain investors are eligible to buy Class I shares. Your financial consultant or other financial intermediary 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 distribution and account maintenance fees of 0.35%, while Class I shares are not.
Because distribution and account maintenance 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.
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, other financial intermediary, or the Fund's Transfer Agent at 1-888-763-2260.
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 distribution plans that the Fund has adopted under Rule 12b-1. The Distributor uses the money that it receives from the deferred sales charge and
MERCURY SELECT GROWTH FUND | 15 |
the distribution fees to cover the costs of marketing, advertising and compensating the financial consultant, dealer or other financial intermediary who assists you in your decision to purchase Fund shares.
Because distribution and account maintenance 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.
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:
Year Since Purchase | Sales Charge* |
---|---|
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% |
* The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends 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:
16 | MERCURY SELECT GROWTH FUND |
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.
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.
MERCURY SELECT GROWTH FUND | 17 |
The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through your financial consultant, securities dealer, broker, investment adviser, service provider or other financial intermediary. 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 or other financial intermediary may help you with this decision. The Fund does not issue share certificates.
Because of the high cost of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts.
18 | MERCURY SELECT GROWTH FUND |
If you want to | Your choices | Information important for you to know | |
---|---|---|---|
Buy shares | First, select the share class appropriate for you | Refer to the pricing of shares table on page 13. Be sure to read this Prospectus carefully. | |
Next, determine the amount of your investment | The minimum initial investment for
the Fund is $1,000 for all accounts except: º $500 for certain fee-based programs º $100 for retirement plans (The minimums for initial investments may be waived or reduced under certain circumstances.) | ||
Have your financial consultant, securities dealer, or other financial intermediary submit your purchase order | The price of your shares is based on the next calculation
of net asset value after your order is placed. Generally, any purchase
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. However, certain financial
intermediaries may require submission of orders prior to that
time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Certain securities dealers or financial intermediaries may charge a fee in connection with a purchase. For example, the fee charged by Merrill Lynch, Pierce, Fenner & Smith Incorporated is currently $5.35. The fees charged by securities dealers or other financial intermediaries may be higher or lower. | ||
Or contact the Transfer Agent | To purchase shares directly, call the Transfer Agent at 1-888-763-2260 and request a purchase application. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this Prospectus. | ||
Add to your investment | Purchase additional shares | The
minimum investment for additional purchases is generally $100 for all
accounts except: º $50 for certain fee-based programs º $1 for retirement plans (The minimums for additional purchases may be waived under certain circumstances.) | |
Acquire additional shares through the automatic dividend reinvestment plan | All dividends are automatically reinvested without a sales charge. | ||
Participate in the automatic investment plan | You may invest a specific amount in the Fund on a periodic
basis through your securities dealer or other financial
intermediary: º The current minimum for such automatic investments is $100. The minimum may be waived or revised under certain circumstances. | ||
MERCURY SELECT GROWTH FUND | 19 |
If you want to | Your choices | Information important for you to know | |
---|---|---|---|
Transfer shares to another securities dealer or other financial intermediary | Transfer to a participating securities dealer or other financial intermediary | To transfer your shares of the Fund to another securities dealer or other financial intermediary, an authorized agreement must be in place between the Distributor and each of the transferring and receiving securities dealer or other financial intermediary. Certain shareholder services may not be available for the transferred shares. You may only purchase additional shares of funds previously owned before the transfer. All future trading of these assets must be coordinated by the receiving firm. | |
Transfer to a non-participating securities dealer or other financial intermediary | You must either: º Transfer your shares to an account with the Transfer Agent; or º Sell your shares, paying any applicable deferred sales charge. | ||
Sell your shares | Have your financial consultant, securities dealer, or other financial intermediary submit your sales order | The price
of your shares is based on the next calculation of net asset value
after your order is placed. Generally, for your redemption request to
be priced at the net asset value on the day of your request, you must
submit your request to your financial intermediary prior to that day's
close of business on the New York Stock Exchange (generally, 4:00 p.m.
Eastern time). However, certain financial intermediaries may require
submission of orders prior to that 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. Certain securities dealers or financial intermediaries may charge a fee in connection with a sale of shares. For example, the fee charged by Merrill Lynch, Pierce, Fenner & Smith Incorporated is currently $5.35. No processing fee is charged if you redeem the shares directly through the Transfer Agent. The fees charged by securities dealers or other financial intermediaries 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. A signature guarantee
will generally be required but may be waived in certain limited
circumstances. You can obtain a signature guarantee from a bank,
securities dealer, securities broker, credit union, savings
association, national securities exchange and registered securities
association. A notary public seal will not be acceptable. The Transfer
Agent will normally mail redemption proceeds within seven days
following receipt of a properly completed request. If you make a
redemption request before the Fund has collected payment for the
purchase of shares, the Fund or the Transfer Agent may delay mailing
your proceeds. This delay usually will not exceed ten days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-888-763-2260. | ||
20 | MERCURY SELECT GROWTH FUND |
If you want to | Your choices | Information important for you to know | |
---|---|---|---|
Sell shares systematically | Participate in the Fund's Systematic Withdrawal Plan | You can choose to receive systematic payments from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. You can generally arrange through your selected dealer or other financial intermediary for 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 automatically reinvested. For Class B and C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time the Plan is established. The deferred sales charge is waived for systematic sales of shares. Ask your financial consultant or other financial intermediary for details. | |
Exchange your shares | Select the fund into which you want to exchange. Be sure to read that fund's prospectus | You can exchange your shares of the
Fund for shares of other Mercury mutual funds or for shares of the
Summit Cash 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 will 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. To exercise the exchange privilege contact your financial consultant, securities dealer, or other financial intermediary or call the Transfer Agent at 1-888-763-2260. 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. | |
MERCURY SELECT GROWTH FUND | 21 |
Net Asset Value the market value in U.S. dollars of the Fund's total assets after deducting liabilities, divided by the number of shares outstanding.
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, based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining share price is the next one calculated after a purchase or redemption order is placed. Net asset value is generally calculated by valuing each security at its closing price for the day. 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.
The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses.
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 because Class B and Class C shares have higher distribution and transfer agency fees. 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.
If you participate in certain fee-based programs offered by Mercury or an affiliate of Mercury, or by selected dealers or other financial intermediaries 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
22 | MERCURY SELECT GROWTH FUND |
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 other financial intermediary.
MERCURY SELECT GROWTH FUND | 23 |
Dividends ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid.
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 or other financial intermediary that has an agreement with the Fund, contact your financial consultant or other financial intermediary 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.
"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 ordinary 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. Dividends from the Fund's ordinary income and short-term capital gains are taxable as ordinary income. Capital gain dividends received by individuals are generally taxed at different rates than ordinary income dividends. If you redeem Fund shares or exchange them for shares of another fund, any gain on the transaction may be subject to tax.
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.
24 | MERCURY SELECT GROWTH FUND |
Mercury Asset Management US, a division of Fund Asset Management, L.P. ("Mercury" or the "Investment Adviser") is the investment adviser to the Portfolio. Since all the Fund's assets will be invested in the Portfolio, investment advisory services are provided only at the Portfolio level and the Fund does not have an investment adviser. Mercury has been the manager of the underlying Portfolio's investments under the overall supervision of the Board of Trustees of the Mercury Asset Management Master Trust since the Fund was reorganized in June, 2000. Mercury and its affiliates manage portfolios with over $559 billion in assets (as of March 31, 2000) for individuals and institutions seeking investments worldwide. This amount includes assets managed for its affiliates.
The Investment Adviser is paid at the rate of 0.50% of the Portfolio's average daily net assets.
From February 1, 1997 until it was reorganized in June, 2000, the Fund operated as Turner Large Cap Growth Equity Fund, a portfolio of the TIP Funds. During that period, Turner Investment Partners, Inc. was the investment adviser to the Turner Large Cap Growth Equity Fund. For Turner Large Cap Growth Equity Fund's fiscal year ended September 30, 1999, Turner Investment Partners, Inc. waived/reimbursed expenses at the rate of .66% of the fund's average daily net assets. Pursuant to a sub-advisory agreement with the Investment Adviser, Turner Investment Partners, Inc. (the "Subadviser") is currently the Portfolio's subadviser. The Subadviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment programs. The Subadviser also ensures compliance with the Fund's investment policies and guidelines. As of March 31, 2000, the Subadviser had approximately $9.547 billion in assets under management.
The Subadviser manages the Portfolio's underlying investments through a committee of investment professionals comprised of Robert Turner, John Hammerschmidt and Mark Turner. The background of each committee member is set forth below.
Robert E. Turner, CFA, Chairman and Chief Investment Officer of the Subadviser, is lead manager of the Fund. Mr. Turner also manages other investment funds and accounts. Mr. Turner founded Turner Investment Partners, Inc. in 1990. Prior to 1990, he was Senior Investment Manager with Meridian Investment Company. He has 19 years of investment experience.
MERCURY SELECT GROWTH FUND | 25 |
John Hammerschmidt, Senior Equity Portfolio Manager of the Subadviser, is co-manager of the Fund. Mr. Hammerschmidt also manages other investment funds and accounts. Mr. Hammerschmidt joined the Subadviser in 1992. Prior to 1992, he was Vice President in Government Securities Trading at S.G. Warburg. He has 17 years of investment experience.
Mark Turner, Vice Chairman of the Subadviser, is co-manager of the Fund. Mr. Turner also manages other investment funds and accounts. Mr. Turner co-founded Turner Investment Partners, Inc. in 1990. Prior to 1990, he was Vice President and Senior Portfolio Manager with First Maryland Asset Management. He has 18 years of investment experience.
Fund Asset Management, L.P. provides administrative services to the Fund.
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 or vote the shares of the Portfolio held by it in the same proportion as the votes of all other feeder funds. If some of the other feeder funds are larger than the Fund, these other feeder funds would have more voting power than the Fund over the operations of the Portfolio.
26 | MERCURY SELECT GROWTH FUND |
As the year 2000 began, there were few problems caused by the inability of certain computer systems to tell the difference between the year 2000 and the year 1900 (commonly known as the "Year 2000 Problem"). It is still possible that some computer systems could malfunction in the future because of the Year 2000 Problem or as a result of actions taken to address the Year 2000 Problem. Fund management does not anticipate that its services or those of the Fund's other service providers will be adversely affected, but Fund management will continue to monitor the situation. If malfunctions related to the Year 2000 Problem do arise, the Fund and its investments could be negatively affected.
MERCURY SELECT GROWTH FUND | 27 |
The Financial Highlights table is intended to help you understand the Fund's past financial performance. These financial highlights present the performance of Turner Large Cap Growth Equity Fund, the Fund's predecessor, for the period from February 1, 1997 (commencement of operations) to March 31, 2000. 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). The financial highlights for the three fiscal years ended September 30, 1999 were audited by Ernst & Young LLP, independent auditors, whose report was unqualified. The report of Ernst & Young LLP, along with the Fund's financial statements, is included in the Fund's 1999 annual report to shareholders, which is available upon request. The financial highlights for the six-month period ended March 31, 2000 have not been audited.
For The
Periods Ended September 30: | 2000(2) | 1999 | 1998 | 1997(1)
|
---|---|---|---|---|
Net Asset Value, Beginning of Period | $18.90 | $13.22 | $12.28 | $10.00 |
Income From Investment Operations | ||||
Net Investment Income (Loss) | (0.05) | (0.08) | (0.01) | 0.01 |
Net Gains or Losses on Securities (both realized and unrealized) | 11.27 | 5.76 | 1.98 | 2.27 |
Total From Investment Operations | 11.22 | 5.68 | 1.97 | 2.28 |
Less Distributions | ||||
Dividends (from net investment income) | | | (0.01) | |
Distributions (from capital gains) | (1.48) | | (1.02) | |
Total Distributions | (1.48) | | (1.03) | |
Net Asset Value, End of Period | $28.64 | $18.90 | $13.22 | $12.28 |
Total Return+ | 61.22% | 42.97% | 17.26% | 22.8% |
Ratios/Supplemental Data | ||||
Net Assets, End of Period (000) | $45,629 | $8,459 | $4,328 | $701 |
Ratio of Expenses to Average Net Assets (including waivers and reimbursements) | 1.00% | 1.00% | 1.00% | 1.00%* |
Ratio of Net Income (Loss) to Average Net Assets | (0.62)% | (0.47)% | (0.10)% | 0.20%* |
Ratio of Expenses to Average Net Assets (excluding waivers and reimbursements) | 1.27% | 2.41% | 7.70% | 26.45%* |
Ratio of Investment Income (Loss) to Average Net Assets (exclude waivers and reimbursements) | (0.89)% | (1.88)% | (6.80)% | (25.25)%* |
Portfolio Turnover Rate | 307.02% | 370.71% | 234.93% | 346.47%* |
* Annualized
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on February 1, 1997.
(2) For the six-month period ended March 31, 2000. All ratios for the period have been annualized.
28 | MERCURY SELECT GROWTH FUND |
[This page intentionally left blank]
MERCURY SELECT GROWTH FUND | 29 |
[This page intentionally left blank]
30 | MERCURY SELECT GROWTH FUND |
Fund
Mercury Select Growth Fund
of
Mercury Asset Management Funds, Inc.
P.O. Box 9011
Princeton,
New Jersey 08543-9011
(888-763-2260)
Investment Adviser
Mercury Asset Management US,
a
division of Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Subadviser
Turner Investment Partners, Inc.
1235 Westlakes Drive, Suite 350
Berwyn, PA 19312
Administrator
Fund Asset Management, L.P.
800
Scudders Mill Road
Plainsboro, New Jersey 08536
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville,
Florida 32246-6484
(888-763-2260)
Mailing Address:
P.O. Box
45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
Princeton Forrestal Village
116-300 Village Boulevard
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
The Chrysler Building
405 Lexington Avenue
New York,
New York 10174
MERCURY SELECT GROWTH FUND |
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 other financial intermediary, 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 other financial intermediary, or the Transfer Agent at 1-888-763-2260.
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 45289, Jacksonville, Florida 32232-5289 or by calling 1-888-763-2260.
Contact your financial consultant, other financial intermediary, 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 1-202-942-8090 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 electronic request at the following e-mail address: [email protected], or writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.
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 IN THIS PROSPECTUS.
Investment Company Act File #811-08797.
CODE #19104-0600
© Mercury Asset Management
US
GRAPHIC OMITTED
Prospectus o June 14, 2000
STATEMENT OF ADDITIONAL INFORMATION
P.O. Box 9011, Princeton, New Jersey
08543-9011 º Phone No. (888) 763-2260
Mercury Select Growth 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 capital appreciation. The Fund seeks to achieve this objective through investments primarily in a diversified portfolio of common stocks and other equity securities of very large cap companies that are traded in the U.S. securities markets that Fund management believes have strong earnings growth potential. The Fund will seek to achieve its investment objective by investing all of its assets in Mercury Master Select Growth 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 realized.
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 June 14, 2000 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling the Fund at 1-888-763-2260 or your financial consultant or other financial intermediary, or by writing to the address listed above. The Prospectus is incorporated by reference into the Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Turner Large Cap Growth Equity Fund's financial statements are incorporated in this Statement of Additional Information by reference to its 1999 annual and March 31, 2000 semi-annual reports to shareholders. You may request copies of the annual and semi-annual reports at no charge by calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m. on any business day.
The date of this Statement of
Additional Information is
June
14, 2000
(This page intentionally left blank.) The investment objective of the Fund is capital appreciation. This
is a fundamental policy and cannot be changed without shareholder
approval. The Fund tries to achieve its
objective
by investing
primarily (and, under normal conditions, at least 65% of its total
assets) in a diversified portfolio of common stocks and other equity
securities of companies whose total market capitalization is at least
$10 billion that are traded in the U.S. securities markets that Fund
management believes have strong earnings growth
potential. The Fund may also purchase securities of mid
and large cap U.S. companies (companies whose total market
capitalization is at least $1 billion and $5 billion, respectively)
that Fund management believes offer strong earnings growth
potential.
The Fund seeks to purchase securities that are
well diversified across economic sectors. The Russell
Top 200
Growth Index is the Fund's current
benchmark. The Fund will only purchase securities that
are traded on registered exchanges or the over-the-counter market in
the United States. The
Fund
may also purchase shares of other investment companies and foreign
securities. 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 is classified as a diversified Fund under the
Investment Company Act of 1940, as amended (the "Investment Company
Act").
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. In
addition, for simplicity, although Mercury Asset Management US (the
"Investment Adviser" or "Mercury US"), a division of Fund
Asset Management, L.P. ("FAM" or the "Administrator") is
the Fund's investment adviser, this Statement of Additional
Information uses the term "Investment Adviser" to include both
Mercury US and the Subadviser, unless the context requires otherwise.
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 realized.
Due to its investment strategy, the Fund may engage in trading for
short-term gains. The Fund 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 Fund may invest up to 10% of its total assets in the
securities of non-U.S. issuers in the form of American Depositary
Receipts ("ADRs"). 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. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets. The Fund may
invest in unsponsored ADRs. The issuers of unsponsored ADRs 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
"About the Details 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.
Mid Cap Companies. The Fund may invest in common
stocks and other equity securities of U.S. companies with medium market
capitalizations (i.e.,
between
$1
billion and $5 billion)
that
Fund management believes have strong earnings growth potential.
Medium capitalization companies may be more vulnerable to adverse
business or economic events than larger, more established companies. In
particular, these mid-size companies may have limited product lines,
markets and financial resources, and may depend upon a relatively small
management group.
2 Foreign Security Risks. The Fund may invest in
securities of foreign issuers with a strong U.S. trading presence, as
well as in sponsored and unsponsored ADRs. As a result, the Fund's
investments may include companies organized, traded or having
substantial operations outside the U.S. This may expose the Fund to
risks associated with foreign investments. Foreign 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 may invest in companies that issue
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 investments may be subject to non-U.S. withholding
taxes. Although the Fund may invest in securities denominated in
currencies other than the U.S. dollar, it has no present intention to
do so.
Convertible Securities. Although the Fund may
invest in convertible securities, it has no present intention to do so.
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
relative to its credit quality and
the
potential capital appreciation that is offered by the underlying common
stock, among other things.
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
United
States
dollars,
the underlying equity securities may be quoted in the currency of the
country where the issuer is domiciled. With respect to
convertible
securities
denominated in
a currency different from that of the underlying equity
securities,
the conversion
price may be based on a fixed exchange rate established at the time the
security is issued. As a result, fluctuations in the exchange rate
between the currency in which the debt security is denominated and the
currency in which the share price is quoted will affect the value of
the convertible security.
Apart from currency considerations, the value of
convertible
securities
is influenced
by both the yield of nonconvertible securities of
comparable issuers and by the value of the underlying common stock. The
value of a convertible security viewed without regard to its conversion
feature
(i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." To the extent interest rates change, the
investment value of the convertible security typically will fluctuate.
However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market
value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates
directly with the price of the underlying common stock. If, because of
a low price of the common stock the conversion value is substantially
below the investment value of the convertible security, the price of
the convertible security is governed principally by its investment
value.
3 To the extent the conversion value of a convertible security
increases to a point that approximates or exceeds its investment value,
the price of the convertible security will be influenced principally by
its conversion value. A convertible security will sell at a premium
over the conversion value to the extent investors place value on the
right to acquire the underlying common stock while holding a
fixed-income security.
Holders of
convertible securities generally have a claim on the assets of the
issuer prior to the common stockholders but
may be subordinated to other debt securities of the same issuer. A
convertible security may be subject to
redemption at the option of the issuer at a price established in the
charter provision, indenture or other
governing instrument pursuant to which the convertible security was
issued. If a convertible security held by
the Fund is called for redemption, the Fund will be required to redeem
the security, convert it into the underlying
common stock or sell it to a third party. Certain convertible
debt securities may provide a put option to
the holder which entitles the holder to cause the security to
be redeemed by the issuer at a premium over
the stated principal amount of the debt security under
certain circumstances.
Debt
Securities. The Fund may hold convertible
and nonconvertible debt securities and preferred securities. The Fund
has established no rating criteria for the debt securities in which it
may invest and such securities may
not be rated at all for
creditworthiness.
In purchasing such securities, the Fund will rely on the Investment
Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment
Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and
regulatory matters.
Junk Bonds. Junk bonds are debt securities that
are rated below investment grade by the major
rating agencies or are unrated securities that Fund
management believes are of comparable quality.
Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high
risk investments that may cause income and principal
losses for the Fund. The major risks in junk bond
investments include the following:
Junk bonds may be issued by less creditworthy companies. These
securities are vulnerable to adverse changes
in the issuer's industry and to general economic conditions. Issuers
of junk bonds may be unable to meet their
interest or principal payment obligations because of an economic
downturn, specific issuer developments or
the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers
of investment grade bonds. If the issuer experiences financial stress,
it may be unable to meet its debt
obligations. The issuer's ability to pay its debt obligations also may
be lessened by specific issuer developments,
or the unavailability of additional
financing.
Junk bonds are frequently ranked junior to claims by other
creditors. If the issuer cannot meet its
obligations, the senior obligations are generally paid
off before the junior obligations.
Junk bonds frequently have redemption features that permit an
issuer to repurchase the security from the
Fund before it matures. If an issuer redeems the junk bonds, the Fund
may have to invest the proceeds in bonds
with lower yields and may lose
income.
Prices of junk bonds are subject to extreme price fluctuations.
Negative economic developments may have a
greater impact on the prices of junk bonds than on other higher rated
fixed income
securities.
Junk bonds may be less liquid than higher rated fixed income
securities even under normal economic
conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in
the prices quoted for junk bonds by the dealers.
Because they are less liquid, judgment may play a greater
role in valuing certain of the Fund's portfolio
securities than in the case of securities trading in a more
liquid market.
The Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new
terms with a defaulting issuer.
4 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 Fund will not purchase securities while its borrowings
exceed 5% of its assets.
Although the Fund may use leverage for purposes other than for
clearance of securities transactions and to provide initial and
variation margin payments in connection with transactions involving
futures contracts and options on futures, it has no present intention
to do so. 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.
Certain types of borrowings by the Fund may result in the Fund
being subject to covenants in credit
agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not
anticipated that observance of such covenants would
impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's
investment objectives and policies. However, a breach of
any such covenants not cured within the specified cure
period may result in acceleration of outstanding
indebtedness and require the Fund to dispose of
portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment
Adviser, provided that the terms of such
borrowings are no less favorable than those available from comparable
sources of funds in the
marketplace.
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
not
registered ("restricted
securities
")
under the Securities Act of 1933, as amended (the "Securities
Act").
Restricted securities may be sold in private
placement transactions between issuers and their purchasers and may be
neither listed on an exchange nor traded in other established markets.
In many cases, privately placed securities may
not be
freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. As a result of the absence
of a public trading market, privately placed securities may
be less liquid and more difficult to value than publicly
traded securities. To the extent that privately placed securities may
be resold in privately negotiated transactions, the prices realized
from the sales, due to illiquidity, could be less than
5 those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the Fund
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include
investments in smaller, less
seasoned
issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct
portfolio transactions in such securities.
144A Securities. The Fund may purchase
restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. The
Board of Directors has determined to treat as liquid Rule 144A
securities that are either
freely tradable in their
primary markets offshore or
have been
determined to be liquid in accordance with the policies and procedures
adopted by the Board of Directors. The Board of Directors
has adopted guidelines and delegated to the
Investment Adviser
the daily function of determining and monitoring liquidity
of restricted securities. The Board of Directors, however, will retain
sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance
exactly how this market for restricted securities sold and offered
under Rule 144A will
continue to develop,
the Board of Directors will carefully monitor
the
Fund's investments in these securities. This investment
practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities. Securities Lending. The Fund may lend securities
with a value not exceeding 33 1/3 % of its total
assets to banks, brokers and other financial
institutions.
In return, the Fund receives collateral
in cash or securities issued or guaranteed by the U.S.
Government which will be maintained at all times in
an
amount equal to at least 100% of the current market value of the
loaned securities
.
During the period of such a loan, the
Fund typically receives the income on both the loaned securities and
the collateral and thereby increases its yield. In certain
circumstances, the
Fund may receive a flat fee for its
loans.
Such
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
net
assets in repurchase
agreements maturing in more than seven days (together with other
illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. The Fund will require the
seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term
of the repurchase agreement. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price.
Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund shall
be dependent upon intervening fluctuations of the market value of such
6 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, Delayed Delivery Securities
and Forward Commitments. The Fund may purchase or sell securities
that it is entitled to receive on a when issued basis. The Fund may
also purchase or sell securities on a delayed delivery basis. The Fund
may also purchase or sell securities through a forward commitment.
These transactions involve the purchase or sale of securities by the
Fund at an established price with payment and delivery taking place in
the future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering
into the transaction. The Fund has not established any limit on the
percentage of its assets that may be committed in connection with these
transactions. When the Fund
purchases
securities in
these transactions, the Fund
segregates
an 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 that a security purchased or sold
through a forward commitment will be delivered. The value of securities
in these transactions on the delivery date may be more or less than the
Fund's purchase price. The Fund may bear the risk of a decline in the
value of the security in these transactions and may not benefit from an
appreciation in the value of the security during the commitment period.
The Fund may use instruments referred to as Derivatives.
Derivatives are financial instruments the
value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure
of value or rates, such as the Standard & Poor's 500
Index or the prime lending rate). Derivatives allow
the Fund to increase or decrease the level of risk to
which the Fund is exposed more quickly and
efficiently than transactions in other types of
instruments.
Hedging. The Fund may use Derivatives for
hedging purposes. Hedging is a strategy in which a
Derivative is used to offset the risk that other fund
holdings may decrease in value. Losses on the other
investment may be substantially reduced by gains on a
Derivative that reacts in an opposite manner to
market movements. While hedging can reduce losses, it
can also reduce or eliminate gains if the market
moves in a different manner than anticipated by the
Fund or if the cost of the Derivative outweighs the
benefit of the hedge. Hedging also involves the risk
that changes in the value of the Derivative will not
match those of the holdings being hedged as expected by
the Fund, in which case any losses on the
holdings being hedged may not be
reduced.
The Fund may use Derivative instruments and trading strategies
including the following:
Indexed and Inverse Securities. The Fund may
invest in securities the potential return of which is
based on an index. As an illustration, the Fund may
invest in a debt security that pays interest based on
the current value of an interest rate index, such as
the prime rate. The Fund may also invest in a debt
security which returns principal at maturity based on
the level 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 (that is, a security the value of which will move in the opposite
direction of changes to 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. Indexed and inverse securities involve
credit
7 risk, and certain indexed and inverse
securities may involve currency risk, leverage risk and liquidity
risk. The Fund may invest in indexed and
inverse securities for hedging purposes only. When used for
hedging purposes, indexed and inverse
securities involve correlation
risk.
Purchasing Put Options. The Fund may purchase
put options on securities held in its portfolio or
on securities or interest rate indices which are
correlated with securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up
front payment (the "option premium") the
Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price
(the "exercise price")
on or before a specified date (the "expiration
date"), in the case of an option on
securities, or to receive from another party a payment
based on the amount a specified securities index
declines below a specified level on or before the
expiration date, in the case of an option on a securities
index. The purchase of a put option limits the Fund's
risk of loss in the event of a decline in the market
value of the portfolio holdings underlying the put
option prior to the option's expiration date. If the
market value of the portfolio holdings associated with
the put option increases rather than decreases,
however, the Fund will lose the option premium and will
consequently realize a lower return on the
portfolio holdings than would have been realized
without the purchase of the put. Purchasing a put option
may involve correlation risk, and may also involve
liquidity and credit risk.
Purchasing Call Options. The Fund may also purchase
call options on securities it intends to purchase
or securities or interest rate indices, which are
correlated with 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. Purchasing a call option involves
correlation risk, and may also involve liquidity and credit
risk.
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 Call Options. The Fund may write (i.e.,
sell) call options on securities held in its portfolio
or securities indices the performance of which
correlates with securities held in its portfolio. When the
Fund writes a call option, in return for an option
premium, the Fund gives another party the right to buy
specified securities owned by the Fund at the exercise
price on or before the expiration date, in the case
of an option on securities, or agrees to pay to another
party an amount based on any gain in a specified
securities index beyond a specified level on or before
the expiration date, in the case of an option on a
securities index. 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.
Writing a call option may involve correlation risk.
Writing Put Options. 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. In the event the party
to which the Fund has written an option fails to exercise its
rights under the option because the value of
the underlying securities is greater than the exercise price, the
Fund
8 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"). Writing a put option may involve
substantial leverage risk.
The Fund is also authorized to sell put or call options in
connection with closing out call or put
options it has previously
purchased.
Other than with respect to closing transactions, the Fund will
write only call or put options that are
"covered." A call or 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 Derivatives" below. A call option
will also 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 which 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 credit risk. OTC options
also involve greater liquidity risk. See "Additional Risk Factors
of OTC Transactions; Limitations on the Use
of OTC Derivatives"
below.
The Fund may engage in transactions in futures and options
thereon. Futures are standardized,
exchange-traded contracts which obligate a purchaser to
take delivery, and a seller to make delivery, of
a specific amount of an asset 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.
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. Futures involve
substantial leverage
risk.
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.
9 The Fund will limit transactions in futures and options on futures
to financial futures contracts (i.e.,
contracts for which the underlying asset is a currency
or securities or interest rate index) purchased or sold
for hedging purposes (including anticipatory hedges).
The Fund will further limit transactions in futures
and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity
pool" under regulations of the Commodity
Futures Trading Commission.
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 in circumstances in which direct investment is restricted by
local law or is otherwise
impractical.
The Fund will enter into an equity swap transaction only if,
immediately following the time the Fund
enters into the transaction, the aggregate notional
principal amount of equity swap transactions to which
the Fund is a party would not exceed 5% of the Fund's
net assets.
Swap agreements entail the risk that a party will default on its
payment obligations to the Fund thereunder.
The Fund will seek to lessen the risk to some extent by entering into a
transaction only if the counterparty meets
the current credit requirement for OTC option counterparties. Swap
agreements also bear the risk that the Fund
will not be able to meet its obligations to the counterparty. The Fund,
however, will deposit in a segregated
account with its custodian, liquid securities or cash or cash
equivalents or other assets permitted to be
so segregated by the Commission in an amount equal to or greater than
the market value of the liabilities under
the swap agreement or the amount it would cost the Fund initially to
make an equivalent direct investment, plus
or minus any amount the Fund is obligated to pay or is to
receive under the swap
agreement.
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. 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
forward 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. Forward foreign
exchange transactions involve substantial currency
risk, and also involve credit
and liquidity
risk.
Currency Futures. 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.
Currency futures involve substantial currency risk, and also involve
leverage risk.
Currency Options. 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,
10
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 engage in
transactions in options on currencies either on
exchanges or OTC markets. See "Types of Options" above
and "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives" below.
Currency options involve substantial currency risk, and
may also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will
not speculate in Currency Instruments. Accordingly,
the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns
(including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which
are denominated in such currency. 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 demonstrable 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.
Risk Factors in Hedging Foreign
Currency. Hedging transactions involving Currency
Instruments involve substantial
risks, including
correlation risk. While the Fund's use of Currency Instruments to
effect hedging strategies is intended to
reduce the volatility of the net asset value of the Fund's shares, the
net asset value of the Fund's shares will
fluctuate. Moreover, although Currency Instruments will be used
with the intention of hedging against
adverse currency movements, transactions in Currency
Instruments involve the risk that
anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be
ineffective. To the extent that the Fund hedges against anticipated
currency movements which 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 and it is not possible to engage
in effective foreign currency
hedging.
Derivatives are volatile and involve significant risks,
including:
º Credit risk the risk that the counterparty on a
Derivative transaction will be unable to honor
its financial obligation to the
Fund.
º 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.
º Leverage risk the risk associated with certain
types of investments or trading strategies (such
as borrowing money to increase the amount of
investments) that relatively small market
movements may result in large changes in the value of
an investment. Certain investments or
trading strategies that involve leverage can result in
losses that greatly exceed the amount
originally invested.
º 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.
Use of Derivatives for hedging purposes involves correlation risk.
If the value of the Derivative moves more or
less than the value of the hedged instruments, the Fund will experience
a gain or loss which will not be completely
offset by movements in the value of the hedged
instruments.
The Fund intends to enter into transactions involving Derivatives
only if there appears to be a liquid
secondary market for such instruments or, in the case
of illiquid instruments traded in OTC transactions,
11
such instruments satisfy the criteria set forth below
under "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives." However,
there can be no assurance that, at any specific
time, either a liquid secondary market will exist for a
Derivative or the Fund will otherwise be able to sell
such instrument at an acceptable price. It may
therefore not be possible to close a position in a
Derivative without incurring substantial
losses, if at all.
Certain transactions in Derivatives (such as futures transactions
or sales of put options) involve substantial
leverage risk and may expose the Fund to potential losses, which exceed
the amount originally invested by the Fund.
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 marked-to-market basis, to the transaction
(as calculated pursuant to requirements of the Commission).
Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to
loss.
Certain Derivatives traded in OTC markets, including indexed
securities, swaps and OTC options, involve
substantial liquidity risk. 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 Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and
generally do not require payment of margin, to the extent that the Fund
has unrealized gains in such instruments or
has deposited collateral with its counterparty, the Fund is at risk
that its counterparty will become bankrupt
or otherwise fail to honor its obligations. The Fund will attempt
to minimize the risk that a counterparty
will become bankrupt or otherwise fail to honor its obligations
by engaging in transactions in Derivatives
traded in OTC markets only with financial institutions which
have substantial capital or which have
provided the Fund with a third-party guaranty or other
credit
enhancement.
Other Special Considerations. The Fund may
invest without limit in cash, repurchase agreements and short-term
obligations when the Fund believes it is advisable to do so (on a
temporary defensive basis). Short-term investments and temporary
defensive positions may limit the potential for growth in the value of
shares of the Fund.
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).
12 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 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:
13 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 transactions,
the sum of the market value of OTC options currently outstanding which
are held by the Fund or Portfolio, the market value of the underlying
securities covered by OTC call options currently outstanding which were
sold by the Fund or Portfolio and margin deposits on the Fund or
Portfolio's existing OTC options on futures contracts exceed 15% of
the net assets of the Fund or Portfolio, taken at market value,
together with all other assets of the Fund or Portfolio which are
illiquid or are not otherwise readily marketable. However, if an OTC
option is sold by the Fund or Portfolio to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York
and if the Fund or Portfolio has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price,
then the Fund or Portfolio will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e.,
current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is
typically a formula price that is generally based on a multiple of the
premium received for the option, plus the amount by which the option is
"in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund or Portfolio and may be amended by the
Trustees or the Directors without the approval of the shareholders.
However, the Directors or Trustees will not change or modify this
policy prior to the change or modification by the Commission staff of
its position.
Portfolio securities of the Portfolio and the Fund generally may
not be purchased from, sold or loaned to the 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,
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.
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 14 acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. A
high rate of portfolio turnover results in correspondingly higher
brokerage commission expenses and may also result in negative tax
consequences, such as an increase in capital gains dividends or in
ordinary income dividends.
For the fiscal years ended September 30, 1997, 1998, and 1999
the Fund's portfolio turnover rates were as follows: 346.47%,
234.93% and 370.71%.
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 (53) 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 (59) 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
(60)
Director(2)(3) 410 Uris Hall, Columbia University, New
York, New York 10027. Professor of Finance and Economics at the
Columbia University Graduate School of Business since 1991; Chairman of
Outward Bound USA since 1997; Chairman of Wave Hill, Inc. since 1980.
JAMES T. FLYNN (60) Director(2)(3)
340 East 72nd Street, New York, New York 10021. Chief Financial Officer
of J.P. Morgan & Co. Inc. from 1990 to 1995 and an employee of J.P.
Morgan in various capacities from 1967 to 1995.
W. CARL KESTER (48) Director(2)(3)
Harvard Business School, Morgan Hall 393, Soldiers Field, Boston,
Massachusetts 02163. Industrial Bank of Japan Professor of Finance,
Senior Associate Dean and Chairman of the MBA Program of Harvard
University Graduate School of Business Administration since 1999; James
R. Williston Professor of Business Administration of Harvard University
Graduate School of Business from 1997 to 1999; MBA Class of 1958
Professor of Business Administration of Harvard University Graduate
School of Business Administration from 1981 to 1997; Independent
Consultant since 1978.
KAREN P. ROBARDS (50) Director(2)(3)
Robards & Company, 173 Riverside Drive, New York, New York 10024.
President of Robards & Company, a financial advisory firm, for more
than five years; Director of Enable Medical Corp. since 1996; Director
of Cine Muse Inc. since 1996; Director of the Cooke Center for Learning
and Development, a not-for-profit organization, since 1987.
PETER JOHN GIBBS (42) Senior Vice
President(1)(2) 33 King William Street, London, EC4R 9AS,
England. Chairman and Chief Executive Officer of Mercury Asset
Management International Ltd since 1998; Director of Mercury Asset
Management Ltd. since 1993; Director of Mercury Asset Management
International Channel Islands Ltd. since 1997.
DONALD C. BURKE
(40)
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. 15 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
(40)
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.
As of February 15, 2000 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.
The Corporation and the Trust pay each non-interested
Director/Trustee, for service to the Fund and the Portfolio, a fee of
$3,000 per year plus $500 per Board meeting attended. The Corporation
and the Trust also compensate each member of the Audit and Nominating
Committee (the "Committee"), which consists of all of the
non-interested Directors/Trustees, at a rate of $1,000 per year. The
Corporation and the Trust reimburse each non-interested
Director/Trustee for his out-of-pocket expenses relating to attendance
at Board and Committee meetings.
The following table sets forth the aggregate compensation the
Corporation and the Trust expect to pay to the non-interested
Directors/Trustees for their first full fiscal year and the aggregate
compensation paid by all investment companies advised by the Investment
Adviser or its affiliates ("Mercury
and Affiliates
Advised Funds") to the non-interested Directors/Trustees for the
calendar year ending December 31, 1999.
The Directors of the Corporation and the Trustees of
the Trust may purchase Class I shares of the Fund at net asset value.
See "Purchase of Shares Reduced Initial Sales Charges Purchase
Privileges of Certain Persons."
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 16 fiscal years ended September 30, 1997, 1998,
and 1999 the Fund paid SEI Investments Mutual Funds Services (the
predecessor Fund's administrator) the following administrative fees
(net of waivers): $3,057, $31,129 and $65,307.
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. Certain expenses
will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See
"Purchase of Shares Distribution Plans." 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.
Investment
Advisory Services
and Fees. 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 US as Investment Adviser (the "Investment
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 0.50% of the average daily net assets of the Portfolio.
For the fiscal years ended September 30, 1997, 1998 and 1999, Turner
Investment Partners, Inc.
waived advisory
fees of $2,281, $15,530 and $56,778, respectively. Additionally, for
the fiscal years ended September 30, 1997, 1998 and 1999, the Fund
was reimbursed other expenses by Turner Investment
Partners, Inc.
of: $28,215, $79,930 and
$49,999.
Payment of Trust
Expenses. The
Investment Advisory Agreement obligates
the Investment Adviser to provide investment advisory services and to
pay, or cause an affiliate to pay, for maintaining its staff and
personnel and to provide office space, facilities and necessary
personnel for the Trust. The Investment Adviser is also obligated to
pay, or cause an affiliate to pay, the fees of all Officers, Trustees
and Directors who are affiliated persons of the Investment Adviser or
any sub-adviser or of an affiliate of the Investment Adviser or any
sub-adviser. The Trust pays, or causes to be paid, all other expenses
incurred in the operation of the Portfolio and the Trust (except to the
extent paid by the Distributor), including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies,
shareholder reports, 17 copies of the Registration Statement, charges of
the custodian, any sub-custodian and the transfer agent, expenses of
portfolio transactions, expenses of redemption of shares, Commission
fees, expenses of registering the shares under Federal, state or
non-U.S. laws, fees and actual out-of-pocket expenses of non-interested
Trustees, accounting and pricing costs (including the daily calculation
of net asset value), insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Trust or the Portfolio. Accounting services are
provided to the Trust by the Investment Adviser or an affiliate of the
Investment Adviser, and the Trust reimburses the Investment Adviser or
an affiliate of the Investment Adviser for its costs in connection with
such services.
Mercury US, a division of FAM, is located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536. FAM is a wholly owned subsidiary of
ML & Co., a financial services holding company and the parent of
Merrill Lynch. ML & Co. and Princeton Services, Inc., the partners of
FAM, are "controlling persons" of FAM as defined under the
Investment Company Act because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
Mercury US has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Turner Investment
Partners, Inc.
with respect to the
Portfolio, pursuant to which Turner Investment
Partners, Inc.
manages the Portfolio to the
extent not managed by Mercury US. Mercury US will pay Turner Investment
Partners, Inc.
a fee in an amount to be
determined from time to time by Mercury US and Turner Investment
Partners but in no event in excess of the amount that Mercury US
actually receives for providing services to the Trust pursuant to the
Investment Advisory Agreement.
Turner Investment Partners, Inc.,
1235
Westlakes Drive, Suite 350, Berwyn, PA 19312, is a professional
investment management firm founded in March 1990. Robert E. Turner
is the Chairman and controlling shareholder of Turner Investment
Partners, Inc.
As
of December 31, 1999,
Turner Investment
Partners, Inc.
had discretionary management
authority with respect to approximately $5.61 billion of assets. Turner
Investment Partners, Inc.
has provided
investment advisory services to investment companies since 1992.
Duration and Termination. Unless earlier
terminated as described below, the Investment Advisory Agreement and
Sub-Advisory Agreement will each continue in effect for two years from
its effective date. Thereafter, they will remain in effect from year to
year if approved annually (a) by the Board of Trustees of the Trust or
by a majority of the outstanding shares of the Portfolio and (b) by a
majority of the Trustees of the Trust who are not parties to the
Investment Advisory Agreement or Sub-Advisory Agreement or interested
persons (as defined in the Investment Company Act) of any such party.
The Investment Advisory Agreement and Sub-Advisory Agreement are not
assignable and will automatically terminate in the event of its
assignment. In addition, such contracts may be terminated with respect
to the Portfolio by the vote of a majority of the outstanding voting
securities of such Portfolio, or by the Investment Adviser without
penalty on 60 days' written notice to the other party.
Transfer Agency Services. Financial Data
Services, Inc. (the "Transfer Agent"), a 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"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the
Transfer Agent receives annual fee ranging 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. The Transfer Agent is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. Additionally, a $0.20
monthly closed account charge will be assessed on all accounts which
close during the calendar year. Application of this fee will commence
the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the
Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. 18 Distribution Expenses. The Corporation has
entered into a distribution agreement with the Distributor with respect
to each class of Fund shares in connection with the continuous 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 financial
intermediaries and potential 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 Investment Advisory Agreement described
above.
The Board of Trustees of the Trust, the Board of Directors of the
Corporation, the Investment Adviser, the Subadviser, and the
Distributor (each, a "Rule 17j-1 Organization") 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 Rule 17j-1
Organizations and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.
The Codes require that all employees of the Rule 17j-1
Organizations pre-clear any personal securities investment (with
limited exceptions, such as government securities). The preclearance
requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of
the Rule 17j-1 Organizations include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition against
profiting on short term trading in securities. In addition, no employee
may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by the Rule
17j-1 Organization. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel
of the Fund within periods of trading by the Fund in the same (or
equivalent) securities.
Reference is made to "Account Choices How to Buy, Sell,
Transfer and Exchange Shares" in the Prospectus.
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 bears the expenses of the ongoing distribution and
the account maintenance fees and 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, as applicable, 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 Fund offers its shares at a public offering price equal to the
next determined net asset value per share plus any sales charge
application to the class of shares selected by the investor. The
applicable offering price for purchase orders is based upon the net
asset value of the Fund next determined after the order is placed.
Generally any purchase orders placed prior to the close of business on
the New York 19 Stock Exchange (the "NYSE") (generally 4:00
p.m., Eastern time) which includes orders placed after the
determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value on the day the
order is placed. However, certain financial intermediaries may require
submission of orders prior to that time.
The Fund or the Distributor may suspend the continuous offering of
the Fund's shares of any class at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the Fund or
the Distributor. Neither the Distributor nor the dealers or other
financial intermediaries are permitted to withhold placing orders to
benefit themselves by a price change. Certain securities dealers or
other financial intermediaries may charge a fee to process a sale of
shares. For example, the fee charged by Merrill Lynch is currently
$5.35. Purchase made directly through the Transfer Agent are not
subject to the processing fee.
Investors who prefer an initial sales charge alternative may elect
to purchase Class A shares or, if an eligible investor, Class I shares.
Investors choosing the initial sales charge alternative who are
eligible to purchase Class I shares should purchase Class I shares
rather than Class A shares, because there are distribution and account
maintenance fees imposed on Class A shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive, because similar sales
charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time also
may elect to purchase Class I or Class A shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class
B or Class C shares may exceed the initial sales charges, and, in the
case of Class A shares, the distribution and account maintenance fees.
Although some investors who previously purchased Class I shares may no
longer be eligible to purchase Class I shares of other Mercury Funds,
those previously purchased Class I shares, together with Class A, Class
B and Class C share holdings, will count toward a right of accumulation
which may qualify the investor for a reduced initial sales charge on
new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class
B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The
ongoing Class A distribution and account maintenance fees will cause
Class A shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class I shares.
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.
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 the
Investment Adviser or any of its affiliates. Also eligible to purchase
Class I shares at net asset value are participants in certain
investment 20 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, selected dealers,
brokers, investment advisers, service providers and other financial
intermediaries.
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 Funds, including the Corporation, and to employees
of certain selected dealers or other financial intermediaries. Class I
shares may also be offered at net asset value to certain accounts over
which Mercury or an affiliate exercises investment discretion.
The Distributor may reallow discounts to selected dealers or other
financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such
dealers or other financial intermediaries. Since securities dealers or
other financial intermediaries 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.
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 to obtain such investments.
Reinvested Dividends. No initial sales charges
are imposed upon Class I and Class A shares issued as a result of the
automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges are
applicable through a right of accumulation under which eligible
investors are permitted to purchase shares of the Fund subject to an
initial sales charge at the offering price applicable to the total of
(a) the public offering price of the shares then being purchased plus
(b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of 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 or other financial intermediary, 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 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 the Investment Adviser 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 21 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. Members
of the Board of Directors of the Corporation and Trustees of the Trust
and of other investment companies advised by the Investment Adviser 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 US, FAM and certain other
entities directly or indirectly wholly owned and controlled by ML &
Co.), employees of certain selected dealers or other financial
intermediaries, 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. The Fund realizes economies of scale and reduction of
sales-related expenses by virtue of the familiarity of these persons
with the Fund. Employees and directors or trustees wishing to purchase
shares of the Fund must satisfy the Fund's suitability standards.
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.
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. Class A shares may be offered at net asset value in
connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company.
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 contingent
deferred sales charge ("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 or
other financial intermediary.
Purchases Through Certain Financial
Intermediaries. Reduced sales charges may be applicable for
purchases of Class I or Class A shares of the Fund through certain
financial advisers, selected dealers, brokers, investment advisers,
service providers and other financial intermediaries.
A waived sales charge on a purchase of Class I shares will apply
to current beneficial shareholders who were also beneficial
shareholders of the Fund
as of the
opening of business of the Fund on Monday, June 19,
2000.
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 Class 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
22 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 and other financial
intermediaries that have agreements with Mercury or its affiliates;
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.
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 or other
financial intermediaries 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 intermediaries for
selling Class B and Class C shares. 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 Class C Shares Deferred Sales Charge Options," Class
B shares of equity Mercury mutual funds
convert automatically to Class A shares approximately eight
years
23 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 Conversion Date, without the imposition of any sales charge, 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.
The Distributor compensates financial intermediaries for selling
Class B and Class C shares at the time
of purchase from its own funds. Proceeds from 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
or other financial intermediaries) 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
intermediaries for selling Class B and Class C shares. 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 "Purchase of Shares
Distribution Plans" above. Impositions
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 "Purchase of Shares Limitations on
the Payment of Deferred Sales Charges"
above.
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 the Class A shares provides that the
Fund pays the Distributor distribution and account maintenance fees
relating to the shares of the relevant class, accrued daily and paid
monthly, at the annual rate of 0.35% of the average daily net assets
of the Fund attributable to shares of the relevant class in order to
compensate the Distributor for providing, or arranging for the
provision of, distribution and account maintenance activities. The
Distribution Plan for each of the 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 for providing, or arranging for the provision of, 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 for providing, or arranging for the
provision of, shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments
to financial intermediaries 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 financial intermediaries without the assessment of an
initial sales charge and at the same time permit the Distributor to
compensate financial intermediaries in connection with the sale of the
Class B and Class C shares. In this regard, the purpose and function of
the ongoing 24 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.
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
Board of Directors of the Corporation for their consideration in
connection with their deliberations as to the continuance of the Class
A, 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 or other financial intermediaries in connection with
the Class A, Class B and Class C shares, and there is no assurance that
the Board of 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 Board of Directors of the
Corporation 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 "Account Choices How to Buy, Sell,
Transfer and Exchange Shares" in the Prospectus.
In their consideration of each Distribution Plan, the Board of
Directors of the Corporation 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 non-interested
Directors shall be committed to the discretion of the non-interested
Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested 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 non-interested 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
non-interested 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.
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 or the CDSC borne by the Class A, 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 25 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 A, 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).
Reference is made to "Account Choices How to Buy, Sell,
Transfer and Exchange Shares" in the Prospectus.
The Fund is required to redeem for cash all shares of the Fund
upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial
receipt of proper notice of redemption. Except for any CDSC that may be
applicable, there will be no charge for redemption if the redemption
request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to
any such redemption may be suspended for more than seven days only for
periods during which trading on 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 market value of
the securities held by the Fund at such time.
Because of the high cost of maintaining smaller shareholder
accounts, the Fund may redeem the shares in your account (without
charging any deferred sales charge) if the net asset value of your
account falls below $500 due to redemptions you have made. You will be
notified that the value of your account is less than $500 before the
Fund makes an involuntary redemption. You will then have 60 days to
make an additional investment to bring the value of your account to at
least $500 before the Fund takes any action. This involuntary
redemption does not apply to retirement plans or Uniform Gifts or
Transfers to Minors Act accounts ("UGMA/UTMA accounts").
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 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other
than by mail should be delivered to Financial Data Services, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption.
Redemption request should not be sent to the Fund. The redemption
request in either event requires the signature(s) of all persons in
whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the
redemption request may require a guarantee by an "eligible guarantor
institution" as 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. In the event a signature guarantee is required, notarized
signatures are not sufficient. In general, signature guarantees are
waived on redemptions of less than $50,000 as long as the following
requirements are met: (i) all requests require the signature(s) of all
persons whose name(s) shares are recorded on the Transfer Agent's
register; (ii) all checks must be mailed to the stencil address of
record on the Transfer Agent's register and (iii) the stencil address
must not have changed within 30 days. Certain rules may apply regarding
certain account types such as, but not limited to UGMA/UTMA accounts,
Joint Tenancies with Right of Survivorship, contra broker transactions,
and institutional accounts. In certain instances, the Transfer Agent
may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as 26 executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the
Transfer Agent, payments will be mailed within seven days of receipt of
a proper notice of redemption.
At various times the Fund may be requested to redeem shares for
which it has not yet received good payment (e.g., cash,
Federal Funds or certified check drawn on a U.S. bank). The Fund may
delay or cause to be delayed the mailing of a redemption check until
such time as good payment (e.g., cash, Federal Funds or
certified check drawn on a U.S. bank) has been collected for the
purchase of such Fund shares, which will usually not exceed 10 days.
The Fund will also repurchase shares through a shareholder's
listed securities dealer or other financial intermediary. 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
the order is placed. Generally, shares will be priced at the net asset
value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer or other financial
intermediary prior to the close of business on the NYSE (generally the
NYSE closes at 4:00 p.m., Eastern time) and such request is received by
the Fund from such dealer or other financial intermediary not later
than 30 minutes after the close of business on the NYSE on the same
day. However, certain financial intermediaries may require submission
of orders prior to that time. 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 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 or other financial intermediaries 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 or other financial intermediaries 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 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.
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.
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. Subject to policies established
by the Board of Trustees, the Investment Adviser is primarily
responsible for the execution of the Portfolio's portfolio
transactions and the allocation of brokerage. The Trust has no
obligation to deal with any broker or group of brokers in the execution
of transactions in portfolio securities and does not use any particular
broker or dealer. In executing transactions with brokers and dealers,
the Investment Adviser seeks to obtain the best net results for the
Portfolio, taking into account such factors as price (including the
applicable 27 brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm
and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonable competitive commission
rates, the Portfolio does not necessarily pay the lowest spread or
commission available. In addition, consistent with the Conduct Rules of
the NASD and policies established by the Board of Trustees, the
Investment Adviser may consider sales of shares of the Portfolio as a
factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust; however, whether or not a particular broker
or dealer sells shares of a Portfolio neither qualifies nor
disqualifies such broker or dealer to execute transactions for the
Trust.
Subject to obtaining the best net results, brokers who provide
supplemental investment research services to the Investment Adviser may
receive orders for transactions by the Trust. Such supplemental
research services ordinarily consist of assessments and analyses of the
business or prospects of a company, industry or economic sector.
Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under its
Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of
such supplemental information. If in the judgment of the Investment
Adviser the Trust will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to a
broker furnishing such services that are in excess of commissions that
another broker may have charged for effecting the same transaction.
Certain supplemental research services may primarily benefit one or
more other investment companies or other accounts for which the
Investment Adviser exercises investment discretion. Conversely, the
Trust may be the primary beneficiary of the supplemental research
services received as a result of portfolio transactions effected for
such other accounts or investment companies.
The Trust anticipates that its brokerage transactions involving
securities of issues domiciled in countries other than the United
States generally will be conducted primarily on the principal stock
exchanges of such countries. Brokerage commissions and other
transactions costs on foreign stock exchange transactions generally are
higher than in the United States, although the Trust will endeavor to
achieve the best net results in effecting its portfolio transactions.
There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Trust may invest in certain securities traded in the OTC
market and intends to deal directly with the dealers who make a market
in securities involved, except in those circumstances in which better
prices and execution are available elsewhere. Under the Investment
Company Act, persons affiliated with the Trust and persons who are
affiliated with such affiliated persons are prohibited from dealing
with the Trust as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts,
the Trust will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions.
However, an affiliated person of the Trust may serve as its broker in
OTC transactions conducted by an agency basis provided that, among
other things, the fee or commission received by such affiliated broker
is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. In
addition, the Trust may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch
is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures approved by the Board of
Trustees of the Trust that either comply with rules adopted by the
Commission or with interpretations of the Commission staff. See
"Investment Objectives and Policies Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of
the U.S. national securities exchanges from executing exchange
transactions for their affiliate and institutional accounts that they
manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually
furnishes the account with the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any
rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Trust in any of its portfolio
transactions executed on any such securities 28 exchange of which it is a member, appropriate
consents have been obtained from the Trust and annual statements as to
aggregate compensation will be provided to the Trust.
The Board of Trustees of the Trust has considered the possibility
of seeking to recapture for the benefit of the Portfolio brokerage
commissions and other expenses of portfolio transactions by conducting
portfolio transactions through affiliated entities. For example,
brokerage commissions received by affiliated brokers could be offset
against the advisory fee paid by the Portfolio to the Investment
Adviser. After considering all factors deemed relevant, the Board of
Trustees made a determination not to seek such recapture. The Trustees
will reconsider this matter from time to time.
Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Investment
Adviser or an affiliate when one or more clients of the Investment
Adviser or an affiliate are selling the same security. If purchases or
sales of securities arise for consideration at or about the same time
that would involve the Trust or other clients or funds for which the
Investment Adviser or an affiliate acts as manager, transactions in
such securities will be made, insofar as feasible, for the respective
funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Investment
Adviser or an affiliate during the same period may increase the demand
for securities being purchased or the supply or securities being sold,
there may be an adverse effect on price.
Reference is made to "Account Choices How Shares are
Priced" in the Prospectus.
The net asset value of the shares of all classes 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 based on prices at
the time of closing. The NYSE generally closes at 4:00 p.m., Eastern
time. Any assets or liabilities expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of
valuation. The NYSE is not open for trading on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the
Administrator and the Distributor, and the advisory fees payable
indirectly by the Portfolio to the 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 and distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares, and the daily expense
accruals of the distribution and 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 that are traded on stock exchanges are valued
at the last sale price on the exchange on which such securities are
traded as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price for long
positions, and at the last available ask 29 price for short positions. In cases where
securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the
Board of Trustees as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price or
yield equivalent obtained from one or more dealers or pricing services
approved by the Board of Trustees of the Trust. Short positions in
securities traded in the OTC market are valued at the last available
ask price. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market. When the Portfolio writes an option, the amount
of the premium received is recorded on the books of the Portfolio as an
asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option
written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last
ask price. Options purchased by the Portfolio are valued at their last
sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. The value of
swaps, including interest rate swaps, caps, and floors, will be
determined by obtaining dealer quotations. Other investments, including
financial futures contracts and related options, are stated at market
value. Obligations with remaining maturities of 60 days or less are
valued at amortized cost unless the Investment Adviser believes that
this method no longer produces fair valuations. Repurchase agreements
will be valued at cost plus accrued interest. Securities and assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Trustees of the Trust. Such valuations and procedures will be
reviewed periodically by the Board of Trustees of the Trust.
Each investor in the Trust may add to or reduce its investment in
the Portfolio on each day the NYSE is open for trading. The value of
each investor's (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 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 determination of net asset value of the
Portfolio.
30 The Fund offers a number of shareholder services described below
that are designed to facilitate investment in its 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
or other financial intermediary.
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 dividends. 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 dividends. 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 may
transfer their Fund shares to another securities dealer or other
financial intermediary that has an authorized agreement with the
Distributor. Certain shareholder services may not be available for the
transferred shares. After the transfer, the shareholder may purchase
additional shares of funds owned before the transfer and all future
trading of these assets must be coordinated by the new firm. If a
shareholder wishes to transfer his or her shares to a securities dealer
or other financial intermediary that has not entered into an authorized
agreement with the Distributor, the shareholder must either (i) redeem
his or her shares, paying any applicable CDSC or (ii) continue to
maintain an Investment Account at the Transfer Agreement for those
shares. The shareholder may also request the new securities dealer or
other financial intermediary to maintain the shares in an account at
the Transfer Agent registered in the name of the securities dealer or
other financial intermediary for the benefit of the shareholder whether
the securities dealer or other financial intermediary has entered into
an authorized agreement or not.
Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from a selected dealer
or other financial intermediary 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 or other financial
intermediary for those shares.
A shareholder may make additions to an Investment Account at any
time by purchasing Class I shares (if an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public offering
price. These purchases may be made either through the shareholder's
securities dealer or other financial intermediary or by mail directly
to the Transfer Agent, acting as agent for such securities dealer or
other financial intermediary. You may also add to your account by
automatically investing a specific amount in the Fund on a periodic
basis through your selected dealer or other financial intermediary. The
current minimum for such automatic additional investments is $100. This
minimum may be waived or revised under certain circumstances.
Unless specific instructions are given as to the method of
payment, dividends will be automatically reinvested, without sales
charge, in additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as
determined after the close of business on the NYSE on the payment date
for such dividends. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends. 31 Shareholders may, at any time, by written notification to their
selected dealer or other financial intermediary the shareholder's
account is maintained with a selected dealer or other financial
intermediary or by written notification or by telephone
(1-888-763-2260) to the Transfer Agent, if the account is maintained
with the Transfer Agent, elect to have subsequent dividends, paid in
cash, rather than reinvested in shares of the Fund or vice versa
(provided that, in the event that a payment on an account maintained at
the Transfer Agent would amount to $10.00 or less, a shareholder will
not receive such payment in cash and such payment will automatically be
reinvested in additional shares). Commencing ten days after the receipt
by the Transfer Agent of such notice, those instructions will be
effected. The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on
amounts represented by uncashed dividend checks. Cash payments can also
be directly deposited to the shareholder's bank account.
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 net asset value determined
after 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 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 "Account Choices Pricing of
Shares Class B and Class C Shares Deferred Sales Charge
Options" in the Prospectus. Where the systematic withdrawal plan is
applied to Class B shares, upon conversion of the last Class B shares
in an account to Class A shares, a shareholder must make a new election
to join the 32 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.
The minimum initial purchase to establish a retirement or an
education savings plan is $100. Dividends received in each of the
retirement plans are exempt from Federal taxation until distributed
from the plans. Different tax rules apply to Roth IRA plans and
education savings plans. Investors considering participation in any
retirement or education savings 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.
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 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 33 schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's
CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B shares is "tacked" to
the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those
of 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 intermediary, 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 or other financial intermediaries. 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.
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
or other financial intermediaries (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 or other financial intermediary.
The Fund intends to distribute substantially all its net
investment income, if any. Dividends from such net investment income
will be paid at least annually. All net realized capital gains, if any,
will be distributed to the Fund's shareholders annually. From time to
time, the Fund may declare a special distribution at or about the end
of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital
gains be distributed during the calendar year. 34 See "Shareholder Services Automatic Dividend Reinvestment
Plan" for information concerning the manner in which dividends may
be reinvested automatically in shares of the Fund. Shareholders may
elect in writing to receive any 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
"Pricing of Shares 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.
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 or from an
excess of net realized short-term capital gains over net long-term
capital losses (together referred to hereafter as "ordinary income
dividends") are taxable to shareholders as ordinary income, whether
or not reinvested.
The Fund may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is
treated as income earned by the Fund and therefore is subject to the
distribution requirements of the Code. Because the original issue
discount income earned by the Fund in a taxable year may not be
represented by cash income, the Fund may have to dispose of other
securities and use the proceeds to make distributions to satisfy the
Code's distribution requirements. Debt securities acquired by the Fund
also may be subject to the market discount rules.
Distributions made from an excess of net long-term capital gains
over net short-term capital losses (including gains from certain
transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as capital gains regardless
of the length of time a shareholder has owned shares. The maximum
long-term capital gains rate for individuals is 20%. 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 capital gain or ordinary income 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 non-U.S. countries. Tax
conventions between certain countries and the United States may reduce
or 35 eliminate such taxes. It is impossible to
determine in advance the effective rate of foreign tax to which the
Fund will be subject, since the amount of Fund assets to be invested in
any particular non-U.S. country is not known. Because the Fund limits
its investments in non-U.S. securities, it is anticipated that Fund
shareholders will not be entitled to claim U.S. foreign tax credits
with respect to foreign taxes paid by the Fund.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on ordinary income dividends and
redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a
certified taxpayer identification number is not on file with the Fund
or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such shareholder is not
otherwise subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a
30% United States withholding tax under existing provisions of the
Code applicable 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 gain dividends with respect
to such shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring shares of the Fund, then any loss recognized on the exchange
will be reduced (or any gain increased) to the extent the sales charge
paid to 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 its capital gains, determined, in general, on an October 31
year end, plus certain undistributed amounts from previous years. The
Fund anticipates that it will make sufficient timely distributions to
avoid imposition of the excise tax.
The Fund may purchase or sell options and futures and foreign
currency options and futures, and related options on such futures.
Options and futures contracts that are "Section 1256 contracts"
will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each option or futures
contract will be treated as sold for its fair market value on the last
day of the taxable year. In 36 general, unless a special election is made, gain
or loss from transactions in Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may
affect the taxation of the Fund's transactions in options, futures and
forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain closing transactions in options, futures and forward foreign
exchange contracts. Similarly, Code Section 1091, which deals with
"wash sales," may cause the Fund to postpone recognition of
certain losses for tax purposes; and Code Section 1258, which deals
with "conversion transactions," may apply to recharacterize
certain capital gains as ordinary income for tax purposes. Code Section
1259, which deals with "constructive sales" of appreciated
financial positions (e.g., stock), may treat the Fund as
having recognized income before the time that such income is
economically recognized by the Fund.
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 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.
Ordinary income and capital gains dividends and gains from the
sale or exchange of Fund shares 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.
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 and the maximum sales charge in the case of
Class I and Class A shares. Dividends paid by the Fund with respect to
al shares, to the extent any dividends are paid, will be calculated in
the same manner at the same time on the same day 37 and will be in the same amount, except that
account maintenance and distribution charges [(and, in the case of
Class A, distribution and account maintenance fees)] and any
incremental transfer agency costs relating to each class of shares will
be borne exclusively by that class. The Fund will include performance
data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
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 not 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 various
indices including the Standard & Poor's 500 Index, the Value Line
Composite Index, the Dow Jones Industrial Average, 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 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. In
addition, from time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance rating in advertisements or
supplemental sales literature. The Fund may from time to time quote in
advertisements or other materials other applicable measures of
performance and may also make reference to awards that may be given to
the Investment Adviser. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
Total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. The
Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating
expenses and the amount of realized and unrealized net capital gains or
losses during the period. The value of an investment in the Fund will
fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost. 38 The Fund may provide information designed to help
investors understand how the Fund is seeking to achieve its investment
objectives. This may include information about past, current or
possible economic, market, political, or other conditions, descriptive
information on general principles of investing such as asset
allocation, diversification and risk tolerance, discussion of the
Fund's portfolio composition, investment philosophy, strategy or
investment techniques, comparisons of the Fund's performance or
portfolio composition to that of other funds or types of investments,
indices relevant to the comparison being made, or to a hypothetical or
model portfolio. The Fund may also quote various measures of volatility
and benchmark correlation in advertising and other materials, and may
compare these measures to those of other funds or types of investments.
Set forth below is total return information for Class I shares of
the Fund for the periods indicated.
39 The Fund operated as the Turner Large Cap Growth Equity Fund, a
portfolio of the TIP Funds, from February 1, 1997 (commencement of
operations) until it was reorganized
in
June,
2000.
Since the reorganization, the Fund has operated as the Mercury Select
Growth Fund, a series of the Corporation.
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 400,000,000 shares
divided into four classes,
designated Class
I, Class A,
Class B and Class C shares.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of
directors of the Corporation (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.
The Trust is organized as a Delaware Business Trust. Whenever the
Fund is requested to vote on any matter relating to the Portfolio or the Trust, the
Corporation will hold a meeting of the Fund's shareholders and will
cast its vote as instructed by the Fund's shareholders or vote the shares of the Portfolio or the Trust held by it in
the same proportion as the votes of all other feeder funds. If some of the other feeder funds are larger than the Fund,
these other feeder funds would have more voting power than the Fund over the operations of the Portfolio or the Trust.
The offering price for Class I shares of the Fund based on the
Fund's net assets and number of shares outstanding as of March
31, 2000 is calculated as set forth below:
40 Deloitte & Touche LLP, Princeton Forrestal Village, 116-300
Village Boulevard, Princeton, New Jersey 08540-6400, has been selected
as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.
Brown Brothers Harriman & Co. (the "Custodian"), 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.
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.
Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174, is counsel for the Fund.
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.
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.
As of April 19, 2000, each of the following persons was known to
be the beneficial owner of more than 5% of the outstanding shares of
Turner Large Cap Growth Equity Fund:
41 Assuming that Charles Schwab & Co., Inc. ("Charles Schwab")
owns the same number of shares of the Turner Large Cap Growth Equity
Fund on the date of completion of the reorganization as on April
19, 2000, Charles Schwab will own of record, on a pro forma basis,
524,936.2200 shares of the Fund after completion of the reorganization.
Assuming that Joseph Amato owns the same number of shares of the
Turner Large Cap Growth Equity Fund on the date of completion of the
reorganization as on April 19, 2000, Joseph Amato will own of record,
on a pro forma basis, 92,352.5320 shares of the Fund after completion
of the reorganization.
Assuming that Connecticut General Life Ins. Co. owns the same
number of shares of the Turner Large Cap Growth Equity Fund on the date
of completion of the reorganization as on April 19, 2000, Connecticut
General Life Ins. Co. will own of record, on a pro forma basis,
650,524.2160 shares of the Fund after completion of the reorganization.
On April 19, 2000, the Trustees and officers of Turner Large Cap
Growth Equity Fund as a group (19 persons) owned an aggregate of less
than 1% of the outstanding shares of Turner Large Cap Growth Equity
Fund.
To the knowledge of the Fund, as of April 19, 2000, no person or
entity owned beneficially or of record 5% or more of any class of
shares of the Fund or of all classes of Fund shares in the aggregate.
As of April 19, 2000, the Directors and officers of the Fund as a
group (nine persons) owned an aggregate of less than 1% of the
outstanding shares of the Fund and Mercury's parent corporation.
The Turner Large Cap Growth Equity Fund's
financial statements are incorporated in this
Statement of Additional Information by reference to its 1999
annual and March 31, 2000 semi-annual
reports
to shareholders. You may request
copies
of the annual
and semi-annual reports
at
no charge by calling 1-888-763-2260 between 8:00 a.m. and 8:00 p.m.
on any business day.
42 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.
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 A-1 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.
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.
A-2 Preferred stock rating symbols and their definitions are as
follows:
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.
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of
the obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation; (2) nature of
and provisions of the obligation; and A-3 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.
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 A-4 Debt obligations of issuers outside the United States
and its territories are rated on the same basis as domestic corporate
and municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
Bond Investment Quality Standards: Under present
commercial bank regulations issued by the Comptroller of the Currency,
bonds rated in the top four categories ("AAA," "AA,"
"A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for
investment by savings banks, trust companies, insurance companies and
fiduciaries generally.
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:
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. A-5 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:
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. A-6 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.
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.
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.
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.
A-7
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.
Fitch speculative grade bond ratings provide a guide to investors
in determining the credit risk associated with a particular security.
The ratings ("BB" to "C") represent Fitch's assessment of
the likelihood of timely payment of principal and interest in
accordance with the terms of obligation for bond issues not in default.
For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect
the differences in degrees of credit risk.
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.
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. A-8 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:
A-9 CODE #19105-0600
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES
Derivatives
Options on Securities and Securities
Indices
Futures
Swaps
Foreign Exchange Transactions
Risk Factors in Derivatives
Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives
Investment
Restrictions
(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
of the
Corporation are not subject to the limitations set forth in
this investment restriction.
(d) The Fund may not purchase additional securities
while its borrowings exceed 5% of its total assets.
Portfolio Turnover
MANAGEMENT OF THE FUND
Directors and Officers
Compensation of Directors/Trustees
Name of
Director/TrusteeAggregate
Compensation
From Fund/PortfolioPension or Retirement
Benefits Accrued as
Part of Fund/Portfolio
ExpensesTotal
Compensation
from Fund/Portfolio
and Mercury and
Affiliates
Advised Funds
Paid to
Directors/Trustees(1)David O.
Beim
$6,000
None
$47,667
James T.
Flynn
$6,000
None
$89,667
W. Carl
Kester
$6,000
None
$89,667
Karen P.
Robards
$6,000
None
$47,667
Administration Arrangements
Management and Advisory Arrangements
Code of Ethics
PURCHASE OF SHARES
Initial Sales Charge Alternatives Class I and Class A Shares
Reduced Initial Sales Charges
Deferred Sales Charges Class B and Class C Shares
Distribution Plans
Limitations on the Payment of Deferred Sales Charges
REDEMPTION OF SHARES
Redemption
Repurchase
Reinstatement Privilege Class I and Class A Shares
PORTFOLIO TRANSACTIONS AND BROKERAGE
PRICING OF SHARES
Determination of Net Asset Value
SHAREHOLDER SERVICES
Investment Account
Automatic Investment Plan
Automatic Dividend Reinvestment Plan
Systematic Withdrawal Plan
Retirement and Education Savings Plans
Exchange Privilege
Fee-Based Programs
DIVIDENDS AND TAXES
Dividends
Taxes
Tax Treatment of Options Transactions
Other Tax Matters
PERFORMANCE DATA
Class
I Shares Period Expressed
as a
percentage
based on a
hypothetical
$1,000
investmentRedeemable
Value of a
hypothetical
$1,000
investment
at the end of
the period
Average Annual Total Return
(including maximum
applicable sales charges) October 1, 1998 -
September 30, 1999
35.46%
$1,355
February 1, 1997 -
September 30, 1998
(since
inception)
28.55%
$1,951
GENERAL INFORMATION
Description of Shares
Computation of Offering Price Per Share
Class
I Net Assets
$45,753,032
Number
of Shares Outstanding
1,593,344
Net
Assets Value Per Share (net assets divided by number of shares
outstanding)
$28.64
Sales
Charge (for Class I: 5.25% of Offering Price; (5.54% of net amount
invested))*
1.59
Offering Price
$30.23
* Previous owners will have sales charge waived.
Independent Auditors
Custodian
Transfer Agent
Legal Counsel
Reports to Shareholders
Additional Information
Name
and Address of Shareholder Percentage and Type of
Ownership Charles Schwab & Co. Inc.
Attn: Mutual Funds/Team
S
4500 Cherry Creek Dr. S. Fl 3
Denver, CO 8020932.37%;
record ownership
Joseph Amato
1 Amato Dr.
Hoosic, PA
18507-17885.70%; beneficial ownership
Connecticut General Life
Ins. Co.
Attn: Carmen Rivera H191H
280 Trumbull St.
Hartford,
CT 06103-350948.12%; record ownership
FINANCIAL STATEMENTS
APPENDIX A
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Services, Inc.'s Corporate Debt
Ratings
Aaa
Bonds
that are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa
Bonds that are rated Aa are judged
to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa
Bonds
that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba
Bonds that are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be
very moderate, and therefore not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds
in this class.
B
Bonds that are rated B generally lack
characteristics of desirable investments. Assurance of interest and
principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa
Bonds that are
rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or
interest.
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.
Description of Moody's Commercial Paper Ratings
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:
º Leading market positions in
well-established industries
º High rates of return on funds employed
º Conservative capitalization structures
with moderate reliance on debt and ample asset protection
º Broad margins in earnings coverage of
fixed financial charges and higher internal cash generation
º 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.
Description of Moody's Preferred Stock Ratings
aaa
An
issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa
An issue that is rated "aa" is considered a
high-grade preferred stock. This rating indicates that there is
reasonable assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable future.
a
An
issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "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.
Description of Standard & Poor's Corporate Debt Ratings
AAA
Debt
rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues only in small
degree.
A
Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than debt in higher-rated categories.
BBB
Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
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.
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.
Description of Standard & Poor's Commercial Paper Ratings
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.
Description of Standard & Poor's Preferred Stock Ratings
I.
Likelihood
of payment-capacity and willingness of the issuer to meet the timely
payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
II.
Nature of, and provisions of, the issue.
III.
Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA
This is the highest rating that may be assigned by Standard
& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA
A preferred
stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated
"AAA."
A
An issue rated "A" is backed by a sound
capacity to pay the preferred stock obligations, although it is
somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB
An issue rated
"BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB
Preferred stock rated "BB,"
"B," and "CCC" are regarded, on balance, as predominantly
B
speculative with respect to the issuer's capacity to pay
preferred stock obligations.
CCC
"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.
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade
Bond Ratings
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.
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.
Description of Fitch Speculative Grade Bond Ratings
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. Such bonds are extremely
DD
speculative and should be
valued on the basis of their ultimate recovery value in
D
liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
Description of Fitch Investment Grade Short-term Ratings
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.
|