<PAGE>
As filed with the Securities and Exchange Commission on October 4, 1999
Securities Act File No. 333-
Investment Company Act File No. 811-09605
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. [X]
(Check appropriate box or boxes)
---------------
MERCURY INDEX FUNDS, INC.
(Exact name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (888) 763-2260
TERRY K. GLENN
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
---------------
Copies to:
Counsel for the Fund: and IRA P. SHAPIRO, Esq.
JOEL H. GOLDBERG, Esq. P.O. Box 9011
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP Princeton, New Jersey 08543-9011
919 Third Avenue
New York, New York 10022
---------------
It is proposed that this filing will become effective:
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------
Index Master Series Trust has also executed this Registration Statement.
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<PAGE>
Prospectus
[Mercury Logo]
Mercury Index Funds, Inc.
1999
[A subscription period for shares of the funds will end
on , unless extended.]
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>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[LOGO]
KEY FACTS
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About the Mercury Index Funds................................................ 3
Fees and Expenses............................................................ 9
[LOGO]
DETAILS ABOUT THE FUNDS
- -------------------------------------------------------------------------------
How the Funds Invest........................................................ 13
Investment Risks............................................................ 18
[Historical Performance Data]............................................... 26
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
Pricing of Shares........................................................... 27
How to Buy, Sell, Transfer and Exchange Shares.............................. 30
How Shares Are Priced....................................................... 34
Fee-based Programs.......................................................... 34
Dividends, Capital Gains and Taxes.......................................... 35
[LOGO]
MANAGEMENT OF THE FUNDS
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The Management Team......................................................... 37
Master/feeder Structure..................................................... 39
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
</TABLE>
MERCURY INDEX FUNDS, INC.
<PAGE>
[LOGO] Key Facts
ABOUT THE MERCURY INDEX FUNDS
- --------------------------------------------------------------------------------
What is each Fund's stated investment objective?
Mercury S&P 500 Index Fund
The investment objective of the Mercury S&P 500 Index Fund is to match the
performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500") as closely as possible before the deduction of Fund expenses. The S&P 500
is a market-weighted index composed of 500 common stocks issued by large-
capitalization U.S. companies in a wide range of businesses. The stocks
included in the index collectively represent a substantial portion of all
common stocks publicly traded in the U.S.
Mercury Small Cap Index Fund
The investment objective of the Mercury Small Cap Index Fund is to match the
performance of the Russell 2000 Index (the "Russell 2000") as closely as
possible before the deduction of Fund expenses. The Russell 2000 is a market-
weighted index composed of approximately 2,000 common stocks issued by smaller-
capitalization U.S. companies in a wide range of businesses.
Mercury Aggregate Bond Index Fund
The investment objective of the Mercury Aggregate Bond Index Fund is to match
the performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate
Bond Index") as closely as possible before the deduction of Fund expenses. The
Aggregate Bond Index is composed primarily of dollar-denominated investment
grade bonds of different types.
Mercury International Index Fund
The investment objective of the Mercury International Index Fund is to match
the performance of the Morgan Stanley Capital International EAFE Capitalization
Weighted Index (the "EAFE Index") as closely as possible before the deduction
of Fund expenses. The EAFE Index is composed of equity securities of companies
from various industrial sectors whose primary trading markets are located
outside the U.S. Companies included in the EAFE Index are selected from among
the larger capitalization companies in these markets.
The weighting of the EAFE Index is based on the relative market capitalization
of each of the countries in the index.
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
Prospectus in the sidebar.
Common Stock -- units of ownership of a corporation.
Bonds -- debt obligations issued by governments, corporations and other
issuers.
MERCURY INDEX FUNDS, INC.
3
<PAGE>
[LOGO] Key Facts
What are each Fund's main investment strategies?
All Funds
Each Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of that Fund's index. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments in, or correlated with, the
applicable index. A Fund may change its target index if Fund management
believes a different index would better enable the Fund to match the
performance of the market segment represented by the current index.
Each Fund invests all of its assets in a Series of Index Master Series Trust
that has the same goals as the Fund. All investments will be made at the level
of the Series. This structure is sometimes called a "master/feeder" structure.
Each Fund's investment results will correspond directly to the investment
results of the underlying Series it invests in. For simplicity, this Prospectus
uses the term "Fund" to include the underlying Series a Fund invests in. We
cannot guarantee that the Funds will achieve their objectives.
Mercury S&P 500 Index Fund
The Mercury S&P 500 Index Fund invests in the common stocks represented in the
S&P 500 in roughly the same proportions as their weightings in the S&P 500. The
Fund may also invest in derivative instruments linked to the S&P 500. At times
the Fund may not invest in all of the common stocks in the S&P 500 or, in the
same weightings as in the S&P 500. At those times, the Fund chooses investments
so that the market capitalizations, industry weighting and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the S&P 500 as a whole. The Fund may also engage in securities lending.
Mercury Small Cap Index Fund
The Mercury Small Cap Index Fund invests in a statistically selected sample of
stocks included in the Russell 2000 and in derivative instruments linked to the
Russell 2000. The Fund may not invest in all of the common stocks in the
Russell 2000, or in the same weightings as in the Russell 2000. The Fund
chooses investments so that the market capitalizations, industry weightings and
other fundamental characteristics of the stocks and derivative instruments
chosen are similar to the Russell 2000 as a whole. The Fund may also engage in
securities lending.
MERCURY INDEX FUNDS, INC.
4
<PAGE>
Mercury Aggregate Bond Index Fund
The Mercury Aggregate Bond Index Fund invests in a statistically selected
sample of bonds which are included in or correlated with the Aggregate Bond
Index, and in derivative instruments linked to the Aggregate Bond Index. The
Fund may not invest in all of the bonds in the Aggregate Bond Index, or in the
same weightings as in the Aggregate Bond Index. The Fund may invest in bonds
not included in the index, but which are selected to reflect characteristics
such as maturity, duration, or credit quality similar to bonds in the index.
This may result in different levels of interest rate, credit or prepayment
risks from the levels of risks on the Aggregate Bond Index. The Aggregate Bond
Index is composed of a variety of dollar-denominated investment grade bonds,
including bonds issued by the U.S. government and foreign governments and their
agencies, and bonds issued by U.S. or foreign companies, among others. The Fund
may also engage in securities lending.
Mercury International Index Fund
The Mercury International Index Fund invests in a statistically selected sample
of equity securities included in the EAFE Index and in derivative instruments
linked to the EAFE Index. The Fund will, under normal circumstances, invest in
all of the countries represented in the EAFE Index. The Fund may not, however,
invest in all of the companies within a country, represented in the EAFE Index,
or in the same weightings as in the EAFE Index. The Fund will choose
investments so that the market capitalizations, industry weightings and other
fundamental characteristics of the stocks and derivative instruments chosen are
similar to the EAFE Index as a whole. The Fund may also engage in securities
lending.
What are the main risks of investing in the Funds?
As with any mutual fund, the value of each Fund's investments, and, therefore,
the value of a Fund's shares, may go up or down. If the value of a Fund's
investments goes down, you may lose money. The value changes in the equity
investments of the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and
Mercury International Fund may occur because a particular stock market is
rising or falling, or as a result of specific factors that may affect the value
of particular investments.
The Mercury Aggregate Bond Index Fund's bond investments are subject to
interest rate, credit, prepayment and extension risk. Interest rate risk is the
risk that when interest rates go up, the value of debt instruments generally
goes down. In general, the market price of debt securities with longer
Maturity -- the time at which the principal amount of a bond is scheduled to be
repaid.
Duration -- the sensitivity of a bond or bond portfolio to changes in interest
rates.
Market Timing -- Some shareholders try to profit by buying investments when
they expect prices to rise and selling investments when they expect prices to
fall. The frequent short term buying and selling of Fund shares by these
shareholders may disrupt a Fund's investment program and will generate
additional transaction costs that are borne by all Fund shareholders, including
long-term shareholders that do not generate these additional costs. In order to
discourage short-term investors who engage in market timing, allocate short-
term transaction costs to shareholders that cause a Fund to incur these costs
and protect a Fund's long-term shareholders, each Fund assesses a redemption
fee on shares sold or exchanged within ninety days of purchase.
MERCURY INDEX FUNDS, INC.
5
<PAGE>
maturities will go up or down more in response to changes in interest rates
than shorter term securities. Credit risk is the risk that the issuer will be
unable to pay the interest or principal when due. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the
obligation. Prepayment and extension risk relate to asset-backed securities.
Prepayment risk is the risk that in periods of declining interest rates,
borrowers may pay what they owe on the underlying assets more quickly than
anticipated. This can reduce the yield to maturity on the security, and the
Fund may receive a lower interest rate when it reinvests the proceeds.
Extension risk is the risk that in periods of rising interest rates, borrowers
may pay what they owe on the underlying assets more slowly than anticipated. As
a result, the average maturity of the Fund's portfolio will increase, thus
increasing the Fund's exposure to interest rate risk.
Each Fund may invest in foreign securities to the extent foreign securities are
represented in the index tracked by that Fund. Currently, the Mercury
International Index Fund will invest primarily in foreign securities and the
Mercury Aggregate Bond Index Fund will invest a portion of its assets in
foreign securities. The Mercury Aggregate Bond Index Fund will invest only in
dollar-denominated foreign securities, while the Mercury International Index
Fund will invest principally in securities denominated in foreign currencies.
Because the Mercury International Index Fund and Mercury Aggregate Bond Index
Fund invest a significant portion of their assets in foreign securities, these
Funds will be subject to additional risks. For example, the Mercury
International Index Fund's and Mercury Aggregate Bond Index Fund's securities
may go up or down in value depending on foreign political and economic
developments and U.S. and foreign laws relating to foreign investment. Foreign
securities may also be less liquid, more volatile and harder to value than U.S.
securities. In addition, the foreign securities in which the Mercury
International Index Fund will invest are subject to significant changes in
value due to exchange rate fluctuations.
The Funds are also subject to selection risk, which is the risk that a Fund's
investments, which may not fully mirror the index, may underperform the
securities in the index. Each Fund will attempt to be fully invested at all
times, and will not hold a significant portion of its assets in cash. The Funds
will generally not attempt to hedge against adverse market movements.
Therefore, a Fund might go down in value more than other mutual funds in the
event of a general market decline. In addition, an index fund has operating and
other expenses while an index does not. As a result, while a
[LOGO] Key Facts
MERCURY INDEX FUNDS, INC.
6
<PAGE>
Fund will attempt to track its target index as closely as possible, it will
tend to underperform the index to some degree over time.
Each Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, a Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps a Fund's
performance when its investments are successful, but also hurts a Fund's
performance when its investments are unsuccessful.
Who should invest?
The Mercury S&P 500 Index Fund may be an appropriate investment for you if you:
. Want to invest in large U.S.
companies.
. Are investing with long-term
goals in mind, such as
retirement or funding a child's
education.
. In seeking to match the
performance of the S&P 500, are
willing to accept the risk that
the value of your investment may
decline.
. Are not looking for a
significant amount of current
income.
The Mercury Small Cap Index Fund may be an appropriate investment for you if
you:
. Want to invest in smaller
capitalization U.S. companies
and can accept the additional
risk and volatility associated
with stocks of these companies.
. Are investing with long-term
goals in mind, such as
retirement or funding a child's
education.
. In seeking to match the
performance of the Russell 2000,
are willing to accept the risk
that the value of your
investment may decline.
. Are not looking for a
significant amount of current
income.
MERCURY INDEX FUNDS, INC.
7
<PAGE>
[LOGO] Key Facts
The Mercury Aggregate Bond Index Fund may be an appropriate investment for you
if you:
. In seeking to match the
performance of the Aggregate
Bond Index, are willing to
accept a lower potential for
capital appreciation.
. Are looking for an investment
that provides income.
The Mercury International Index Fund may be an appropriate investment for you
if you:
. Are looking for exposure to a
variety of foreign markets and
can accept the additional risk
and volatility associated with
foreign investing.
. Are investing with long-term
goals in mind, such as
retirement or funding a child's
education.
. In seeking to match the
performance of the EAFE Index,
are willing to accept the risk
that the value of your
investment may decline.
. Are not looking for a
significant amount of current
income.
MERCURY INDEX FUNDS, INC.
8
<PAGE>
FEES AND EXPENSES
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Each Fund offers two different classes of shares, Class I and Class A shares.
Although your money will be invested the same way no matter which class of
shares you buy, Class A shares pay an ongoing account maintenance fee while
Class I shares do not. Not everyone is eligible to buy Class I shares. Your
financial consultant can help you determine whether you are eligible to buy
Class I shares. See "How to Buy, Sell, Transfer and Exchange Shares," below.
The tables show the different fees and expenses that you may pay if you buy and
hold each class of shares of each Fund. Future expenses may be greater or less
than those indicated below.
Class I Shares
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid Mercury
directly from Mercury Mercury Aggregate Mercury
your S&P 500 Small Cap Bond International
investment): Index Fund Index Fund Index Fund Index Fund
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load)
imposed on
purchases (as a
percentage of
offering price) None None None None
- ------------------------------------------------------------------
Maximum Deferred
Sales Charge
(Load) (as a
percentage of
original
purchase price
or redemption
proceeds,
whichever is
lower) None None None None
- ------------------------------------------------------------------
Maximum Sales
Charge (Load)
imposed on
Dividend
Reinvestments None None None None
- ------------------------------------------------------------------
Redemption
Fee(a) 0.25% 0.50% 0.25% 0.50%
- ------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------
Maximum Account
Fee None None None None
- ------------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(b):
- ------------------------------------------------------------------
Management
Fee(c) 0.05% 0.08% 0.06% 0.11%
- ------------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(d) None None None None
- ------------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(e) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Administrative
Fees(f) 0.245% 0.29% 0.19% 0.34%
- ------------------------------------------------------------------
Total Other
Expenses 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Total Annual
Fund Operating
Expenses(g) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Fee
Waiver/Expense
Reimbursement(h) 0.045% 0.07% 0.05% 0.10%
- ------------------------------------------------------------------
Net Total Annual
Fund Operating
Expenses(i) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
</TABLE>
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed
below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these include sales charges and redemption fees, which you
may pay when you buy or sell shares of a Fund.
Redemption Fee -- this fee is retained by the Fund in order to benefit all
remaining shareholders by offsetting the additional costs incurred by the Fund
due to short-term trading by some shareholders. The Redemption Fee is not paid
to the Fund's Adviser, Distributor or Transfer Agent.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating a
Fund.
Management Fee -- a fee paid to the investment adviser for managing a Fund.
Distribution Fees -- fees used to support a Fund's marketing and distribution
efforts, such as advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate dealers for
account maintenance activities.
MERCURY INDEX FUNDS, INC.
9
<PAGE>
Class A Shares
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid Mercury
directly from Mercury Mercury Aggregate Mercury
your S&P 500 Small Cap Bond International
investment): Index Fund Index Fund Index Fund Index Fund
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load)
imposed on
purchases (as a
percentage of
offering price) None None None None
- ------------------------------------------------------------------
Maximum Deferred
Sales Charge
(Load) (as a
percentage of
original
purchase price
or redemption
proceeds,
whichever is
lower) None None None None
- ------------------------------------------------------------------
Maximum Sales
Charge (Load)
imposed on
Dividend
Reinvestments None None None None
- ------------------------------------------------------------------
Redemption
Fee(a) 0.25% 0.50% 0.25% 0.50%
- ------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------
Maximum Account
Fee None None None None
- ------------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(b):
- ------------------------------------------------------------------
Management
Fee(c) 0.05% 0.08% 0.06% 0.11%
- ------------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(d) 0.25% 0.25% 0.25% 0.25%
- ------------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(e) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Administrative
Fees(f) 0.245% 0.29% 0.19% 0.34%
- ------------------------------------------------------------------
Total Other
Expenses 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Total Annual
Fund Operating
Expenses(g) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
Fee
Waiver/Expense
Reimbursement(h) 0.45% 0.07% 0.05% 0.10%
- ------------------------------------------------------------------
Net Total Annual
Fund Operating
Expenses(i) 0. % 0. % 0. % 0. %
- ------------------------------------------------------------------
</TABLE>
(a) You will pay a Redemption Fee on your Fund shares if you redeem or exchange
your shares within ninety days of your purchase.
(b) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(c) Paid by the Series. The Investment Adviser or its affiliate provides
accounting services to each Series at its cost.
(d) The Funds call the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other materials.
[LOGO] Key Facts
MERCURY INDEX FUNDS, INC.
10
<PAGE>
(Footnotes continued from previous page)
(e) Based on estimated amounts for the current fiscal year. The Transfer Agent
is an affiliate of the Investment Adviser. Each Fund pays the Transfer
Agent an annual fee at the annual rate of [0.05]% of the Fund's average
daily net assets for its services and the Transfer Agent is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement.
(f) Paid by the Funds. The Administrator provides accounting services to each
Fund at its cost.
(g) In addition, certain securities dealers may charge a fee to process a
purchase or sale of shares.
(h) Includes a contractual fee waiver. The Investment Adviser and Administrator
has entered into contractual arrangements with the Fund and the Series it
invests in to provide that the aggregate administrative and management fees
charged to each Fund and the corresponding Series will not exceed the
following amounts: Mercury S&P 500 Index Fund: 0.25%; Mercury Small Cap
Index Fund: 0.30%; Mercury Aggregate Bond Index Fund: 0.20%; and Mercury
International Index Fund: 0.35%.
(i) Includes the expenses of both the Fund and its pro rata share of the
expenses of the Series it invests in, after taking into account the
contractual reductions described in footnote (h). In addition to the
contractual fee waiver described in the previous footnote and reflected in
the table, the Investment Adviser has agreed to voluntarily waive
management fees and/or reimburse expenses of the Fund and/or the
corresponding Series it invests in. The Net Total Annual Fund Operating
Expenses shown in the table do not reflect any such voluntary management
fee waivers and/or reimbursement of expenses because they may be
discontinued by the Investment Adviser at any time without notice. After
taking into account the fee levels described above and the voluntary fee
waivers and/or expense reimbursements, net total annual Fund operating
expenses will be as follows: 0.39% for Class I shares and 0.64% for Class A
shares of the Mercury S&P 500 Index Fund; 0.50% for Class I shares and
0.75% for Class A shares of the Mercury Small Cap Index Fund; 0.35% for
Class I shares and 0.60% for Class A shares of the Mercury Aggregate Bond
Index Fund; and 0.64% for Class I shares and 0.89% for Class A shares of
the Mercury International Index Fund.
MERCURY INDEX FUNDS, INC.
11
<PAGE>
Examples:
These examples are intended to help you compare the cost of investing in a Fund
with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in a Fund for the time periods
indicated, that your investment has a 5% return each year, that you do not pay
the redemption fee, and that each 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:
CLASS I SHARES
<TABLE>
<CAPTION>
Mercury
Mercury Mercury Aggregate Mercury
S&P 500 Small Cap Bond International
Index Fund Index Fund Index Fund Index Fund
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year $ $ $ $
- -------------------------------------------------------------
Three Years $ $ $ $
- -------------------------------------------------------------
</TABLE>
CLASS A SHARES
<TABLE>
<CAPTION>
Mercury
Mercury Mercury Aggregate Mercury
S&P 500 Small Cap Bond International
Index Fund Index Fund Index Fund Index Fund
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year $ $ $ $
- -------------------------------------------------------------
Three Years $ $ $ $
- -------------------------------------------------------------
</TABLE>
[LOGO] Key Facts
MERCURY INDEX FUNDS, INC.
12
<PAGE>
[LOGO] Details About the Fund
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
All Funds
The Funds will not attempt to buy or sell securities based on Fund management's
economic, financial or market analysis, but will instead employ a "passive"
investment approach. This means that Fund management will attempt to invest in
a portfolio of assets whose performance is expected to match approximately the
performance of the respective index before deduction of Fund expenses. A Fund
will only buy or sell securities when Fund management believes it is necessary
to do so in order to match the performance of the respective index.
Accordingly, it is anticipated that a Fund's portfolio turnover and trading
costs will be lower than "actively" managed funds. However, the Funds have
operating and other expenses, while an index does not. Therefore, each Fund
will tend to underperform its target index to some degree over time.
Each Fund will be substantially invested in securities in the applicable index,
and will invest at least 80% of its assets in securities or other financial
instruments which are contained in or correlated with securities in the
applicable index. A Fund may change its target index if Fund management
believes a different index would better enable the Fund to match the
performance of the market segment represented by the current index and,
accordingly, the investment objective of a Fund may be changed without
shareholder approval. In addition to the investment strategies described below,
each Fund may also invest in illiquid securities and repurchase agreements, and
may engage in securities lending.
Each Fund will also invest in short-term money market instruments as cash
reserves to maintain liquidity. These instruments may include obligations of
the U.S. Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and repurchase
agreements. To the extent a Fund invests in short-term money market
instruments, it will generally also invest in options, futures or other
derivatives in order to maintain full exposure to the index. The Funds will not
invest in options, futures, other derivative instruments or short-term money
market instruments in order to lessen the Funds' exposure to common stocks as a
defensive strategy, but will instead attempt to remain fully invested at all
times.
Mercury S&P 500 Index Fund
The S&P 500 is composed of 500 common stocks issued by large-capitalization
U.S. companies in a wide range of businesses. The stocks
ABOUT THE PORTFOLIO MANAGERS
The Mercury S&P 500 Index Fund, the Mercury Small Cap Index Fund and the
[Mercury International Index Fund] are managed by Eric S. Mitofsky.
The Mercury Aggregate Bond Index Fund is co-managed by Gregory Mark Maunz,
Christopher G. Ayoub and Jeff Hewson.
The Mercury International Index Fund is managed by Richard Vella.
MERCURY INDEX FUNDS, INC.
13
<PAGE>
[LOGO] Details About the Fund
included in the index collectively represent a substantial portion of all
common stocks publicly traded in the U.S. The S&P 500 is generally considered
broadly representative of the performance of publicly traded U.S. large
capitalization stocks. The S&P 500 is a market-weighted index, which means that
the largest stocks represented in the index have the most effect on the index's
performance. Currently, the largest stocks in the S&P 500 have an effect on the
performance of the index that is many times greater than the effect of the
other stocks in the index. The stocks in the S&P 500 are chosen by the Standard
& Poor's Rating Group ("S&P"), a division of the McGraw-Hill Companies, Inc.
S&P chooses stocks for inclusion in the S&P 500 based on market capitalization,
trading activity and the overall mix of industries represented in the index,
among other factors. S&P's selection of a stock for the S&P 500 does not mean
that S&P believes the stock to be an attractive investment.
The Fund will normally invest in all 500 stocks in the S&P 500 in roughly the
same proportions as their weightings in the S&P 500. For example, if 5% of the
S&P 500 is made up of the stock of a particular company, the Fund will normally
invest approximately 5% of its assets in that company. This strategy is known
as "full replication." However, when Fund management believes it would be cost
efficient, Fund management is authorized to deviate from full replication and
to instead invest in a statistically selected sample of the 500 stocks in the
S&P 500 which has aggregate investment characteristics, such as average market
capitalization and industry weightings, similar to the S&P 500 as a whole. Fund
management may also purchase stocks not included in the S&P 500 when it
believes that it would be a cost efficient way of approximating the S&P 500's
performance to do so. If Fund management uses these techniques, the Fund may
not track the S&P 500 as closely as it would if it were fully replicating the
S&P 500.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the S&P 500. Derivatives allow the Fund to increase or
decrease its exposure to the S&P 500 quickly and at less cost than buying or
selling stocks. The Fund will invest in options, futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
ABOUT THE INVESTMENT ADVISER
The Funds are managed by Mercury Asset Management US, a division of Fund Asset
Management, L.P.
Market-Weighted Index -- an index in which the weighting of each security is
based on its market capitalization. In a market-weighted index, changes in the
price of a company with a large capitalization affect the level of the index
more than changes in the price of a company with smaller market capitalization.
Market Capitalization -- the number of a company's outstanding shares
multiplied by a share's current market value. Market capitalization is a
measure of a company's size.
MERCURY INDEX FUNDS, INC.
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<PAGE>
Mercury Small Cap Index Fund
The Russell 2000 is composed of the common stocks of the 1,001st through the
3000th largest U.S. companies by market capitalization, as determined by the
Frank Russell Company. The stocks represented in the index are issued by small-
capitalization (generally less than $1.5 billion) U.S. companies in a wide
range of businesses. The Russell 2000 is a market-weighted index, which means
that the largest stocks represented in the index have the most effect on the
index's performance. The Russell 2000 is generally considered broadly
representative of the performance of publicly traded U.S. smaller-
capitalization stocks. Frank Russell Company's selection of a stock for the
Russell 2000 does not mean that Frank Russell Company believes the stock to be
an attractive investment.
The Frank Russell Company updates the Russell 2000 once each year, at which
time there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Fund). Stocks of companies that
merge, are acquired or otherwise cease to exist during the year are not
replaced in the index.
The Fund may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. Instead, the Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000. The
Fund will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments in its portfolio are similar to the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to
the performance of the Russell 2000. Derivatives allow the Fund to increase or
decrease its exposure to the Russell 2000 quickly and at less cost than buying
or selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
MERCURY INDEX FUNDS, INC.
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[LOGO] Details About the Fund
Mercury Aggregate Bond Index Fund
The Lehman Brothers Aggregate Bond Index is a market-weighted index comprised
of approximately 6,500 U.S. dollar-denominated investment grade bonds with
maturities greater than one year, as chosen by Lehman Brothers Holdings Inc.
("Lehman Brothers"). The Aggregate Bond Index includes:
. U.S. government and government
agency securities
. securities issued by
supranational entities, such as
the World Bank
. securities issued by foreign
governments and U.S. and foreign
corporations
. mortgage-backed securities
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Fund may not invest in all of the bonds in the Aggregate Bond Index, or in
the same weightings as in the Aggregate Bond Index. Instead, the Fund may
invest in a statistically selected sample of bonds included in the Aggregate
Bond Index, or in a statistically selected sample of bonds not included in the
index but correlated with bonds that are in the index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund may invest in bonds
not included in the index, but which are selected to reflect characteristics
such as maturity, duration, or credit quality similar to bonds in the index.
This may result in different levels of interest rate, credit or other risks
from the levels of risks on the securities included in the Aggregate Bond
Index. The Mercury Aggregate Bond Index Fund may trade securities to the extent
necessary to maintain the duration of certain segments of the portfolio close
to the duration of corresponding segments of the index, and, accordingly, the
Mercury Aggregate Bond Index Fund may have a higher portfolio turnover rate
than the other Funds.
Because the Aggregate Bond Index is composed of investment grade bonds, the
Fund will invest in corporate bonds rated investment grade (rated at least Baa3
by Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings Group),
or if unrated, of comparable quality. The Fund may continue to hold a security
that is downgraded below investment grade.
Mortgage-Backed Securities -- securities that give their holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans.
Pass through securities -- securities that represent a right to receive
principal and interest payments collected on a pool of mortgages, which are
passed through to security holders (less servicing costs).
Collateralized Mortgage Obligations -- mortgage-backed securities that divide
the principal and interest payments collected on a pool of mortgages into
several revenue streams with different priority rights to various portions of
the underlying mortgage payments.
MERCURY INDEX FUNDS, INC.
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<PAGE>
The Fund will usually invest a substantial portion of its assets in mortgage-
backed securities. Mortgage-backed securities may be either pass through
securities or collateralized mortgage obligations.
The Fund may also purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. This is when the Fund buys or
sells securities with payment and delivery taking place in the future so that
the Fund can lock in a favorable yield and price at the time of entering into
the transaction. The Fund may also enter into dollar rolls in which the Fund
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar securities on a future date from the same
party. During the period between the Fund's sale of one security and purchase
of a similar security, the Fund does not receive principal and interest on the
securities sold. The Fund may also enter into standby commitment agreements in
which the Fund is committed, for a stated period of time, to buy a stated
amount of a fixed income security which may be issued and sold to the Fund at
the option of the issuer. The price of the security is fixed at the time of the
commitment, and the Fund is paid a commitment fee whether the security is
issued or not.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with the performance of the Aggregate Bond Index. Derivatives may allow the
Fund to increase or decrease its exposure to the Aggregate Bond Index quickly
and at less cost than buying or selling bonds. The Fund may invest in options
and futures and other derivative instruments in order to gain market exposure
quickly in the event of subscriptions, to maintain liquidity in the event of
redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
Mercury International Index Fund
The EAFE Index is composed of equity securities of approximately 1,000
companies from various industrial sectors whose primary trading markets are
located outside the U.S. Companies included in the EAFE Index are selected from
among the larger capitalization companies in these markets. The countries
currently included in the EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, The Netherlands,
New Zealand, Norway, Portugal, Singapore, Spain,
MERCURY INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Sweden, Switzerland and United Kingdom. The weighting of the EAFE Index among
these countries is based upon each country's relative market capitalization and
not gross domestic product, which means that the index contains more companies
from countries with the largest capital markets (like Japan and the United
Kingdom) and they have the most effect on the index's performance. The stocks
in the EAFE Index are chosen by Morgan Stanley & Co. Incorporated ("Morgan
Stanley"). Morgan Stanley chooses stocks for inclusion in the EAFE Index based
on market capitalization, trading activity and the overall mix of industries
represented in the index, among other factors. The EAFE Index is generally
considered broadly representative of the performance of stocks traded in the
international markets. Morgan Stanley's selection of a stock for the EAFE Index
does not mean that Morgan Stanley believes the stock to be an attractive
investment.
The Fund will, under normal circumstances, however, invest in all of the
countries represented in the EAFE Index. The Fund may not invest in all of the
companies within a country represented in the EAFE Index, or in the same
weightings as the EAFE Index. Instead, the Mercury International Index Fund may
invest in a statistically selected sample of equity securities included in the
EAFE Index and in derivative instruments correlated with countries within the
EAFE Index.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Fund to increase or
decrease its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the target index.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will
meet its goals, or that a Fund's performance will be positive over any period
of time.
MERCURY INDEX FUNDS, INC.
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Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and Mercury
International Index Fund
Stock Market Risk -- Stock market risk is the risk that the stock markets will
go down in value, including the possibility that the markets will go down
sharply and unpredictably.
Mercury Aggregate Bond Index Fund
Interest Rate Risk -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities.
Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
Event Risk -- Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
Mortgage-Backed Securities -- When interest rates fall, borrowers may refinance
or otherwise repay principal on their mortgages earlier than scheduled. When
this happens, certain types of mortgage-backed securities will be paid off more
quickly than originally anticipated and the Fund has to invest the proceeds in
securities with lower yields. This risk is known as "prepayment risk". When
interest rates rise, certain types of mortgage-backed securities are paid off
more slowly than originally anticipated and the value of these securities will
fall. This risk is known as "extension risk".
Because of prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other debt securities. Small
movements in interest rates (both increases and decreases) may quickly and
significantly reduce the value of certain mortgage-backed securities.
Dollar Rolls -- Dollar Rolls involve the risk that the market value of the
securities that the Fund is committed to buy may decline below the price of the
securities the Fund has sold. These transactions may involve leverage. The Fund
will engage in dollar rolls to enhance return and not for the purpose of
borrowing.
MERCURY INDEX FUNDS, INC.
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[LOGO] Details About the Fund
Standby Commitment Agreements -- Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less than its
purchase price.
When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve
the risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs the Fund loses both the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
Foreign Government Debt -- The Mercury Aggregate Bond Index Fund may invest in
debt securities issued or guaranteed by foreign governments or their agencies.
Investments in these securities subject the Fund to the risk that a government
entity may delay or refuse to pay interest or repay principal on its debt for
various reasons, including cash flow problems, insufficient foreign currency
reserves, political considerations, or the relative size of its debt position
to its economy. If a government entity defaults, it may ask for more time in
which to pay or for further loans. There may be no bankruptcy proceeding by
which all or part of debt securities that a government entity has not repaid
may be collected.
Mercury International Index Fund and Mercury Aggregate Bond Index Fund
Foreign Market Risk -- Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that a Fund will lose
money. In particular, a Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of securities
traded each day, it may make it difficult for a Fund to buy and sell certain
securities. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the U.S.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the U.S. with respect to such issues as growth
of gross national product, reinvestment of capital, resources, and balance of
payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign
MERCURY INDEX FUNDS, INC.
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<PAGE>
markets may also be adversely affected by governmental actions such as the
imposition of capital controls, nationalization of companies or industries,
expropriation of assets, or the imposition of punitive taxes. In addition, the
governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices, impair
a Fund's ability to purchase or sell foreign securities or transfer a Fund's
assets or income back into the U.S., or otherwise adversely affect a Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the U.S. or other foreign countries.
Governmental Supervision and Regulation -- Many foreign governments supervise
and regulate stock exchanges, brokers and the sale of securities less than the
U.S. does. Other countries may not have laws to protect investors the way that
the U.S.' securities laws do. For example, some foreign countries may have no
laws or rules against insider trading (this is when a person buys or sells a
company's securities based on "inside" non-public information about that
company). Also, brokerage commissions and other costs of buying or selling
securities often are higher in foreign countries than they are in the United
States. This reduces the amount a Fund can earn on its investments.
Mercury International Fund
Currency Risk and Exchange Risk -- Securities in which the Mercury
International Index Fund invests are usually denominated or quoted in
currencies other than the U.S. dollar. Changes in foreign currency exchange
rates will affect the value of the securities of the Fund. Generally, when the
U.S. dollar rises in value against a foreign currency, the Fund's investment in
a security denominated in that currency loses value because the currency is
worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value
against a foreign currency, the Fund's investment in a security denominated in
that currency gains value because the currency is worth more U.S. dollars. This
risk is generally known as "currency risk" which is the possibility that a
stronger U.S. dollar will reduce returns for U.S. investors investing overseas
and a weak U.S. dollar will increase returns for U.S. investors investing
overseas.
MERCURY INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Certain Risks of Holding Fund Assets Outside the U.S. -- The Mercury
International Index Fund generally holds the foreign securities and cash in
which it invests outside the U.S. in foreign banks and securities depositories.
Certain of such foreign banks and securities depositories may be recently
organized or new to the foreign custody business and/or may have operations
subject to limited or no regulatory oversight. Also, the laws of certain
countries may put limits on the Fund's ability to recover its assets if a
foreign bank or depository or issuer of a security or any of their agents goes
bankrupt. In addition, it can be expected that it will be more expensive for
the Fund to buy, sell, and hold securities in certain foreign markets than in
the U.S. market due to higher brokerage, transaction, custody and/or other
costs. The increased expense to invest in foreign markets reduces the amount
the Fund can earn on its investments and typically results in a higher
operating expense ratio for the Fund than investment companies invested only in
the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the U.S. and other countries may be
unreliable, increasing the risk of delayed settlements or losses of security
certificates. Settlements in certain foreign countries at times have not kept
pace with the number of securities transactions; these problems may make it
difficult for the Fund to carry out transactions. If the Fund cannot settle or
is delayed in settling a purchase of securities, it may miss attractive
investment opportunities and certain of its assets may be uninvested with no
return earned thereon for some period. If the Fund cannot settle or is delayed
in settling a sale of securities, it may lose money if the value of the
security then declines or, if it has contracted to sell the security to another
party, the Fund could be liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.
European Economic and Monetary Union (EMU) -- A number of European countries
have entered into EMU in an effort to, among other things, reduce trade
barriers between countries and eliminate fluctuations in their currencies. EMU
has established a single European currency (the euro), which was introduced on
January 1, 1999 and has replaced the existing
MERCURY INDEX FUNDS, INC.
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<PAGE>
national currencies of all initial EMU participants. The use of notes and coins
of the relevant national currencies will be phased out by July 1, 2002. Upon
introduction of the euro, certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like other investment companies
and business organizations, including the companies in which the Fund invests,
the Fund could be adversely affected:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned.
. If a participating country
withdraws from EMU.
. If the computing, accounting and
trading systems used by the
Fund's service providers, or by
other entities with which the
Fund or its service providers do
business, are not capable of
recognizing the euro as a
distinct currency.
Mercury Small Cap Index Fund
Small Cap -- Small cap companies may have limited product lines or markets.
They may be less financially secure than larger, more established companies.
They may depend on a small number of key personnel. If a product fails, or if
management changes, or there are other adverse developments, the Fund's
investment in a small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger cap securities or the
stock market as a whole. Moreover, small cap securities generally are not
income producing investments and thus, do not cushion a fund's total return
from price changes.
All Funds
Selection Risk -- Selection risk is the risk that a Fund's investments, which
may not fully mirror its target index, may underperform the securities in the
target index.
Derivatives -- Derivatives allow a Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments. A Fund
may use the following types of derivative instruments: futures, forwards and
options, options on futures, swaps and indexed securities.
Futures -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Forwards -- private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Options -- exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price within a specified time period.
Swaps -- private contracts involving the obligation of each party to exchange
specified payments, which may be based on the value of an index or asset, with
the other party at specified times.
Indexed Securities -- debt obligations that return a variable amount of
principal or interest based on the value of an index at a specified time.
MERCURY INDEX FUNDS, INC.
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<PAGE>
[LOGO] Details About the Fund
Derivatives are volatile and involve significant risks, which may include:
Leverage risk -- the risk associ-
ated with certain types of in-
vestments or trading strategies
(such as borrowing money to in-
crease the amount of investments)
that relatively small market
movements may result in large
changes in the value of an in-
vestment. Certain investments or
trading strategies that involve
leverage can result in losses
that greatly exceed the amount
originally invested.
Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction) on
a derivative transaction will be
unable to honor its financial ob-
ligation to a Fund.
Currency risk -- the risk that
changes in the exchange rate be-
tween currencies will adversely
affect the value (in U.S. dollar
terms) of an investment.
Liquidity risk -- the risk that
certain securities may be diffi-
cult or impossible to sell at the
time that a Fund would like or at
the price that a Fund believes
the security is currently worth.
The Funds may use derivatives for anticipatory hedging. Anticipatory hedging is
a strategy in which a Fund uses a derivative to offset the risk that securities
in which the Fund intends to invest will increase in value before the Fund has
an opportunity to purchase the securities. The Funds will use derivatives for
anticipatory hedging in order to gain exposure efficiently to their underlying
indexes in the event the Funds receive cash inflows.
Borrowing and Leverage -- The Funds may borrow for temporary emergency
purposes, including to meet redemptions. Borrowing may exaggerate changes in
the net asset value of Fund shares and in the yield on a Fund's portfolio.
Borrowing will cost a Fund interest expense and other fees. The costs of
borrowing may reduce a Fund's return.
Certain securities that a Fund buys may create leverage, including, for
example, derivative securities--Like borrowing, these investments may increase
a Fund's exposure to risks.
MERCURY INDEX FUNDS, INC.
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<PAGE>
Illiquid Securities -- Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. A Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so may be less able to
predict a loss. In addition, if Fund management receives material non-public
information about the issuer, a Fund will not be able to sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market but carry the risk that the
active trading market may not continue.
Securities Lending -- Each Fund may lend securities to financial institutions
that provide cash or government securities as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, a Fund may lose money and there may be a
delay in recovering the loaned securities. A Fund may also lose money if it
does not recover the securities and the value of the collateral falls. These
events could trigger adverse tax consequences to a Fund.
Short Sales -- A Fund may borrow the security sold short to make delivery to
the buyer. The Fund must then replace the security it has borrowed. If the
price of a security sold short goes up between the time of the short sale and
the time the Fund must deliver the security to the lender, the Fund will incur
a loss. The Fund must also pay the lender any interest accrued during the
period of the loan.
MERCURY INDEX FUNDS, INC.
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[LOGO] Details About the Fund
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Funds, including additional
details about how they invest, please see the Statement of Additional
Information.
[HISTORICAL PERFORMANCE DATA]
[Do you want to use Index Master Series' Historical Performance Data?]
MERCURY INDEX FUNDS, INC.
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<PAGE>
[LOGO] Your
Account
PRICING OF SHARES
- --------------------------------------------------------------------------------
Each Fund offers two share classes, Class I shares and Class A shares. Each
share class of a Fund represents an ownership interest in the same investment
portfolio. Shares of each class of a Fund are offered without a sales charge or
an ongoing distribution fee, but you will pay a redemption fee if you buy
shares of a Fund and redeem them within ninety days of your purchase. Class A
shares of each Fund pay an ongoing account maintenance fee of 0.25%.
Each Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.
[A subscription period for shares of each Fund will end on , 1999, unless
extended. Subscriptions will be payable, shares will be issued and each Fund
will commence operations on the third business day after the end of the
subscription period. A Fund or the Distributor can terminate the subscription
offering at any time, in which case the Fund will not commence operations or
will commence operations with a limited number of shares.]
After a Fund commences operations, shares can be purchased on each business
day.
MERCURY INDEX FUNDS, INC.
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<PAGE>
[LOGO] Your Account
To better understand the pricing of each Fund's shares, we have summarized the
information below:
<TABLE>
<CAPTION>
Class I Class A
- -------------------------------------------------------------------------------
<C> <C> <S>
Availability? Limited to certain Generally available through selected
investors including: securities dealers.
. Current Class I
shareholders
. Certain Retirement
Plans
. Participants of
certain sponsored
programs
. Certain affiliates or
customers of selected
securities dealers
- -------------------------------------------------------------------------------
Initial Sales No. Entire purchase No. Entire purchase price is
Charge? price is invested in invested in shares of the Fund.
shares of the Fund.
- -------------------------------------------------------------------------------
Deferred Sales No. No.
Charge?
- -------------------------------------------------------------------------------
Account No. 0.25% Account Maintenance Fee. No
Maintenance and Distribution Fee.
Distribution
Fees?
- -------------------------------------------------------------------------------
Redemption Fee? 0.25% Redemption Fee for 0.25% Redemption Fee for shares of
shares of the Mercury the Mercury S&P 500 Index Fund and
S&P 500 Index Fund and the Mercury International Index Fund
the Mercury Aggregate held less than ninety days.
Bond Index Fund held
less than ninety days.
--------------------------------------------------------------------
0.50% Redemption Fee for 0.50% Redemption Fee for shares of
shares of the Mercury the Mercury Small Cap Index Fund and
Small Cap Index Fund and the Mercury International Index Fund
the Mercury held less than ninety days.
International Index Fund
held less than ninety
days.
- -------------------------------------------------------------------------------
</TABLE>
Your financial consultant or securities dealer can help you determine whether
you are eligible to buy Class I shares or participate in any of the programs
listed above. If you are eligible to buy Class I shares, you should buy Class I
shares since Class A shares are subject to an account maintenance fee, while
Class I shares are not.
MERCURY INDEX FUNDS, INC.
28
<PAGE>
If you purchase Class A shares of any Fund, you will pay account maintenance
fees of 0.25% each year under an account maintenance plan that each Fund has
adopted under Rule 12b-1 under the Investment Company Act of 1940. The
Distributor uses the money that it receives from the account maintenance fees
to cover the costs of account maintenance activities, including compensating
the financial consultant or other dealer who assists you with your Fund
account.
If you sell or exchange your shares within ninety days of purchase you will be
charged a redemption fee. The redemption fee is 0.25% of your redemption
proceeds from shares of the Mercury S&P 500 Index Fund and the Mercury
Aggregate Bond Index Fund, and 0.50% of your redemption proceeds from shares of
the Mercury Small Cap Index Fund and the Mercury International Index Fund. By
imposing a redemption fee on sales or exchanges of shares held less than ninety
days, a Fund allocates the additional costs incurred by the Fund as a result of
short-term trading by some shareholders to those shareholders, thereby
protecting the Fund's long-term shareholders. The redemption fee is not a sales
charge or load which is paid to an adviser, distributor or dealer, but is kept
by the Fund to offset the additional short-term trading costs. The ninety day
period will be calculated assuming that the mostly recently purchased shares
are being redeemed first. This will maximize the amount of the redemption fee
that you will pay. The redemption fee will not apply to shares purchased
through reinvested distributions or automatic investments. [Any accounts on
which no redemption fee will be charged? Limit the number of times per year
someone can buy or sell out of a Fund?]
MERCURY INDEX FUNDS, INC.
29
<PAGE>
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
[LOGO] Your Account
The chart below summarizes how to buy, sell, transfer and exchange shares
through certain securities dealers. You may also buy shares through the
Transfer Agent. To learn more about buying shares through the Transfer Agent,
call 1-888-763-2260. Because the selection of a mutual fund involves many
considerations, your financial consultant may help you with this decision. The
Funds do not issue share certificates.
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy shares First, select the share Please refer to the pricing of
class appropriate for shares table on [the previous] page.
you Be sure to read this Prospectus
carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for a
amount of your Fund is $1,000 for all accounts
investment except:
.[$250] for certain fee-based
programs
.[$100] for retirement plans
(The minimums for initial
investments may be waived or reduced
under certain circumstances.)
--------------------------------------------------------------------
Have your financial The price of your shares is based on
consultant or securities the next calculation of net asset
dealer submit your value after your order is placed.
purchase order Any purchase orders placed within
fifteen minutes after the close of
business on the New York Stock
Exchange will be priced at the net
asset value determined that day.
Purchase orders received after that
time will be priced at the net asset
value determined on the next
business day. A Fund may reject any
order to buy shares and may suspend
the sale of shares at any time.
Certain securities dealers may
charge a fee to process a purchase.
For example, the fee charged by
Merrill Lynch, Pierce, Fenner &
Smith Incorporated is currently
$5.35. The fees charged by other
securities dealers may be higher or
lower.
--------------------------------------------------------------------
Or contact the Transfer Instead of purchasing through a
Agent financial consultant or securities
dealer, you can purchase shares of a
Fund by calling the Transfer Agent
to request an application and
mailing a purchase order directly to
the Transfer Agent at the address on
the inside back cover of this
Prospectus.
- -------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
30
<PAGE>
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
- -------------------------------------------------------------------------------
<C> <C> <S>
Add to your Purchase additional The minimum investment for
investment shares additional purchases is [$100] for
all accounts except:
.$50 for certain fee-based programs
.$1 for retirement plans
(The minimums for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
--------------------------------------------------------------------
Participate in the You may automatically invest a
automatic investment specific amount in a Fund on a
plan periodic basis through your
securities dealer:
. The current minimum for such
automatic investments is [$50].
The minimum may be waived or
revised under certain
circumstances.
- -------------------------------------------------------------------------------
Transfer shares Transfer to a To transfer your Fund shares to
to another participating securities another securities dealer,
securities dealer authorized dealer agreements must be
dealer in place between the Distributor and
the transferring securities dealer
and the Distributor and the
receiving securities dealer. All
shareholder services will be
available for all transferred
shares. All future trading of these
shares must be coordinated by the
receiving securities dealer.
--------------------------------------------------------------------
Transfer to a non- You cannot transfer your Fund shares
participating securities to a securities dealer that does not
dealer have an authorized dealer agreement
with the Distributor. You must
either:
.Transfer your shares to an account
with the Transfer Agent; or
.Sell your shares.
- -------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
31
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell your Have your financial The price of your shares is based on
shares consultant or securities the next calculation of net asset
dealer submit your sales value after your order is placed.
order 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 dealer within
fifteen minutes after that day's
close of business on the New York
Stock Exchange (the New York Stock
Exchange generally closes at 4:00
p.m. Eastern time). Any redemption
request placed after that time will
be priced at the net asset value at
the close of business on the next
business day. Dealers must submit
redemption requests to a Fund not
more than thirty minutes after the
close of business on the New York
Stock Exchange on the day the
request was received.
Certain securities dealers may
charge a fee to process a sale of
shares. For example, the fee charged
by Merrill Lynch, Pierce, Fenner &
Smith Incorporated is currently
$5.35. The fees charged by other
securities dealers may be higher or
lower. No processing fee is charged
if you sell shares directly through
the Transfer Agent.
A Fund may reject an order to sell
shares under certain circumstances.
--------------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this
Prospectus. All shareholders on the
account must sign the letter and
signatures must be guaranteed.
Depending on the type of account
and/or type of distribution, certain
additional documentation may be
required. The Transfer Agent will
normally mail sale proceeds within
seven days following receipt of a
properly completed request. If you
make a sales order request before
the Fund has collected payment for
the purchase of shares, the Fund or
the Transfer Agent may delay mailing
your proceeds. This delay usually
will not exceed ten days.
- -------------------------------------------------------------------------------
Sell shares Participate in a Fund's You can generally arrange through
systematically Systematic Redemption your selected dealer for systematic
Program sales of shares of a fixed dollar
amount on a monthly, bi-monthly,
quarterly, semi-annual or annual
basis, subject to certain
conditions. You must have dividends
and other distributions
automatically reinvested. Ask your
financial consultant for details.
- -------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
32
<PAGE>
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
- -------------------------------------------------------------------------------
<C> <C> <S>
Exchange your Select the fund into You can exchange your shares of a
shares which you want to Fund for shares of certain other
exchange. Be sure to Mercury mutual funds or for shares
read that fund's of the Summit Cash Reserves Fund.
prospectus. 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 a Fund's share is
generally exchangeable for shares of
the same class of certain other
Mercury funds. If you own Class I or
Class A shares and wish to exchange
into Summit, you will exchange into
Class A shares of Summit.
Some of the Mercury mutual funds may
impose an initial or deferred sales
charge schedule. If you exchange
Class I or Class A shares for shares
of a fund with an initial sales
charge, you will be charged the
initial sales charge at the time of
exchange.
Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any
time in the future.
- -------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
33
<PAGE>
[LOGO] Your Account
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value. This is the offering price.
Shares are also redeemed at their net asset value, minus any applicable
redemption fee. Each Fund calculates its net asset value (generally by using
market quotations) each day the New York Stock Exchange is open, fifteen
minutes after the close of business on the Exchange (the Exchange generally
closes at 4:00 p.m. Eastern time). The net asset value used in determining your
price is the next one calculated after your purchase or redemption order is
placed. Foreign securities owned by a Fund may trade on weekends or other days
when the Fund does not price its shares. As a result, the Fund's net asset
value may change on days when you will not be able to purchase or redeem the
Fund's shares. If an event occurs after the close of a foreign exchange that is
likely to significantly affect the Fund's net asset value, "fair value" pricing
may be used. This means that the Fund may value its foreign holdings at prices
other than their last closing prices, and the Fund's net asset value will
reflect this.
Generally, Class I shares will have a higher net asset value than Class A
shares because Class I has lower expenses. Also dividends paid on Class I
shares will generally be higher than dividends paid on Class A shares because
Class I shares have lower expenses. Shares sold within ninety days of purchase
will have a lower net asset value because a redemption fee is charged on such
shares.
FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Mercury or an
affiliate of Mercury, or by selected dealers that have an agreement with
Mercury, you may be able to buy Class I shares, including through exchange from
other share classes.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into Class A of a Fund or into Summit. Any
Net Asset Value -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
MERCURY INDEX FUNDS, INC.
34
<PAGE>
redemption or exchange will be at net asset value, minus any applicable
redemption fee. However, if you participate in the program for less than a
specified period, you may be charged a fee in accordance with the terms of the
program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your
financial consultant or your selected dealer.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and Mercury
International Index Fund will distribute net investment income at least
annually. The Mercury Aggregate Bond Index Fund will distribute net investment
income on a monthly basis. The Funds will distribute any net realized long or
short-term capital gains annually. The Funds 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 a Fund or
may be taken in cash. If your account is with a securities dealer that has an
agreement with the Fund, contact your financial consultant about which option
you would like. If your account is with the Transfer Agent and you would like
to receive dividends and distributions in cash, contact the Transfer Agent.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Funds
intend to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends received by individuals are generally
taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, a 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.
Dividends and interest received by the Mercury International Index Fund and the
Mercury Aggregate Bond Index Fund may give rise to withholding and
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
MERCURY INDEX FUNDS, INC.
35
<PAGE>
[LOGO] Your Account
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. The Mercury
International Index Fund expects to make an election that will generally
require shareholders to include in income their share of foreign withholding
taxes paid by the Fund. Shareholders may be entitled to treat these taxes as
taxes paid by them, and therefore, deduct such taxes in computing their taxable
income or, in some cases, to use them as foreign tax credits against the U.S.
income taxes otherwise owed.
By law, a Fund must withhold 31% of your distributions and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal tax law
of an investment in a Fund. It is not a substitute for personal tax advice.
Consult your personal tax advisor about the potential tax consequences of an
investment in a Fund under all applicable tax laws.
"Buying a dividend"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before a Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax advisor.
MERCURY INDEX FUNDS, INC.
36
<PAGE>
Management of the Funds [LOGO]
THE MANAGEMENT TEAM
- --------------------------------------------------------------------------------
Mercury Asset Management US, a division of Fund Asset Management, L.P. manages
the underlying Series' investments and their business operations under the
overall supervision of the Board of Trustees of Index Master Series Trust. The
Investment Adviser has the responsibility for making all investment decisions
for the Series.
The investment professionals in the group that manage the Funds include:
Eric S. Mitofsky, Senior Vice President of the Funds and the Portfolio Manager
of the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and [Mercury
International Index Fund]. Mr. Mitofsky has been a First Vice President of the
Investment Adviser since 1997 and was a Vice President from 1992 to 1997.
Richard Vella, Vice President of the Funds and the Portfolio Manager of the
Mercury International Index Fund. Mr. Vella has been a First Vice President of
the Investment Adviser since 1999, a Managing Director of Bankers Trust Company
from 1995 to 1999, and a Senior Portfolio Manager for global quantitative
products and index products and head of the Global Index Fund Group at Bankers
Trust Company from 1985 to 1999.
Gregory Mark Maunz, Senior Vice President of the Funds and Co-Portfolio Manager
of the Mercury Aggregate Bond Index Fund. Mr. Maunz has been a First Vice
President of the Investment Adviser since 1997 and was a Vice President from
1985 to 1997.
Christopher G. Ayoub, Senior Vice President of the Funds and Co-Portfolio
Manager of the Mercury Aggregate Bond Index Fund. Mr. Ayoub has been a First
Vice President of the Investment Adviser since 1998 and was a Vice President
from 1985 to 1998.
Jeff Hewson, Vice President of the Funds and Co-Portfolio Manager of the
Aggregate Bond Index Fund. Mr. Hewson has been a Director (Global Fixed Income)
of the Investment Adviser since 1998 and was a Vice President from 1989 to
1998.
MERCURY INDEX FUNDS, INC.
37
<PAGE>
[LOGO] Management of the Funds
The Funds have hired Mercury Asset Management US, a division of Fund Asset
Management, L.P. as administrator of the Funds to provide administrative
services. For providing management and administrative services to the Funds,
Mercury Asset Management US, a division of Fund Asset Management, L.P., is paid
at the rates shown in the following table:
<TABLE>
<CAPTION>
Contractual Fee Rate
----------------------------------------
Total
Management and
Management Administrative Administrative
Series Fee (b) Fee Fee
- ------ ---------- -------------- --------------
<S> <C> <C> <C>
Mercury S&P 500 Index Fund............ 0.05% 0.245% 0.295%
Mercury Small Cap Index Fund.......... 0.08% 0.29% 0.37%
Mercury Aggregate Bond Index Fund..... 0.06% 0.19% 0.25%
Mercury International Index Fund...... 0.11% 0.34% 0.45%
<CAPTION>
Actual Fee Rate (a)
----------------------------------------
Total
Management and
Management Administrative Administrative
Series Fee (c) Fee (c) Fee
- ------ ---------- -------------- --------------
<S> <C> <C> <C>
Mercury S&P 500 Index Fund............ 0.005% 0.245% 0.25%
Mercury Small Cap Index Fund.......... 0.01% 0.29% 0.30%
Mercury Aggregate Bond Index Fund..... 0.01% 0.19% 0.20%
Mercury International Index Fund...... 0.01% 0.34% 0.35%
</TABLE>
- --------
(a) Shows actual amounts currently being paid, which reflect the contractual
fee waiver described in footnote (c).
(b) Paid by the Series.
(c) A contract among each Fund, the Series it invests in and the Investment
Adviser and Administrator provides that the actual management fee and the
actual administrative fee can change from the amounts shown in the table
but that the aggregate of management and administrative fees will not
exceed the amounts shown in the final column (the Total Management and
Administrative Fee column). This arrangement accounts for the difference
between the actual and contractual investment advisory fee rates shown
above. See "Fees and
MERCURY INDEX FUNDS, INC.
38
<PAGE>
Expenses" under "Fund Facts" for information about the fees paid to the
Investment Adviser and its affiliates.
Fund Asset Management, L.P. is part of the Asset Management Group, which had
approximately $ billion in investment company and other portfolio assets
under management as of 1999. This amount includes assets managed for
affiliates of the Investment Adviser. [Disclosure regarding FAM's experience to
be added.]
MASTER/FEEDER STRUCTURE
- --------------------------------------------------------------------------------
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their investment objectives by
investing all their assets in the corresponding Series of the Index Master
Series Trust. Investors in each Fund will acquire an indirect interest in the
underlying Series. The Funds do not have an investment adviser since each
Fund's assets are invested in its corresponding Series.
Other "feeder" funds may also invest in the "master" Series. This structure may
enable the Funds 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.
A Fund may withdraw from the Series 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 a Fund over the
operations of the Series.
Whenever the Series holds a vote of its feeder funds, a Fund will pass the vote
through to its own shareholders.
A Note about Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Funds could
MERCURY INDEX FUNDS, INC.
39
<PAGE>
[LOGO] Management of the Funds
be adversely affected if the computer systems used by the Funds' management or
other Fund service providers do not properly address this problem before
January 1, 2000. The Funds' management expects to have addressed this problem
before then, and does not anticipate that the services it provides will be
adversely affected. The Funds' other service providers have told the Funds'
management that they also expect to resolve the Year 2000 Problem, and the
Funds' management will continue to monitor the situation as the year 2000
approaches. However, if the problem has not been fully addressed, the Funds
could be negatively affected. The Year 2000 Problem could also have a negative
impact on the companies in which the Funds invest. This negative impact may be
greater for companies in foreign markets, since they may be less prepared for
the Year 2000 Problem than domestic companies and markets. If the companies in
which the Funds invest have Year 2000 Problems, the Funds' returns could be
adversely affected.
MERCURY INDEX FUNDS, INC.
40
<PAGE>
The Management Team
Funds
Mercury Index Funds, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(888-763-2260)
Investment Adviser and Administrator
Mercury Asset Management US,
a division of Fund Asset Management, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Transfer Agent
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062 [check zip code]
(888-763-2260)
Independent Auditors
[TBA]
Distributor
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian
[TBA]
Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
MERCURY INDEX FUNDS, INC.
<PAGE>
[LOGO] For More Information
Shareholder Reports
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Funds' annual report you
will find a discussion of the relevant market conditions and investment
strategies that significantly affected the Funds' performance during its last
fiscal year. You may obtain these reports at no cost by calling 1-888-763-2260.
If you hold your Fund shares through a brokerage account or directly at the
Transfer Agent, you may receive only one copy of each shareholder report and
certain other mailings regardless of the number of Fund accounts you have. If
you prefer to receive separate shareholder reports for each account (or if you
are receiving multiple copies and prefer to receive only one), call your
financial consultant or, if none, write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call your
financial consultant or the Transfer Agent at 1-888-763-2260.
Statement of Additional Information
The Funds' Statement of Additional Information contains further information
about the Funds and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing or calling the
Funds at Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida
32232-4062 or by calling 1-888-763-2260.
Contact your financial consultant or the Funds at the telephone number or
address indicated on the inside back cover of this Prospectus if you have any
questions.
Information about the Funds (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from the
information contained in this Prospectus.
Investment Company Act File #811-09605.
Code #[ ].
(C)Mercury Asset Management US, a division of Fund Asset Management, L.P.
[Prospectus]
[Mercury Logo]
Mercury Index Funds, Inc.
[ , 1999]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Mercury Index Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (888) 763-2260
----------------
Mercury Index Funds, Inc. (the "Corporation") currently consists of four
portfolios or series: Mercury S&P 500 Index Fund ("Mercury S&P 500 Index
Fund"), Mercury Small Cap Index Fund ("Mercury Small Cap Index Fund"), Mercury
Aggregate Bond Index Fund ("Mercury Aggregate Bond Index Fund") and Mercury
International Index Fund ("Mercury International Index Fund," and together
with the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and Mercury
Aggregate Bond Index Fund, the "Funds," and each, a "Fund"). Each Fund is a
non-diversified mutual fund whose investment objective is to provide
investment results that, before expenses, seek to replicate the total return
(i.e., the combination of capital changes and income) of a specified
securities index. Each Fund will seek to achieve its investment objective by
investing all of its assets in the series (collectively, the "Series," and
each, a "Series") of Index Master Series Trust (the "Trust") that has the same
investment objective as the Fund. Each Fund's investment experience will
correspond directly to the investment experience of the respective Series in
which it invests. There can be no assurance that the investment objectives of
the Funds will be achieved.
Each Fund offers two classes of shares, Class I shares and Class A shares.
Class I shares of each Fund are offered at a price equal to the next
determined net asset value per share without the imposition of any front-end
or deferred sales charge, and are not subject to any ongoing account
maintenance or distribution fee. Distribution of Class I shares of each Fund
is limited to certain eligible investors. Class A shares of each Fund are
offered at a price equal to the next determined net asset value per share
without the imposition of any front-end or deferred sales charge and are not
subject to any ongoing distribution fee, but are subject to an ongoing account
maintenance fee at an annual rate of 0.25% of average daily net assets. If you
sell or exchange your shares within ninety days of purchase you will be
charged a redemption fee. The redemption fee is 0.25% of your redemption
proceeds from shares of the Mercury S&P Index Fund and the Mercury Aggregate
Bond Index Fund, and 0.50% of your redemption proceeds from shares of the
Mercury Small Cap Index Fund and the Mercury International Index Fund. The
Funds' distributor is Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc.
----------------
This Statement of Additional Information of the Funds is not a prospectus
and should be read in conjunction with the Prospectus of the Funds, dated
, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling the Funds at 888-763-2260 or your financial consultant, or by writing
to the address listed above. This Statement of Additional Information
incorporates by reference the Prospectus.
----------------
Mercury Asset Management US -- Investment Adviser
Mercury Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies........................................ 2
Mercury S&P 500 Index Fund.............................................. 2
Mercury Small Cap Index Fund............................................ 2
Mercury Aggregate Bond Index Fund....................................... 3
Mercury International Index Fund........................................ 4
About Indexing and Management of the Funds.............................. 4
Other Investment Policies, Practices and Risk Factors................... 5
Portfolio Strategies Involving Options, Futures, Swaps, Indexed
Instruments and Foreign Exchange Transactions.......................... 12
Risk Factors in Derivatives............................................. 15
Additional Information Concerning the Indices........................... 16
Investment Restrictions................................................. 17
Portfolio Turnover...................................................... 20
Management of the Funds................................................... 20
Directors and Officers.................................................. 20
Compensation of Directors/Trustees...................................... 22
Administration Arrangements............................................. 22
Management and Advisory Arrangements.................................... 23
Code of Ethics.......................................................... 24
Purchase of Shares........................................................ 25
Account Maintenance Plan................................................ 26
Redemption of Shares...................................................... 27
Redemption.............................................................. 27
Repurchase.............................................................. 27
Redemption Fee.......................................................... 28
Portfolio Transactions and Brokerage...................................... 28
Determination of Net Asset Value.......................................... 30
Shareholder Services...................................................... 31
Investment Account...................................................... 31
Automatic Investment Plan............................................... 32
Automatic Dividend Reinvestment Plan.................................... 32
Systematic Redemption Program........................................... 32
Retirement Plans........................................................ 33
Exchange Privilege...................................................... 33
Fee-based Programs...................................................... 34
Dividends and Taxes [to be reviewed/updated].............................. 34
Dividends............................................................... 34
Taxes................................................................... 34
Tax Treatment of Options and Futures Transactions....................... 36
Special Rules for Certain Foreign Currency Transactions................. 36
The Series.............................................................. 37
Performance Data.......................................................... 37
General Information....................................................... 38
Description of Shares................................................... 38
Computation of Offering Price per Share................................. 39
Independent Auditors.................................................... 39
Custodian............................................................... 39
Transfer Agent.......................................................... 39
Legal Counsel........................................................... 39
Reports to Shareholders................................................. 39
Additional Information.................................................. 39
Independent Auditor's Report.............................................. 40
Financial Statements...................................................... 41
Appendix
Ratings of Fixed Income Securities...................................... A-1
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The Corporation currently consists of four series: Mercury S&P 500 Index
Fund, Mercury Small Cap Index Fund, Mercury Aggregate Bond Index Fund and
Mercury International Index Fund. Each Fund is a non-diversified mutual fund
whose investment objective is to provide investment results that, before
expenses, seek to replicate the total return (i.e., the combination of capital
changes and income) of a specified securities index.
Each Fund will seek to achieve its investment objective by investing all of
its assets in the series of Index Master Series Trust that has the same
investment objective as the Fund. Each Fund's investment experience and
results will correspond directly to the investment experience of the
respective Series in which it invests. Thus, all investments will be made at
the level of the Series. 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 Series in which the Fund invests. Reference is made to the
discussion under "How the Funds Invest" and "Investment Risks" in the
Prospectus for information, with respect to each Fund's and each Series'
investment objectives and policies. There can be no assurance that the
investment objectives of the Funds will be achieved.
The Funds' investment objectives are not fundamental policies and may be
changed by the Board of Directors of the Corporation (the "Directors"),
without shareholder approval. The Directors may also change the target index
of any respective Fund if they consider that a different index would
facilitate the management of the Fund in a manner which better enables the
Fund to seek to replicate the total return of the market segment represented
by the current index.
Mercury S&P 500 Index Fund
The investment objective of the Mercury S&P 500 Index Fund is to match the
performance of the Standard & Poor's(R) 500 Composite Stock Price Index (the
"S&P 500") as closely as possible before the deduction of Fund expenses. There
can be no assurance that the investment objective of the Fund will be
achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Master S&P 500 Index Series of the Trust ("Master S&P 500 Index
Series"), which has the same investment objective as the Fund. The following
is a description of the investment policies of the Mercury S&P 500 Index Fund.
In seeking to replicate the total return of the S&P 500, Mercury Asset
Management US, a division of Fund Asset Management, L.P. (the "Investment
Adviser," or "FAM") generally will allocate the Mercury S&P 500 Index Fund's
investments among common stocks in approximately the same weightings as the
S&P 500. In addition, the Investment Adviser may use options and futures
contracts and other types of financial instruments relating to all or a
portion of the S&P 500. At times the Fund may not invest in all of the common
stocks in the S&P 500, or in the same weightings as in the S&P 500. At those
times, the Fund chooses investments so that the market capitalizations,
industry weighting and other fundamental characteristics of the stocks and
derivative instruments chosen are similar to the S&P 500 as a whole. The
Mercury S&P 500 Index Fund may also engage in securities lending. See "Other
Investment Policies, Practices and Risk Factors."
The S&P 500 is composed of the common stocks of 500 large capitalization
companies from various industrial sectors, most of which are listed on the New
York Stock Exchange Inc. A company's stock market capitalization is the total
market value of its outstanding shares. The S&P 500 represents a significant
portion of the market value of all common stocks publicly traded in the United
States.
Mercury Small Cap Index Fund
The investment objective of the Mercury Small Cap Index Fund is to match the
performance of the Russell 2000(R) Index (the "Russell 2000") as closely as
possible before the deduction of Fund expenses. There can be no assurance that
the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Master Small Cap Index Series of the Trust ("Master Small Cap
Index Series"), which has the same investment objective as the Fund. The
following is a description of the investment policies of the Mercury Small Cap
Index Fund.
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In seeking to replicate the total return of the Russell 2000, the Investment
Adviser may not allocate the Mercury Small Cap Index Fund's investments among
all of the common stocks in the Russell 2000, or in the same weightings as the
Russell 2000. Instead, the Mercury Small Cap Index Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000 and
other types of financial instruments. The Investment Adviser may use options
and futures contracts and other types of financial instruments relating to all
or a portion of the Russell 2000. The investments to be included in the
Mercury Small Cap Index Fund will be selected so that the market
capitalizations, industry weightings and other fundamental characteristics of
the stocks, and of the stocks underlying or otherwise related to the foregoing
financial instruments, closely approximate those same factors in the Russell
2000, with the objective of reducing the selected investment portfolio's
deviation from the performance of the Russell 2000 (this deviation is referred
to as "tracking error"). The Mercury Small Cap Index Fund may also engage in
securities lending. See "Other Investment Policies, Practices and Risk
Factors."
The Russell 2000 is composed of approximately 2,000 smaller-capitalization
common stocks from various industrial sectors. A company's stock market
capitalization is the total market value of its outstanding shares.
Mercury Aggregate Bond Index Fund
The investment objective of the Mercury Aggregate Bond Index Fund is to
match the performance of the Lehman Brothers Aggregate Bond Index (the
"Aggregate Bond Index") as closely as possible before the deduction of Fund
expenses. There can be no assurance that the investment objective of the Fund
will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Master Aggregate Bond Index Series of the Trust ("Master
Aggregate Bond Index Series"), which has the same investment objective as the
Fund. The following is a description of the investment policies of the Mercury
Aggregate Bond Index Fund.
In seeking to replicate the total return of the Aggregate Bond Index, the
Investment Adviser may not allocate the Mercury Aggregate Bond Index Fund's
investments among all of the bonds in the Aggregate Bond Index, or in the same
weightings as the Aggregate Bond Index. Instead, the Mercury Aggregate Bond
Index Fund may invest in a statistically selected sample of bonds included in
the Aggregate Bond Index, or in a statistically selected sample of bonds not
included in the Aggregate Bond Index but correlated with bonds that are in the
Aggregate Bond Index, and in derivative instruments limited to the Aggregate
Bond Index. The Investment Adviser may use options and futures contracts and
other types of financial instruments relating to all or a portion of the
Aggregate Bond Index. The Fund may invest in bonds not included in the
Aggregate Bond Index, but which are selected to reflect characteristics such
as maturity, duration or credit quality similar to bonds in the Aggregate Bond
Index. The investments to be included in the Mercury Aggregate Bond Index Fund
will be selected with the objective of reducing the selected investment
portfolio's deviation from the performance of the Aggregate Bond Index
(tracking error). Selection of bonds other than those included in the
Aggregate Bond Index, or in different weightings from the Aggregate Bond
Index, may result in levels of interest rate, credit or prepayment risks that
differ from the levels of risks on the securities composing the Aggregate Bond
Index. See "Other Investment Policies, Practices and Risk Factors--Investments
in Fixed-Income Securities." The Mercury Aggregate Bond Index Fund may also
engage in securities lending. See "Other Investment Policies, Practices and
Risk Factors."
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by
entities, such as the World Bank, constituted by the governments of several
countries to promote economic development) and mortgage-backed securities with
maturities greater than one year. Corporate bonds contained in the Aggregate
Bond Index represent issuers from various industrial sectors.
The Mercury Aggregate Bond Index Fund may invest in U.S. Treasury bills,
notes and bonds and other "full faith and credit" obligations of the U.S.
Government. The Mercury Aggregate Bond Index Fund may also invest in U.S.
Government agency securities, which are debt obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government. "Agency" securities
may not be backed by the "full faith and credit" of the U.S. Government. U.S.
Government agencies may include the Federal Farm Credit Bank, the Resolution
Trust Corporation and the Government National Mortgage Association. "Agency"
obligations are not explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury bonds.
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Because the Aggregate Bond Index is composed of investment grade bonds, the
Mercury Aggregate Bond Index Fund will invest in corporate bonds rated
investment grade--i.e., those rated at least Baa3 by Moody's Investors
Service, Inc. ("Moody's") or BBB--by Standard & Poor's Ratings Group ("S&P"),
[include Fitch?] the equivalent by another nationally recognized statistical
rating organization ("NRSRO") or, if unrated, of equal quality in the opinion
of the Investment Adviser. Corporate bonds ranked in the fourth highest rating
category, while considered "investment grade", have more speculative
characteristics and are more likely to be downgraded than securities rated in
the three highest ratings categories. In the event that the rating of a
security in the Mercury Aggregate Bond Index Fund is lowered below Baa or BBB,
the Mercury Aggregate Bond Index Fund may continue to hold the security. Such
securities rated below investment grade are considered to be speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Descriptions of the ratings of
bonds are contained in the Appendix.
The Mercury Aggregate Bond Index Fund may also invest in other instruments
that "pass through" payments on such obligations, such as collateralized
mortgage obligations ("CMOs").
Mercury International Index Fund
The investment objective of the Mercury International Index Fund is to match
the performance of the Morgan Stanley Capital International EAFE(R)
Capitalization Weighted Index (the "EAFE Index") as closely as possible before
the deduction of Fund expenses. There can be no assurance that the investment
objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Master International (Capitalization Weighted) Index Series of
the Trust ("Master International Index Series"), which has the same investment
objective as the Fund. The following is a description of the investment
policies of the Mercury International Index Fund.
In seeking to mirror the total return of the EAFE Index, the Mercury
International Index Fund will, under normal circumstances, invest in all of
the countries in the EAFE Index, but the Investment Adviser may not allocate
Mercury International Index Fund's investments among all of the companies
within a country, represented in the EAFE Index, or in the same weightings as
the EAFE Index. Instead, the Mercury International Index Fund may invest in a
statistically selected sample of the equity securities included in the EAFE
Index and other types of financial instruments. In addition, the Investment
Adviser may use options and futures contracts and other types of financial
instruments relating to all or a portion of the EAFE Index. The investments to
be included in the Mercury International Index Fund will be selected so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks, and of the stocks underlying or otherwise
related to the foregoing financial instruments, closely approximate those same
factors in the EAFE Index, with the objective of reducing the selected
investment portfolio's deviation from the performance of the EAFE Index
(tracking error). The Mercury International Index Fund may also engage in
securities lending. See "Other Investment Policies, Practices and Risk
Factors."
The EAFE Index is composed of equity securities of approximately 1,000
companies from various industrial sectors whose primary trading markets are
located outside the United States and which are selected from among the larger
capitalization companies in such markets. A company's stock market
capitalization is the total market value of its outstanding shares. The
countries currently included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and United Kingdom. The weighting of the EAFE Index among these
countries is based upon each country's relative market capitalization. Gross
Domestic Product (GDP) is the basis for country weightings in another version
of the EAFE Index. Using the market capitalization weighting tends to increase
the relative weighting of Japan and the United Kingdom while decreasing the
weighting of certain European countries, generally resulting in a less
diversified EAFE Index.)
About Indexing and Management of the Funds
About Indexing. The Funds are not managed according to traditional methods
of "active" investment management, which involve the buying and selling of
securities based upon economic, financial, and market analyses and investment
judgment. Instead, each Fund, utilizing essentially a "passive" or "indexing"
investment
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approach, seeks to replicate, before each Fund's expenses (which can be
expected to reduce the total return of a Fund), the total return of its
respective index.
Indexing and Managing the Funds. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments which are contained in or
correlated with securities in the applicable index (equity securities, in the
case of the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and
Mercury International Index Fund and fixed-income securities in the case of
the Mercury Aggregate Bond Index Fund).
Because each Fund seeks to mirror the total return of its respective index,
generally the Investment Adviser will not attempt to judge the merits of any
particular security as an investment but will seek only to mirror the total
return of the securities in the relevant index. However, the Investment
Adviser may omit or remove a security which is included in an index from the
portfolio of a Fund if, following objective criteria, the Investment Adviser
judges the security to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions.
The Investment Adviser may acquire certain financial instruments based upon
individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets. Others may provide for the payment to a Fund or by a Fund of amounts
based upon the performance (positive, negative or both) of a particular
security or basket. The Investment Adviser will select such instruments when
it believes that the use of the instrument will correlate substantially with
the expected total return of a target security or index. In connection with
the use of such instruments, the Investment Adviser may enter into short sales
in an effort to adjust the weightings of particular securities represented in
the basket to more accurately reflect such securities' weightings in the
target index.
Each Fund's ability to mirror the total return of its respective index may
be affected by, among other things, transaction costs, administration and
other expenses incurred by the Fund, taxes (including foreign withholding
taxes, which will affect the Mercury International Index Fund and the Mercury
Aggregate Bond Index Fund due to foreign tax withholding practices), changes
in either the composition of the index or the assets of a Fund, and the timing
and amount of Series investors' contributions and withdrawals, if any. In
addition, each Fund's total return will be affected by incremental operating
costs (e.g., transfer agency, accounting) that will be borne by the Fund.
Under normal circumstances, it is anticipated that each Fund's total return
over periods of one year and longer will, on a gross basis and before taking
into account expenses (incurred at either the Series or the Fund level) be
within 10 basis points (a basis point is one one-hundredth of one percent
(0.01%)) for the Mercury S&P 500 Index Fund, 100 basis points for the Mercury
Small Cap Index Fund, 150 basis points for the Mercury International Index
Fund, and 50 basis points for the Mercury Aggregate Bond Index Fund, of the
total return of the applicable indices. There can be no assurance, however,
that these levels of correlation will be achieved. In the event that this
correlation is not achieved over time, the Trustees and the Directors will
consider alternative strategies for the Series and the Funds. Information
regarding correlation of a Fund's performance to that of a target index may be
found in the Funds' annual report.
Other Investment Policies, Practices and Risk Factors
Cash Management. Generally, the Investment Adviser will employ futures and
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the Investment Adviser, a portion of a Fund's
assets may be invested in certain types of instruments with remaining
maturities of 397 days or less for liquidity purposes. Such instruments would
consist of: (i) obligations of the U.S. Government, its agencies,
instrumentalities, authorities or political subdivisions ("U.S. Government
Securities"); (ii) other fixed-income securities rated Aa or higher by Moody's
or AA or higher by S&P or, if unrated, of comparable quality in the opinion of
the Investment Adviser; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time a Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer or the
issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA
or higher by S&P or outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1
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by Moody's or A-1 by S&P; or, if no such ratings are available, the instrument
must be of comparable quality in the opinion of the Investment Adviser.
Dollar Rolls. The Mercury Aggregate Bond Index Fund may enter into dollar
rolls, in which the Mercury Aggregate Bond Index Fund will sell securities for
delivery in the current month and simultaneously contract to repurchase
substantially similar (the same type and coupon) securities on a specified
future date from the same party. During the roll period, the Mercury Aggregate
Bond Index Fund forgoes principal and interest paid on the securities sold.
The Mercury Aggregate Bond Index Fund is compensated by the difference between
the current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
Dollar rolls involve the risk that the market value of the securities
subject to the Mercury Aggregate Bond Index Fund's forward purchase commitment
may decline below the price of the securities the Mercury Aggregate Bond Index
Fund has sold. In the event the buyer of the securities files for bankruptcy
or becomes insolvent, the Mercury Aggregate Bond Index Fund's use of the
proceeds of the current sale portion of the transaction may be restricted
pending a determination by the other party, or its trustee or receiver,
whether to enforce the Mercury Aggregate Bond Index Fund's obligation to
purchase the similar securities in the forward transaction. Dollar rolls are
speculative techniques which can be deemed to involve leverage. The Mercury
Aggregate Bond Index Fund will establish a segregated account with its
custodian in which it will maintain liquid securities in an aggregate amount
equal to the amount of the forward commitment. The Mercury Aggregate Bond
Index Fund will engage in dollar roll transactions to enhance return and not
for the purpose of borrowing. Each dollar roll transaction is accounted for as
a sale of a portfolio security and a subsequent purchase of a substantially
similar security in the forward market.
Short Sales. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the Investment Adviser may
sell a security a Fund does not own, or in an amount greater than the Fund
owns (i.e., make short sales). Such transactions will be used only in an
effort to adjust the weightings of particular securities represented in the
basket to reflect such securities' weightings in the target index. The
Investment Adviser will not employ short sales in reflection of the Investment
Adviser's outlook for the securities markets or for the performance of the
securities sold short. Generally, to complete a short sale transaction, a Fund
will borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed. The price at the time of
replacement may be more or less than the price at which the security was sold
by the Fund. Until the security is replaced, the Fund is required to pay to
the lender any interest which accrues during the period of the loan. To borrow
the security, the Fund may be required to pay a premium which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker to the extent necessary to meet margin requirements until the
short position is closed out. Until the Fund replaces the borrowed security,
it will (a) maintain in a segregated account with its custodian cash or liquid
securities at such a level that the amount deposited in the account plus the
amount deposited with the broker as collateral will equal the current market
value of the security sold short or (b) otherwise cover its short position.
Cash Flows; Expenses. The ability of each Fund to satisfy its investment
objective depends to some extent on the Investment Adviser's ability to manage
cash flow (primarily from purchases and redemptions and distributions from the
Fund's investments). The Investment Adviser will make investment changes to a
Fund's portfolio to accommodate cash flow while continuing to seek to
replicate the total return of the Series' target index. Investors should also
be aware that the investment performance of each index is a hypothetical
number which does not take into account brokerage commissions and other
transaction costs, custody and other costs of investing, and any incremental
operating costs (e.g., transfer agency, accounting) that will be borne by the
Funds. Finally, since each Fund seeks to replicate the total return of its
target index, the Investment Adviser generally will not attempt to judge the
merits of any particular security as an investment.
Investment in Fixed-Income Securities. Because the Mercury Aggregate Bond
Index Fund will invest in fixed-income securities, it will be subject to the
general risks inherent in such securities, primarily interest rate risk,
credit risk, event risk, prepayment risk and extension risk.
Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. As a rule bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline; if interest
rates fall,
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bond prices generally rise. In addition, for a given change in interest rates,
longer-maturity bonds generally fluctuate more in price than shorter-maturity
bonds. To compensate investors for these larger fluctuations, longer-maturity
bonds usually offer higher yields than shorter-maturity bonds, other factors,
including credit quality, being equal. These basic principles of bond prices
also apply to U.S. Government Securities. A security backed by the "full faith
and credit" of the U.S. Government is guaranteed only as to its stated
interest rate and face value at maturity, not its current market price. Just
like other fixed-income securities, government-guaranteed securities will
fluctuate in value when interest rates change.
Credit risk is the possibility that an issuer of securities held by the
Mercury Aggregate Bond Index Fund will be unable to make payments of either
interest or principal when due or will be perceived to have a diminished
capacity to make such payments in the future. The credit risk of the Mercury
Aggregate Bond Index Fund is a function of the diversification and credit
quality of its underlying securities.
The Mercury Aggregate Bond Index Fund may also be exposed to event risk,
which includes the possibility that fixed-income securities held by the
Mercury Aggregate Bond Index Fund may suffer a substantial decline in credit
quality and market value due to issuer restructurings. Certain restructurings
such as mergers, leveraged buyouts, takeovers or similar events, are often
financed by a significant expansion of corporate debt. As a result of the
added debt burden, the credit quality and market value of a firm's existing
debt securities may decline significantly. Other types of restructurings (such
as corporate spinoffs or privatizations of governmental or agency borrowers or
the termination of express or implied governmental credit support) may also
result in decreased credit quality of a particular issuer.
Prepayment risk is the possibility that the principal of the mortgage loans
underlying mortgage-backed securities may be prepaid at any time. As a general
rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates the Mercury Aggregate Bond Index Fund
may be required to reinvest its assets in securities with lower interest
rates. [In periods of increasing interest rates, prepayments generally may
decline, with the effect that the mortgage-backed securities held by the
Mercury Aggregate Bond Index Fund may exhibit price characteristics of longer-
term debt securities.]
Extension risk is the possibility that the principal of the mortgage loans
underlying mortgage-backed securities may be repaid more slowly than
anticipated. As a general rule, extensions increase during a period of rising
interest rates, and decrease during a period of falling interest rates. As a
result, during periods of rising interest rates the average maturity of the
Mercury Aggregate Bond Index Fund's portfolio may increase, thus increasing
the Fund's exposure to interest rate risk.
The corporate substitution strategy used by the Mercury Aggregate Bond Index
Fund (discussed above) may increase or decrease the Mercury Aggregate Bond
Index Fund's exposure to the foregoing risks relative to those of the
Aggregate Bond Index.
[Sovereign Debt. The Mercury Aggregate Bond Index Fund may invest a
significant portion of its assets in debt obligations ("sovereign debt")
issued or guaranteed by foreign governments (including foreign states,
provinces and municipalities) of [developed] countries or their agencies and
instrumentalities ("governmental entities"). Investment in sovereign debt
involves a high degree of risk that the governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, [the governmental entity's policy
towards the International Monetary Fund] and the political constraints to
which a governmental entity may be subject. In certain countries, governmental
entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal
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of interest when due may result in the cancellation of such third parties'
commitments to lend funds to the governmental entity, which may further impair
such debtor's ability or willingness to timely service its debts.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt, including the Funds, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There may be no bankruptcy proceeding by which
sovereign debt on which a governmental entity has defaulted may be collected
in whole or in part.]
European Economic and Monetary Union (EMU). For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and has
replaced the existing national currencies of all EMU participants. EMU took
effect for the initial EMU participants as of January 1, 1999, and was
implemented over the weekend January 1, 1999 through January 3, 1999
("conversion weekend"). The use of notes and coins of the relevant national
currencies will be phased out by July 1, 2002. Upon introduction of the euro,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro. These
securities trade and make dividend and other payments only in euros.
No assurance can be given that EMU will proceed as planned, that the changes
planned for the EU can be successfully implemented, or that those changes will
result in the economic and monetary unity and stability intended. There is a
possibility that EMU will not be completed, or will be completed but then
partially or completely unwound. Because any participating country may opt out
of EMU within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which would diminish its credibility
and influence. Any of these occurrences could have adverse effects on the
markets of both participating and non-participating countries, including sharp
appreciation or depreciation of the participants' national currencies and a
significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to
lower government debt and inflation rates that were introduced in anticipation
of EMU. Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities that have been redenominated
in euros are transferred back into that country's national currency,
particularly if the withdrawing country is a major economic power. Such
developments could have an adverse impact on the [Mercury International Index]
Fund's investments in Europe generally or in specific countries participating
in EMU. Gains or losses resulting from the euro conversion may be taxable to
Fund shareholders under foreign or, in certain limited circumstances, U.S. tax
laws.
When-issued Securities and Forward Commitments. The Mercury Aggregate Bond
Index Fund may purchase or sell securities that it is entitled to receive on a
when- issued basis. The Mercury Aggregate Bond Index 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 Mercury Aggregate Bond
Index 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 Mercury Aggregate Bond Index Fund has not established any limit on the
percentage of its assets that may be committed in connection with these
transactions. When the Mercury Aggregate Bond Index Fund is purchasing
securities in these transactions, the Fund maintains a segregated account with
its custodian of cash, cash equivalents, U.S. Government securities or other
liquid securities in an amount equal to the amount of its purchase
commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the
delivery date may be more or less than the Fund's purchase price. The Mercury
Aggregate Bond Index 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.
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[Does any Fund invest in Warrants?]
Illiquid or Restricted Securities. Each 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 a Fund's assets in
illiquid securities may restrict the ability of a 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 a 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.
Each Fund may invest in securities that are "restricted securities."
Restricted securities have contractual or legal restrictions on their resale
and include "private placement" securities that a Fund may buy directly from
the issuer. Restricted securities may be neither listed on an exchange nor
traded in other established markets. Privately placed securities may or may
not be freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. As a result of the absence of a
public trading market, privately placed securities may be more difficult to
value than publicly traded securities and may be less liquid, or illiquid, and
therefore may be subject to the risks associated with illiquid securities, as
described in the preceding paragraph. Some restricted securities, however, may
be liquid.
In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately
placed securities held by a 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 a 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, a Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct
portfolio transactions in such securities.
144A Securities. Each Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"). The Board of
Directors has determined to treat as liquid Rule 144A securities that are
either (i) freely tradable in their primary markets offshore or (ii) non-
investment grade debt securities that the Fund's management determines are as
liquid as publicly registered non-investment grade debt securities. The Board
of Directors has adopted guidelines and delegated to each Fund's management
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 each Fund's investments in these securities.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities.
Standby Commitment Agreements. The Mercury Aggregate Bond Index Fund may
enter into standby commitment agreements. These agreements commit the Mercury
Aggregate Bond Index Fund, for a stated period of time, to purchase a stated
amount of fixed- income securities that may be issued and sold to the Fund at
the option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement the Mercury
Aggregate Bond Index Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued. The Mercury Aggregate Bond Index Fund
will enter into such agreements for the purpose of investing in the security
underlying the commitment at a yield and price that is considered advantageous
to the Fund. The Mercury Aggregate Bond Index Fund will not enter into a
standby commitment with a remaining term in excess of 90 days and will limit
its investment in such commitments so that the aggregate purchase price of
securities subject to such commitments, together with the value of [all other
illiquid securities] or [portfolio securities subject to legal restrictions on
resale that affect their marketability], will
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not exceed 15% of its net assets taken at the time of the commitment. The
Mercury Aggregate Bond Index Fund will maintain a segregated account with its
custodian of cash, cash equivalents, U.S. Government securities or other
liquid securities in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Mercury Aggregate Bond Index Fund may bear the risk of a decline in the value
of such security and may not benefit from an appreciation in the value of the
security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Aggregate Bond Index Fund's
net asset value. The cost basis of the security will be adjusted by the amount
of the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements. Each 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, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the
Investment Adviser otherwise deems to be credit worthy. Under such agreements,
the counterparty 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, with respect to the Mercury International Index Fund, to the extent
the repurchase agreement is not denominated in U.S. dollars, the Mercury
International Index Fund's return may be affected by currency fluctuations.] A
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. A 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,
a Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the
rate of return to the Fund shall be dependent upon intervening fluctuations of
the market value of such security and the accrued interest on the security. In
such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform.
Securities Lending. Each Fund may lend securities with a value not exceeding
33 1/3% of its total assets. In return, a Fund receives collateral in an
amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
If cash collateral is received by a Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to a Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on a Fund's portfolio is increased by loans
of its portfolio securities. A Fund may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice, is required
to return borrowed securities within five business days. A 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, a 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.
Borrowing and Leverage. The use of leverage by a 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 a Fund's portfolio. Although the principal of such
borrowings will be fixed, a
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Fund's assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses for a 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 a 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 a 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
a 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 a 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
a 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 a Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
A 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.
Small Cap Companies
An investment in the Mercury Small Cap Index Fund involves greater risk than
is customarily associated with funds that invest in more established
companies. The securities of smaller companies may be subject to more abrupt
or erratic market movements than larger, more established companies or the
market average in general. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. Because of these factors, the Mercury Small Cap Index Fund
believes that its shares may be suitable for investment by persons who can
invest without concern for current income and who are in a financial position
to assume above-average investment risk in search of above-average long-term
reward. It is not intended as a complete investment program but is designed
for those long-term investors who are prepared to experience above-average
fluctuations in net asset value.
While the issuers in which the Mercury Small Cap Index Fund will primarily
invest may offer greater opportunities for capital appreciation than large cap
issuers, investments in smaller companies may involve greater risks and thus
may be considered speculative. Full development of these companies and trends
frequently takes time and, for this reason, the Mercury Small Cap Index Fund
should be considered as a long-term investment and not as a vehicle for
seeking short-term profits.
The securities in which the Mercury Small Cap Index Fund invests will often
be traded only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume typical of trading
on a national securities exchange. As a result, the disposition by the Mercury
Small Cap Index Fund of portfolio securities to meet redemptions or otherwise
may require the Mercury Small Cap Index Fund to sell these securities at a
discount from market prices or during periods when such disposition may not be
desirable or to make many small sales over a lengthy period of time.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of
their business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may
be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Mortgage-Backed Securities. The Mercury Aggregate Bond Index Fund may invest
in mortgage-backed securities. Mortgage-backed securities are "pass-through"
securities, meaning that principal and interest
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payments made by the borrower on the underlying mortgages are passed through
to the Mercury Aggregate Bond Index Fund. The value of mortgage-backed
securities, like that of traditional fixed-income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage-backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The
price paid by the Mercury Aggregate Bond Index Fund for its mortgage-backed
securities, the yield the Mercury Aggregate Bond Index Fund expects to receive
from such securities and the average life of the securities are based on a
number of factors, including the anticipated rate of prepayment of the
underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly than anticipated, thereby
reducing the yield to maturity and the average life of the mortgage-backed
securities. Moreover, when the Mercury Aggregate Bond Index Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a rate
of interest that is lower than the rate on the security that was prepaid. To
the extent that the Mercury Aggregate Bond Index Fund purchases mortgage-
backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If the
Mercury Aggregate Bond Index Fund buys such securities at a discount, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying mortgages may
occur at a slower than expected rate, resulting in maturity extensions. This
particular risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Mercury Aggregate Bond Index Fund. See
"Investments in Fixed-Income Securities" and "Illiquid Securities" above.
Portfolio Strategies Involving Options, Futures, Swaps, Indexed Instruments
and Foreign Exchange Transactions
Each Fund will also utilize options, futures, options on futures, swaps and
other indexed instruments. Futures and options on futures may be employed to
provide liquidity. Futures, options on futures, swaps and other indexed
instruments may be employed as a proxy for a direct investment in securities
underlying a Fund's index. In addition, the International Index Fund may
engage in futures contracts on foreign currencies in connection with certain
foreign securities transactions.
The Investment Adviser will choose among the foregoing instruments based on
its judgment of how best to meet each Fund's goal. In connection therewith,
the Investment Adviser will assess such factors as current and anticipated
securities prices, relative liquidity and price levels in the options, futures
and swap markets compared to the securities markets, and the Funds' cash flow
and cash management needs.
Indexed Securities
The Funds may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (an "index"). As an
illustration, a Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities. If a 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
Options on Securities and Securities Indices
Purchasing Options. Each Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When a
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 a
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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.
Each Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which
substantially replicates the performance of the types of securities it intends
to purchase. When a Fund purchases a call option, in consideration for the
option premium the Fund acquires the 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 maintain
exposure to an index prior to purchasing the underlying securities, in the
case of an option on an index (an "anticipatory hedge"). In the event a Fund
determines not to purchase a security underlying a call option, however, the
Fund may lose the entire option premium.
Each Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Options. Each Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices, the performance of
which is substantially replicated by securities held in its portfolio. When a
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 a 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, a 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.
Each Fund may also write put options on securities or securities indices.
When a 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 a 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 will profit by the amount of the option
premium. By writing a put option, however, a 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 a 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. A 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 on the same security or index but different
expiration dates or exercise prices (a technique called a "spread").
Each Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
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Other than with respect to closing transactions, a Fund will only write call
or put options that are "covered." A put option will be considered covered if
a Fund has segregated assets with respect to such option in the manner
described in "Risk Factors in Derivatives" below. A call option will be
considered covered if a Fund owns the securities it would be required to
deliver upon exercise of the option (or, in the case of option on a securities
index, securities which substantially replicate 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. Each 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 seller, but generally do not require the parties to post margin
and are subject to greater risk of counterparty default. See "Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC Derivatives" below.
Futures
Each Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity
at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value with the Futures
Commission Merchants (the "FCM") effecting the Fund's exchanges or in a third-
party account with the Fund's Custodian. Each day thereafter until the futures
position is closed, the Fund will pay additional margin representing any loss
experienced as a result of the futures position the prior day or be entitled
to a payment representing any profit experienced as a result of the futures
position the prior day. Whether the margin is deposited with the FCM or with
the Custodian, the margin may be deemed to be in the FCM's custody, and,
consequently, in the event of default due to the FCM's bankruptcy, the margin
may be subject to pro rata treatment as the FCM's assets, which could result
in potential losses to a Fund and its shareholders. Even if a transaction is
profitable, a Fund may not get back the same assets which were deposited as
margin or may receive payment in cash.
[The sale of a futures contract limits a Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future's contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, a 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 a 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 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, a Fund may realize a loss relating to
the futures position.]
[Each Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying
commodity is a currency or securities or interest rate index) purchased or
sold for hedging purposes (including anticipatory hedges).] Each 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. Each Fund will only
engage in futures and options transactions from time to time. No Fund is under
any obligation to use such transactions and may not do so.
Foreign Exchange Transactions. The Mercury International Index Fund may
engage in futures contracts on foreign currencies and foreign currency forward
and spot transactions in connection with transactions or anticipated
transactions in securities denominated in foreign currencies. The Mercury
International Index Fund is not required to engage in futures contracts, and
may not do so. 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
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and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Mercury International Index Fund will enter into foreign exchange
transactions only for purposes of hedging either a specific transaction or a
portfolio position. The Fund may enter into a foreign exchange transaction for
purposes of hedging a specific transaction by, for example, purchasing a
currency needed to settle a security transaction at a future date or selling a
currency in which the Fund has received or anticipates receiving a dividend or
distribution.
Swaps
Each 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 securities or equity index. Swap agreements may also be
used to obtain exposure to a security or market without owning or taking
physical custody of securities.
Risk Factors in Derivatives
Use of derivatives for hedging purposes involves the risk of imperfect
correlation in movements in the value of the derivatives and the value of the
instruments being hedged. If the value of the derivatives moves more or less
than the value of the hedged instruments, a Fund will experience a gain or
loss that will not be completely offset by movements in the value of the
hedged instruments.
The Funds intend 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, 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 a 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 (e.g., futures transactions, sales of
put options) may expose a Fund to potential losses which exceed the amount
originally invested by the Fund in such instruments. When a Fund engages in
such a transaction, the Fund will deposit in a segregated account at its
Custodian liquid securities with a value at least equal to the Fund's
exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options may be substantially less liquid than other instruments
in which a Fund may invest. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for a Fund to
ascertain a market value for such instruments. A 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.
The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
The Funds have therefore adopted an investment policy pursuant to which they
will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transactions, the sum of the market value
of OTC options currently outstanding which are held by a Fund, the market
value of the securities underlying OTC call options currently outstanding
which have been sold by a Fund and margin deposits on the Fund's outstanding
OTC options exceeds 15% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise
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not readily marketable. However, if an OTC option is sold by a Fund to a
dealer in U.S. government securities recognized as a "primary dealer" by the
Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a predetermined price, then
the Fund will treat as illiquid such amount of the underlying securities as 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 security minus the
option's exercise price).
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 a 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. Each 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.
Additional Limitations on the Use of Derivatives
The Funds may not use any derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
Additional Information Concerning the Indices
S&P 500. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by the Corporation and the Trust. The Mercury S&P 500
Index Fund and the Master S&P 500 Index Series are not sponsored, endorsed,
sold or promoted by Standard & Poor's, a division of the McGraw Hill
Companies, Inc. ("Standard & Poor's"). Standard & Poor's makes no
representation regarding the advisability of investing in the Fund or the
Series. Standard & Poor's makes no representation or warranty, express or
implied, to the owners of shares of the Fund or the Series or any member of
the public regarding the advisability of investing in securities generally or
in the Fund or the Series particularly or the ability of the S&P 500 to track
general stock market performance. Standard & Poor's only relationship to the
Fund and the Series is the licensing of certain trademarks and trade names of
Standard & Poor's and of the S&P 500 which is determined, composed and
calculated by Standard & Poor's without regard to the Fund and the Series.
Standard & Poor's has no obligation to take the needs of the Fund and the
Series or the owners of shares of the Fund and the Series into consideration
in determining, composing or calculating the S&P 500. Standard & Poor's is not
responsible for and has not participated in the determination of the prices
and amount of the Fund and the Series or the timing of the issuance of sale of
shares of the Fund and the Series or in the determination or calculation of
the equation by which the Fund and the Series is to be converted into cash.
Standard & Poor's has no obligation or liability in connection with the
administration, marketing or trading of the Fund and the Series.
Standard & Poor's does not guarantee the accuracy and/or the completeness of
the S&P 500 Index or any data included therein, and Standard & Poor's shall
have no liability for any errors, omissions, or interruptions therein.
Standard & Poor's makes no warranty, express or implied, as to results to be
obtained by the Fund, the Series, owners of shares of the Fund and the Series,
or any other person or entity from the use of the S&P 500 Index or any data
included therein. Standard & Poor's makes no express or implied warranties and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any data
included therein. Without limiting any of the foregoing, in no event shall
Standard & Poor's have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
Russell 2000. The Mercury Small Cap Index Fund and the Master Small Cap
Index Series are not promoted, sponsored or endorsed by, not in any way
affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Mercury Small Cap Index Fund or the
Master Small Cap Index Series nor any associated literature or publications
and Frank Russell Company makes no representation or warranty, express or
implied, as to their accuracy, or completeness, or otherwise.
16
<PAGE>
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change the Russell 2000(R) Index. Frank
Russell Company has no obligation to take the needs of any particular fund or
its participants or any other product or person into consideration in
determining, composing or calculating the Index.
Frank Russell Company's publication of the Russell 2000(R) Index in no way
suggests or implies an opinion by Frank Russell Company as to the
attractiveness or appropriateness of investment in any or all securities upon
which the Russell 2000 is based. Frank Russell Company makes no
representation, warranty, or guarantee as to the accuracy, completeness,
reliability, or otherwise of the Russell 2000 or any data included in the
Russell 2000. Frank Russell Company makes no representation or warranty
regarding the use, or the results of use, of the Russell 2000 or any data
included therein, or any security (or combination thereof) comprising the
Russell 2000. Frank Russell Company makes no other express or implied
warranty, and expressly disclaims any warranty, or any kind, including,
without means of limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the Russell 2000 or any data or any
security (or combination thereof) included therein.
EAFE Index. The EAFE Index is the exclusive property of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"). The EAFE Index is a service mark of Morgan
Stanley Group Inc. and has been licensed for use by the Investment Adviser and
its affiliates.
The Mercury International Index Fund and the Master International Index
Series are not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan
Stanley makes no representation or warranty, express or implied, to the owners
of shares of the Mercury International Index Fund and the Master International
Index Series or any member of the public regarding the advisability of
investing in securities generally or in the Mercury International Index Fund
and the Master International Index Series particularly or the ability of the
EAFE Index to track general stock market performance. Morgan Stanley is the
licensor of certain trademarks, service marks and trade names of Morgan
Stanley and of the EAFE Index. Morgan Stanley has no obligation to take the
needs of the Mercury International Index Fund and the Master International
Index Series or the owners of shares of the Master International Index Fund
and the Mercury International Index Series into consideration in determining,
composing or calculating the EAFE Index. Morgan Stanley is not responsible for
and has not participated in the determination of the timing of, prices at, or
quantities of shares of the Mercury International Index Fund and the Master
International Index Series to be issued or in the determination or calculation
of the equation by which the shares of the Mercury International Index Fund
and the Master International Index Series are redeemable for cash. Morgan
Stanley has no obligation or liability to owners of shares of the Mercury
International Index Fund and the Master International Index Series in
connection with the administration, marketing or trading of the Mercury
International Index Fund and the Master International Index Series.
Although Morgan Stanley shall obtain information for inclusion in or for use
in the calculation of the EAFE Index from sources which Morgan Stanley
considers reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the EAFE Index or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be obtained by
licensee, licensee's customers and counterparties, owners of shares of the
Mercury International Index Fund and the Master International Index Series, or
any other person or entity from the use of the EAFE Index or any data included
therein in connection with the rights licensed hereunder or for any other use.
Morgan Stanley makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular
purpose with respect to the EAFE Index or any data included therein. Without
limiting any of the foregoing, in no event shall Morgan Stanley have any
liability for any direct, indirect, special, punitive, consequential or any
other damages (including lost profits) even if notified of the possibility of
such damages.
Investment Restrictions
The Corporation has adopted the following restrictions and policies relating
to the investment of each Fund's assets and activities, which are fundamental
policies and may not be changed with respect to a 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
17
<PAGE>
none of the following restrictions shall prevent a Fund from investing all of
its assets in shares of another registered investment company with the same
investment objective (in a master/feeder structure), each Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
non-diversified company under the Investment Company Act.
2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities); provided, that in
replicating the weighting of a particular industry in its target index, a
Fund may invest more than 25% of its total assets in securities of issuers
in that industry.
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
law, a Fund may invest in securities directly or indirectly secured by real
estate or interests therein or issued by companies which 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 government
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 a 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) a 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) a Fund may borrow up to an additional
5% of its total assets for temporary purposes, (iii) a Fund may obtain such
short term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, and (iv) a Fund may purchase securities on
margin to the extent permitted by applicable law. A 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 a Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a 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.
In addition, although each Fund is classified as a non-diversified fund
under the Investment Company Act and is not subject to the diversification
requirements of the Investment Company Act, each Fund is required to comply
with certain requirements under the Internal Revenue Code of 1986, as amended
(the "Code"). To ensure that the Funds satisfy these requirements, the
Declaration of Trust requires that each Series be managed in compliance with
the Code requirements as though such requirements were applicable to the
Series. These requirements include limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of a Fund's total assets are invested in the securities of a single
issuer, or any two or more issuers which are controlled by the Fund and
engaged in the same, similar or related businesses, and (ii) with respect to
50% of the market value of its total assets, not more that 5% of the market
value of its total assets are invested in securities of a single issuer, and
the Fund does not own more than 10% of the outstanding voting securities of a
single issuer. The U.S. Government, its agencies and instrumentalities are not
included within the definition of "issuer" for purposes of the diversification
requirements of the Code. These requirements will be
18
<PAGE>
satisfied at the Series level and not at the level of the Funds based upon a
ruling received from the Internal Revenue Service ("IRS") which entitles the
Funds to "look through" the shares of the Series to the underlying investments
of the Series for purposes of these diversification requirements.
The Trust has adopted investment restrictions substantially identical to the
foregoing, which are fundamental policies of the Trust and may not be changed
with respect to any Series without the approval of the holders of a majority
of the interests of the Series.
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 a 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, a Fund may not:
[(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, a 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. No Fund currently intends to
engage in short sales, except short sales "against the box."]
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Directors of the Corporation have otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (which are restricted securities
that can be resold to qualified institutional buyers, but not to the
general public) and determined to be liquid by the Directors are not
subject to the limitations set forth in this investment restriction.
(d) Make any additional investments if the amount of its borrowings
exceeds 5% of its total assets. Borrowings do not include the use of
investment techniques that may be deemed to create leverage, including, but
not limited to, such techniques as dollar rolls, when-issued securities,
options and futures.
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 Series by the Trustees.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Corporation and Trust have adopted an investment
policy pursuant to which no Series or Fund will purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
that are held by such Fund or Series, the market value of the underlying
securities covered by OTC call options currently outstanding that were sold by
the Fund or Series and margin deposits on the Fund or Series's existing OTC
options on futures contracts exceeds 15% of the net assets of the Fund or
Series taken at market value, together with all other assets of such Fund or
Series that are illiquid or are not otherwise readily marketable. However, if
the OTC option is sold by a Fund or Series to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if a
Fund or Series has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund or Series 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
19
<PAGE>
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 any
Fund or Series 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 each Fund's underlying Series generally may not be
purchased from, sold or loaned to the Investment Adviser or its affiliates or
any of their directors, 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 FAM, the Funds and Series are prohibited
from engaging in certain transactions involving Merrill Lynch, or 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 the conditions under which a Fund and a Series may
purchase from an underwriting syndicate in which Merrill Lynch is a member.
Otherwise, the Funds and Series are prohibited from engaging in portfolio
transactions with Merrill Lynch or its affiliates acting as principal without
an exemptive order.
Portfolio Turnover
Although each Fund will use a passive, indexing approach to investing, each
Fund may engage in a substantial number of portfolio transactions. The rate of
portfolio turnover will be a limiting factor when the Investment Adviser
considers whether to purchase or sell securities for a Fund only to the extent
that the Investment Adviser will consider the impact of transaction costs on a
Fund's tracking error. Changes in the securities comprising a Fund's index
will tend to increase that Fund's portfolio turnover rate, as the Investment
Adviser restructures the Fund's holdings to reflect the changes in the index.
The portfolio turnover rate is, in summary, the percentage computed by
dividing the lesser of a Fund's purchases or sales of securities by the
average net asset value of the Fund. High portfolio turnover involves
correspondingly greater brokerage commissions for a Fund investing in equity
securities and other transaction costs which are borne directly by a Fund. A
high portfolio turnover rate may also result in the realization of taxable
capital gains, including short-term capital gains taxable at ordinary income
rates.
MANAGEMENT OF THE FUNDS
Directors and Officers
The Directors of the Corporation consist of four individuals, three 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
each Fund and perform the various duties imposed on the directors of
investment companies by the Investment Company Act. Information about the
Directors, executive officers and portfolio managers 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 the portfolio's managers,
of each executive officer and Director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
[UPDATE?]
Terry K. Glenn (58)--President and Director(1)(2)--Executive Vice President
of FAM (which terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Jack B. Sunderland (70)--Director(2)--P.O. Box 7, West Cornwall, Connecticut
06796. President and Director of American Independent Oil Company, Inc.
(energy company) since 1987; Member of Council on Foreign Relations since
1971.
Stephen B. Swensrud (65)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman, Fernwood Advisors (investment adviser) since
1996; Principal, Fernwood Associates (financial consultant) since 1975.
20
<PAGE>
J. Thomas Touchton (60)--Director(2)--Suite 3405, One Tampa City Center,
Tampa, Florida, 33602. Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (private investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy Inc.
(electric utility holding company).
Joseph T. Monagle, Jr. (50)--Senior Vice President(1)(2)--Senior Vice
President of FAM since 1990; Department Head of the Global Fixed Income
Division of the Investment Adviser since 1997; Senior Vice President of
Princeton Services since 1993.
Gregory Mark Maunz (46)--Senior Vice President of the Funds and Co-Portfolio
Manager of the Mercury Aggregate Bond Index Fund(1)(2)--First Vice President
of FAM since 1997; Vice President of the FAM from 1985 to 1997; Portfolio
Manager of FAM since 1984.
Jeff Hewson (47)--Vice President of the Funds and Co-Portfolio Manager of
the Mercury Aggregate Bond Index Fund(1)(2)--Director (Global Fixed Income) of
FAM since 1998; Vice President of the FAM Investment Adviser from 1989 to
1998; Portfolio Manager of FAM since 1985.
Eric S. Mitofsky (45)--Senior Vice President of the Funds and Portfolio
Manager of the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and
[Mercury International Index Fund](1)(2)--First Vice President of FAM since
1997; Vice President of FAM from 1992 to 1997.
Christopher G. Ayoub (43)--Senior Vice President of the Funds and Co-
Portfolio Manager of the Mercury Aggregate Bond Index Fund(1)(2)--First Vice
President of FAM since 1998; [Vice President of FAM from 1985 to 1998.]
Richard Vella (42)--[Senior] Vice President of the Funds and Portfolio
Manager of the Mercury International Index Fund(1)(2)--First Vice President of
the Investment Adviser and its affiliate since 1999; Managing Director of
Bankers Trust Company from 1995 to 1999; Senior Portfolio Manager for global
quantitative products and index funds and Head of the Global Index Fund group
at Bankers Trust Company from 1985 to 1999.
Frank Salerno (39)--[Senior] Vice President of the Funds(1)(2)--First Vice
President of the Investment Adviser and its affiliates since 1999; Managing
Director of Bankers Trust Company from 1992 to 1999; Senior Portfolio Manager
for quantitative products and index funds and Chief Investment Officer of
Structured Investments at Bankers Trust Company from 1989 to 1999.
Dean D'Onofrio (40)--Senior Vice President of the Funds and Managing
Director and Head of Quantitative Advisors since 1999; Managing Director in
Corporate Institutional Client Group from 1997 through 1999; Managing Director
of Bankers Trust Company from 1981 to 1996; Analyst, Quantitative Investments
group of Bankers Trust Company from 1981 to 1982, Portfolio Manager of
Quantitative Investments group of Bankers Trust Company from 1983 to 1984.
Head of Qualitative Investments group of Bankers Trust Company from 1985 to
1989. Head of U.S. Equity Derivatives Marketing group of Bankers Trust Company
from 1990 to 1993. Head of Hedge Funds and Arbitrage Trading Group of Bankers
Trust Company from 1994 to 1996.
Phil Green--
Donald C. Burke (36)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of FAM since 1999; Senior Vice President and Treasurer
of Princeton Services since 1999; Vice President of PFD since 1999; First Vice
President of FAM from 1997 to 1999; Director of Taxation of FAM since 1990;
Vice President of FAM from 1990 to 1997.
Ira P. Shapiro (36)--Secretary(1)(2)--First Vice President of FAM since
1998; Director (Legal Advisory) of FAM from 1997 to 1998; Vice President of
FAM from 1996 to 1997; Attorney with FAM from 1993 to 1997.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the
Corporation.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which FAM acts as investment adviser.
21
<PAGE>
As of , 1999, the officers and Directors of the Corporation as a group
(eleven persons) owned an aggregate of less than 1% of the outstanding shares
of Common Stock of Merrill Lynch & Co., Inc. ("ML & Co.") and owned an
aggregate of less than 1% of the outstanding shares of any of the Funds.
[confirm]
Compensation of Directors/Trustees [How will Directors be compensated?]
The Corporation and the Trust expect to pay each individual who serves as a
Director/Trustee not affiliated with FAM or with an affiliate of FAM (each a
"non-affiliated Director/Trustee") [for service to the Funds and Series] a fee
of [$2,500 per year plus $250] per Board meeting attended, together with such
individual's actual out-of-pocket expenses relating to attendance at meetings.
The Corporation and the Trust also expect to compensate members of the Audit
and Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Director/Trustees of the Funds and the Series, with a fee of
[$1,000] per year [for service to the Funds and Series].
The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay the non-affiliated Directors/Trustees for the
fiscal year ended December 31, 1999 and the total compensation paid to non-
affiliated Directors/Trustees by all registered investment companies advised
by FAM and its affiliates, ("FAM and Affiliates--Advised Funds") for the
calendar year ended December 31, 1999.
<TABLE>
<CAPTION>
Total Compensation
Pension or from
Retirement Corporation/Trust
Aggregate Benefits Accrued and FAM and
Compensation as Part of Affiliates Advised
From Corporation/Trust Funds Paid to
Name of Director/Trustee Corporation/Trust Expenses Directors/Trustees(1)
------------------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Jack B. Sunderland...... [$4,500 None [$133,600
Stephen B. Swensrud..... $4,500 None $195,583
J. Thomas Touchton...... $4,500] None $133,600]
</TABLE>
- ----------
(1) The Directors/Trustees serve on the boards of FAM and Affiliates--Advised
Funds as follows: Mr. Sunderland (21 registered investment companies
consisting of 46 portfolios); Mr. Swensrud (26 registered investment
companies consisting of 72 portfolios); Mr. Touchton (21 registered
investment companies consisting of 40 portfolios) [confirm].
Administration Arrangements
The Corporation on behalf of the Funds has entered into an administration
agreement with Mercury Asset Management US, a division of FAM (the
"Administrator") (the "Administration Agreement"). As discussed in the
Prospectus, the Administrator receives for its services to the Funds monthly
compensation at the annual rates of the average daily net assets of each Fund
as follows:
<TABLE>
<CAPTION>
Name of Fund Administration Fee
------------ ------------------
<S> <C>
Mercury S&P 500 Index Fund................................ 0.245%
Mercury Small Cap Index Fund.............................. 0.29%
Mercury Aggregate Bond Index Fund......................... 0.19%
Mercury International Index Fund.......................... 0.34%
</TABLE>
See "Management and Advisory Arrangements" below for a discussion of certain
fee issuances by the Investment Advisor and the Administrator.
The Administration Agreement obligates the Administrator to provide certain
administrative services to the Corporation and the Funds 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 Funds (except to the extent paid by Mercury Funds Distributor, a
division
22
<PAGE>
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 foreign 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 a Fund.
The Distributor will pay certain of the expenses of each Fund incurred in
connection with the continuous offering of its shares. Accounting services are
provided to the Corporation and the Fund by the Administrator, and the
Corporation reimburses the Administrator for its costs in connection with such
services.
Duration and Termination. Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years from its
effective date. Thereafter it will remain in effect from year to year with
respect to each 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 a
Fund without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the majority of outstanding voting shares of each
Fund.
Management and Advisory Arrangements
Management Services. Each Fund invests all of its assets in shares of the
corresponding Series of the Trust. Accordingly, the Funds do not invest
directly in portfolio securities and do not require investment advisory
services. All portfolio management occurs at the level of the Trust. The
Trust, on behalf of, among others, each Series, has entered into an amended
and restated management agreement with the Investment Adviser (the "Management
Agreement"). The Investment Adviser provides the Trust and its Series with
investment advisory and management services. Subject to the supervision of the
Board of Trustees, the Investment Adviser is responsible for the actual
management of each Series' portfolio and constantly reviews the Series'
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Series.
Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Series or
other funds for which it acts as investment adviser or for its advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold there may be an adverse
effect on price.
As discussed in the Prospectus, the Investment Adviser receives for its
services to the Series monthly compensation at the annual rates of the average
daily net assets of each Series as follows:
<TABLE>
<CAPTION>
Contractual Actual
Management Management
Name of Series Fee Fee
- -------------- ----------- ----------
<S> <C> <C>
Master S&P 500 Index Series.............................. 0.05% 0.005%
Master Small Cap Index Series............................ 0.08% 0.01%
Master Aggregate Bond Index Series....................... 0.06% 0.01%
Master International Index Series........................ 0.11% 0.01%
</TABLE>
A contract among each Fund, the Series it invests in, the Investment Adviser
and the Administrator provides that the aggregate of management fee and
administrative fees will not exceed a certain agreed upon amount. This
23
<PAGE>
arrangement accounts for the difference between the actual and contractual
management fee. See "Fees and Expenses" under "Fund Facts," and "Management of
the Fund" under "The Management Team" in the Prospectus.
Payment of Series Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Trust connected with investment and economic research, trading and investment
management of the Trust, as well as the fees of all Trustees who are
affiliated persons of the Investment Adviser or any of its affiliates. Each
Series pays all other expenses incurred in the operation of the Series,
(except to the extent paid by the Distributor), including, among other things,
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports, copies of the Registration
Statements, charges of the Custodian, any Sub-custodian and Transfer Agent,
expenses of portfolio transactions, expenses of redemption of shares,
Commission fees, expenses of registering the shares under federal, state or
foreign laws, fees and out-of-pocket expenses of unaffiliated Trustees,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable
by the Trust or the Series. The Distributor will pay certain of the expenses
of the Series incurred in connection with the offering of its shares of
beneficial interest of each of the Series.
Organization of the Investment Adviser. The Investment Adviser is located at
800 Scudders Mill Road, Plainsboro, NJ 08536, and is a limited partnership,
the partners of which are ML & Co. and Princeton Services. ML & Co. and
Princeton Services [, each a financial services holding company] are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies.
Duration and Termination. Unless earlier terminated as described below, the
Management 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
each Series if approved annually (a) by the Board of Trustees or by a majority
of the outstanding shares of the Series and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of a majority of the outstanding shares of
the Series.
Code of Ethics
The [Board of Trustees of the Trust,] Board of Directors of the Corporation
and [FAM] have adopted a Code of Ethics under Rule 17j-1 of the Investment
Company Act which incorporates the Code of Ethics of the Corporation and of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require, among other things, that all employees of the Investment
Adviser pre-clear any personal securities investment (with limited exceptions,
such as government securities). The pre-clearance 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 Investment Adviser include a ban on acquiring any
securities in a "hot" initial public offering and a prohibition from profiting
on short-term trading in securities. In addition, no employee may purchase or
sell any security that at the time is being purchased or sold (as the case may
be), or to the knowledge of the employee is being considered for purchase or
sale, by any fund advised by the Investment Adviser. Furthermore, the Codes
provide for trading "blackout periods" which prohibit trading by investment
personnel of the Corporation within periods of trading by the Funds in the
same (or equivalent) security (15 or 30 days depending upon the transaction).
[UPDATE?]
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PURCHASE OF SHARES
Reference is made to "Account Choices--How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase
of Fund shares.
Each Fund offers two classes of shares, Class I shares and Class A shares.
Each Class I and Class A share of the Fund represents an identical interest in
the investment portfolio of the Fund and has the same rights, subject to the
following differences. Class I shares of each Fund are offered at a price
equal to the next determined net asset value per share without the imposition
of any front-end or deferred sales charge, and are not subject to any ongoing
account maintenance or distribution fee. Distribution of Class I shares of
each Fund is limited to certain eligible investors. Class A shares of each
Fund are offered at a price equal to the next determined net asset value per
share without the imposition of any front-end or deferred sales charge and are
not subject to any ongoing distribution fee, but are subject to an ongoing
account maintenance fee at an annual rate of 0.25% of average daily net
assets. Class A shares of each Fund have exclusive voting rights with respect
to the Rule 12b-1 distribution plan adopted with respect to Class A shares of
that particular Fund pursuant to which the ongoing account maintenance fee is
charged. [Each class has different exchange privileges.] See "Shareholder
Services--Exchange Privilege." Each class is subject to a redemption fee for
shares held less than ninety days. Each Fund charges a different redemption
fee. See "Redemption of Shares."
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 Funds. Reference is made to "Management of the Funds--Distribution
Expenses."
The Corporation, on behalf of each Fund, has entered into a distribution
agreement with the Distributor in connection with the continuous offering of
shares of the Funds (the "Distribution Agreements"). The Distribution
Agreement obligates the Distributor to pay certain expenses in connection with
the offering of shares of the Funds. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type
and mailed to shareholders, the Distributor pays for the printing and
distribution of copies thereof used in connection with the offering to dealers
and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreement is subject to the
same renewal requirements and termination provisions as the Management
Agreement described above.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), an affiliate of FAM, acts as the Corporation'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 an annual fee at the annual rate of [0.05%] of the average
daily value of the net assets of a Fund for its services and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. 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 record keeping system, provided the record
keeping system is maintained by an affiliate of the Investment Adviser. [Fee
structure to be determined.]
Funds may reject any order to buy shares and may suspend the offering of its
shares at any time.
Investors eligible to purchase Class I shares should purchase Class I shares
rather than Class A shares because there is an account maintenance fee imposed
on Class A shares.
Eligible Class I Investors. Class I shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class I shares. Investors that currently own Class I shares of a
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 programs including
certain managed accounts for which a trust
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<PAGE>
institution, thrift, or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases made through
certain financial advisers that meet and adhere to standards established by
the Investment Adviser. 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 FAM and Affiliates-Advised investment companies,
including the Corporation, and to employees of certain selected dealers.
Each Fund or the Distributor may suspend the continuous offering of a 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. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Certain securities
dealers may charge a fee to process a purchase. Purchases made directly
through the Transfer Agent are not subject to a processing fee.
Account Maintenance Plan
Reference is made to "Account Choices--Pricing of Shares" in the Prospectus
for certain information with respect to the account maintenance plan for Class
A shares pursuant to Rule 12b-1 under the Investment Company Act of the Fund
(the "Account Maintenance Plan") with respect to the account maintenance paid
by the Fund to the Distributor with respect to Class A shares.
The Account Maintenance Plan for Class A shares provides that the Funds pay
the Distributor an account maintenance fee relating to Class A shares accrued
daily and paid monthly, at the annual rate of 0.25% of the average daily net
assets of the Fund attributable to Class A shares in order to compensate the
Distributor and selected dealers (pursuant to sub-agreements) in connection
with account maintenance activities.
The payments under the Account Maintenance Plan 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 Class A shares
regardless of the amount of expenses incurred. In their consideration of the
Account Maintenance Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Account Maintenance
Plan to the Funds and their Class A shareholders. In approving the Account
Maintenance Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that the Account Maintenance
Plan will benefit the Fund, and their Class A shareholders. Information with
respect to the account maintenance-related expenses is presented to the
Directors of the Corporation for their consideration in connection with their
deliberations as to the continuance of the Class A Account Maintenance Plan.
The Funds have no obligation with respect to account maintenance-related
expenses incurred by the Distributor and selected dealers in connection with
the Class A shares, and there is no assurance that the Directors of the
Corporation will approve the continuance of the Account Maintenance Plan from
year to year. However, the Distributor intends to seek annual continuation of
the Account Maintenance Plan. In their review of the Account Maintenance Plan,
the Directors will be asked to take into consideration expenses incurred in
connection with the account maintenance of Class A shares. The account
maintenance fee received with respect to one class will not be used to
subsidize the sale of shares of another class.
In their consideration of the Account Maintenance Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Account Maintenance Plan to each Fund and each related class
of shareholders. The Account Maintenance Plan further provides that, so long
as the Account Maintenance Plan remains in effect, the selection and
nomination of Directors who are not "interested persons" of the Fund, as
defined in the Investment Company Act (the "Independent Directors") shall be
committed to the discretion of the Independent Directors then in office. In
approving the Account Maintenance Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that the
Account Maintenance Plan will benefit each Fund and its related class of
shareholders. The Account Maintenance Plan can be terminated, with respect to
some or all of the Funds, at any time, without penalty, by the vote of a
majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding Class A voting securities of the applicable Fund.
The Account Maintenance Plan cannot be amended to increase materially the
amount to be spent by a Fund
26
<PAGE>
without the approval of the Class A shareholders of the applicable Fund, and
all material amendments are required to be approved by the vote of Directors,
including a majority of the Independent Directors who have no direct or
indirect financial interest in the Account Maintenance Plan, cast in person at
a meeting called for that purpose. Rule 12b-1 further requires that each Fund
preserve copies of the Account Maintenance Plan and any report made pursuant
to such plan for a period of not less than six years from the date of the
Account Maintenance Plan or such report, the first two years in an easily
accessible place.
REDEMPTION OF SHARES
Reference is made to "Account Choices--How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the
redemption and repurchase of Fund shares.
Each 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, minus any applicable redemption fee. There will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at
the time of redemption may be more or less than the shareholder's cost,
depending on the net asset value of a Fund's shares at such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so by tendering the shares directly to the appropriate Fund's Transfer Agent,
Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-
4062. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Redemption requests should not be sent to the Funds. A
redemption request requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as (his) (her) (their) name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.
At various times a Fund may be requested to redeem shares for which it has
not yet received good payment. A Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal
of portfolio securities or determination of the net asset value of a Fund is
not reasonably practicable, and for such other periods as the Commission may
by order permit for the protection of shareholders of the Funds.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the net asset value of such shares at
such time.
Repurchase
Each Fund will also repurchase shares through a shareholder's listed
securities dealer. Each Fund will normally accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset
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<PAGE>
value next computed after receipt of the order by the dealer, minus any
applicable CDSC or redemption fee, if any, provided that the request for
repurchase is received by the dealer prior to the close of business on the
NYSE (generally 4:00 p.m., Eastern time) on the day received and is received
by the Fund from such dealer not later than 30 minutes after the close of
business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to a
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 a Fund
(other than any applicable CDSC or redemption fee, if any). Securities firms
that do not have selected dealer agreements with the Distributor, however, may
impose a transaction charge on the shareholder for transmitting the notice of
repurchase to a Fund. Certain securities dealers may charge a processing fee
to confirm a repurchase of shares. For example, the fee currently charged by
Merrill Lynch is $5.35. Fees charged by other securities dealers may be higher
or lower. Repurchases directly through a Fund's Transfer Agent, on accounts
held at the Transfer Agent, are not subject to the processing fee. Each 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
a Fund, however, may redeem shares as set forth above.
Redemption Fee
Short-term investors, including investors that engage in market timing,
should not invest in the Fund because the Funds impose a redemption fee for
shares held less than ninety days.
As discussed in the Prospectus under "Account Choices--Pricing of Shares,"
if you sell or exchange your shares within ninety days of purchase you will be
charged a redemption fee. The redemption fee is 0.25% of your redemption
proceeds from shares of the Mercury S&P 500 Index Funds and the Mercury
Aggregate Bond Index Fund, and 0.50% of your redemption proceeds from shares
of the Mercury Small Cap Index Fund and the Mercury International Index Fund.
The redemption fee will be subtracted by the Fund from your redemption
proceeds. The redemption fee is not a sales charge or load which is paid to an
adviser, distributor or dealer, as is kept by the Fund to offset the
additional short-term trading costs which result from short-term trading by
some shareholders. The ninety day period will be calculated assuming that the
most recent purchase of shares is being redeemed first. This will maximize the
amount of the redemption fee that you will pay. The redemption fee will not
apply to shares purchased through reinvested distributions or automatic
investments. [Exceptions; Limits on trading?]
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because the Funds will invest exclusively in shares of their corresponding
Series, it is expected that all transactions in portfolio securities will be
entered into by the Series. Subject to policies established by the Board of
Trustees of the Trust, the Investment Adviser is primarily responsible for the
execution of the Series' portfolio transactions and the allocation of
brokerage. The Trust has no obligation to deal with any broker-dealer or group
of broker-dealers in the execution of transactions in portfolio securities of
the Series. Orders for transactions in portfolio securities are placed for the
Trust with a number of brokers and dealers, including affiliates of the
Investment Adviser. Where possible, the Trust deals directly with the dealers
who make a market in the securities involved except in those circumstances
where better prices and execution are available elsewhere. It is the policy of
the Trust to obtain the best results in conducting portfolio transactions for
the Series, taking into account such factors as price (including the
applicable dealer spread or commission), the size, type and difficulty of the
transaction involved, the firm's general execution and operations facilities
and the firm's risk in positioning the securities involved. The portfolio
securities of the Series generally are traded on a principal basis and
normally do not involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the Series primarily consists of
dealer or underwriter spreads. While reasonable competitive spreads or
commissions are sought, the Trust will not necessarily be paying the lowest
spread or commission available. Transactions with respect to the securities of
small and emerging growth companies in which the Series may invest may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions
involving more widely trading securities.
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<PAGE>
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a
company, industry or economic sector) to the Investment Adviser may receive
orders for transactions by the Trust. 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 Management Agreement and the expense 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 be benefitted by supplemental research services, the Investment
Adviser is authorized to pay brokerage commissions to a broker-dealer
furnishing such services which are in excess of commissions which another
broker-dealer may have charged for effecting the same transaction.
Supplemental investment research obtained from such broker-dealers might be
used by the Investment Adviser in servicing all of its accounts and all such
research might not be used by the Investment Adviser in connection with the
Fund. Consistent with the Conduct Rules of the NASD and policies established
by the Trustees, the Investment Adviser may consider sales of shares of the
Funds as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust.
Under the Investment Company Act, persons affiliated with the Trust and
persons who are affiliated with such 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 broker-
dealers acting as principal for their own accounts, affiliated persons of the
Trust, including Merrill Lynch and any of its affiliates, will not serve as
the Trust's broker-dealers in such transactions. However, affiliated persons
of the Trust may serve as its broker-dealer in listed or OTC transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker-dealer is reasonable and fair
compared to the fee or commission received by non-affiliated broker-dealers 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
adopted by the Board of Trustees of the Trust that either comply with rules
adopted by the Commission or with interpretations of the Commission staff.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Trust on the floor of
any U.S. national securities exchange provided that prior authorization of
such transactions is obtained and Merrill Lynch furnishes a statement to the
Trust at least annually setting forth the compensation it has received in
connection with such transactions.
The Trustees of the Trust have considered the possibility of recapturing for
the benefit of the Trust brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the management fee paid by the Trust to
the Investment Adviser. After considering all factors deemed relevant, the
Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
[The portfolio turnover rate is calculated by dividing the lesser of a
Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the securities in the
portfolio during the year. The portfolio turnover rate is generally
anticipated to be . 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.]
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
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<PAGE>
or an affiliate during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus concerning
the determination of net asset value.
The net asset value of the shares of each Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
on each day the NYSE is open for trading (a "Pricing Day"). The close of
business on the NYSE is generally 4:00 p.m., Eastern time. [Each Fund also
will determine its net asset value on any day in which there is sufficient
trading in the underlying Series securities that the net asset value might be
affected materially, but only if on any such day the Fund is required to sell
or redeem shares.] Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of
valuation. The NYSE is not open for trading on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The net asset value is computed
by dividing the value of the securities held by a 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, rounded to the nearest cent. Expenses, including the
fees payable to the Administrator and the Distributor and the advisory fees
payable indirectly by the Series of the Trust to the Investment Adviser, are
accrued daily.
The principal assets of each Fund will normally be its interest in the
underlying Series, which will be valued at its net asset value. Net asset
value is computed by dividing the value of the securities held by the
applicable Series 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 are
accrued daily. The per share net asset value of Class A 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 fees applicable with respect
to Class A shares. Shares sold or exchanged within ninety days of purchase
will have a lower net asset value because a redemption fee is charged on such
shares. It is expected, however, that the per share net asset value of the two
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 (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Trustees as the
primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on
a stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at
the last available ask price in the OTC market prior to the time of valuation.
When a Series writes an option, the amount of the premium received is recorded
on the books of the Series as an asset and an equivalent liability. The amount
of the liability is subsequently valued to reflect the current market value of
the option written, based upon the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased by a Series are valued at their last sale price
in the case of exchange-traded options or, in the case of options traded in
the OTC market, the last bid price. Other investments, including financial
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are generally
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by a
pricing service retained by the Trust. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
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[Bonds held by the Master Aggregate Bond Index Series are traded primarily
in the OTC markets. In determining net asset value, the Master Aggregate Bond
Index Series uses the valuations of portfolio securities furnished by a
pricing service approved by the Board of Trustees. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. The bonds for which quotations are not
readily available are valued at fair market value on a consistent basis as
determined by the pricing service using a matrix system to determine
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Master Aggregate Bond Index Series under the
general supervision of the Board of Trustees. The Board of Trustees has
determined in good faith that the use of a pricing service is a fair method of
determining the valuation of portfolio securities.]
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of a Fund's shares are
determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that will not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
as determined in good faith by the Board of Trustees.
Each investor in the Trust may add to or reduce its investment in any Series
on each Pricing Day. The value of each investor's (including the respective
Fund's) interest in a Series will be determined as of 15 minutes after the
close of business on the NYSE (generally 4:00 p.m., New York Time) by
multiplying the net asset value of the Series by the percentage, effective for
that day, that represents that investor's share of the aggregate interests in
such Series. Any additions or withdrawals, which are to be effected on that
day, will then be effected. The investor's percentage of the aggregate
beneficial interests in a Series 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 applicable Series as of the time or determination
on such day plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in the Series effected on such
day, and (ii) the denominator of which is the aggregate net asset value of the
applicable Series 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 Series by all investors in such Series. The percentage so
determined will then be applied to determine the value of the investor's
interest in such Series as of 15 minutes after the close of business of the
NYSE on the next Pricing Day of the Series.
SHAREHOLDER SERVICES
Each 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 applicable Fund, the Distributor or your selected dealer.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends, and long-term capital gains distributions. A
shareholder with an account held at the Transfer Agent may make additions to
his or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
The Funds do not issue share certificates. Shareholders considering
transferring their Class I or Class A shares from a selected dealer to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take
delivery of shares of a Fund, a shareholder either
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must redeem the Class I or Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class I or
Class A shares. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from a selected
dealer to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will
not take delivery of shares of a Fund, a shareholder must either redeem the
shares so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at a
selected dealer for those shares.
Automatic Investment Plan
A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if an eligible Class I investor as described in the
Prospectus) or Class A shares at the applicable public offering price either
through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. You may also add
to your account by automatically investing a specific amount in a Fund on a
periodic basis through your selected dealer. The current minimum for such
automatic additional investments is [$50]. This minimum may be waived or
revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends and distributions from a Fund may be taken in cash or
automatically reinvested in shares of a Fund at net asset value without a
sales charge. You should consult with your financial consultant about which
option you would like. If you choose the reinvestment option, such
reinvestment will be at the net asset value of shares of the Fund, without
sales charge, as of the close of business on the ex-dividend date of the
dividend or distribution. Shareholders may elect in writing or by telephone
(1-888-763-2260), if the shareholder's account is maintained with the Transfer
Agent, to receive either their dividends or capital gains distributions, or
both, in cash, in which event payment will be mailed or direct deposited on or
about the payment date, except that in all circumstances dividends less than
ten dollars will be reinvested.
Shareholders may, at any time, notify their selected dealer in writing if
the shareholder's account is maintained with a selected dealer or notify the
Transfer Agent in writing or by telephone (1-888-763-2260), if the account is
maintained with the Transfer Agent that they no longer wish to have their
dividend and/or capital gains distributions reinvested in shares of a Fund or
vice versa and, commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. No Fund is responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Systematic Redemption Program
A shareholder may elect to make withdrawals from an Investment Account of
Class I or Class A 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 a Fund having a
value, based on cost or the current offering price, of [$5,000] or more, and
monthly withdrawals are available for shareholders with shares having a value
of [$10,000] or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. With respect to shareholders who
hold accounts directly at the Transfer Agent, redemptions will be made at net
asset value as determined as described herein on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. With
respect to shareholders who hold accounts with their broker-dealer,
redemptions will be made at net asset value determined as described herein on
the first, second, third or fourth Monday of each month, or the first, second,
third or fourth Monday of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be mailed, or the direct deposit for
withdrawal payment will be made, on
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the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in shares of a Fund. A
shareholder's systematic withdrawal plan may be terminated at any time,
without a charge or penalty, by the shareholder, a Fund, a Fund's Transfer
Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. No Fund will knowingly accept purchase orders for
shares of the Fund from investors who maintain a systematic withdrawal plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
Retirement Plans
The minimum initial purchase to establish a retirement plan is [$100].
Capital gains and income received in retirement plans are exempt from Federal
taxation until distributed from the plans. Investors considering
participations in any such plan should review specific tax laws relating
thereto and should consult their attorneys or tax advisors with respect to the
establishment and maintenance of any such plan.
Exchange Privilege [Exchange procedures to be determined.]
U.S. shareholders of each class of shares of a Fund have an exchange
privilege with certain other Mercury mutual funds and Summit. The exchange
privilege does not apply to any other funds. Under a 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. Class I 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 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 and Class A shares also are
exchangeable for shares of Summit, a money market fund specifically designated
for exchange by holders of Class I and Class A. Class I and Class A shares
will be exchanged for Class A shares of Summit. Summit Class A shares do not
include any front-end sales charge or CDSC.
Exchanges of Class I or Class A shares of a Fund 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 each
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.
A redemption fee will be charged on shares exchanged within ninety days of
purchase. Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. To
exercise the exchange privilege, shareholders should contact their financial
consultant, who will advise the applicable Fund of the exchange. Shareholders
of a Fund, and shareholders of the other funds described above
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with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. Each 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. Each Fund reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may
be made.
Fee-based Programs
Certain fee-based programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit
the purchase of Class I shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class I shares. Initial or deferred sales
charges, if any, otherwise due in connection with such exchanges may be waived
or modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in certain Programs may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value. In addition, upon termination of participation in certain
Programs, shares that have been held for less than specified periods within
such Program may be subject to a fee based upon the current value of such
shares. These Programs also generally prohibit such shares from being
transferred to another account, to another broker-dealer or to the Transfer
Agent. Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
certain specific Programs offered through particular selected dealers
(including charges and limitations on transferability applicable to shares
that may be held in such Program) is available in the Program's client
agreement and from the shareholder's selected dealer.
DIVIDENDS AND TAXES
[to be reviewed/updated]
Dividends
It is the Corporation's intention to distribute all of its net investment
income, if any. Dividends from such net investment income are paid at least
annually with respect to each of the Mercury S&P 500 Index Fund, Mercury Small
Cap Index Fund and Mercury International Index Fund. Dividends with respect to
the Mercury Aggregate Bond Index Fund are declared daily and paid monthly. All
net realized capital gains, if any, are distributed to Fund shareholders at
least annually. From time to time, a 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 or its ordinary income and
capital gains be distributed during the taxable year. See "Shareholder
Services--Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions may be reinvested automatically in
shares of the Funds. Shareholders may elect in writing to receive any such
dividends or distributions in cash.
Taxes
The Funds intend to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as a
Fund so qualifies, such Fund will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to shareholders. In order to qualify, a Fund generally must, among
other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, gains from the
sale of securities, or other income (including but not limited to gains from
options or futures) derived with respect to its business of investing in such
stock or securities; (ii) distribute at least 90% of its dividend, interest
and certain other taxable income each year; (iii) at the end of each fiscal
quarter maintain at least 50% of the value of its total assets in cash,
government securities, securities of other RICs, and other securities of
issuers which represent, with respect to each issuer, no
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<PAGE>
more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer; and (iv) at the end of each
fiscal quarter have no more than 25% of its assets invested in the securities
(other than those of the government or other RICs) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses.
Dividends paid by each 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. Distributions made from a Fund's net realized
capital gains (including long-term gains from certain transactions in futures
and options) ("capital gain dividends") are taxable to shareholders as capital
gains, regardless of the length of time the shareholder has owned Fund shares.
The maximum capital gains rate for individuals is 20%. Not later than 60 days
after the close of its taxable year, each Fund will provide shareholders with
a written notice designating the amounts of any ordinary income dividends or
capital gains dividends. Distributions in excess of a Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of a Fund. A portion of the ordinary income dividends paid
by the Mercury S&P 500 Index Fund and Mercury Small Cap Index Fund may be
eligible for the 70% dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, each Fund
will allocate dividends eligible for the dividends received deduction between
the Class I and Class A shareholders according to a method that is based upon
the gross income that is allocable to the Class I and Class A shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. Dividends paid by the Mercury Aggregate Bond Index Fund and the
Mercury International Index Fund will not be eligible for the dividends
received deduction. If a Fund pays a dividend in January which 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.
Redemptions and exchanges of Fund shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such events. A loss
realized on a sale or exchange of shares of a Fund will be disallowed if other
Fund shares 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. Any loss upon the sale or exchange of Fund shares held for six months or
less, which is not disallowed, will be treated as long-term capital loss to
the extent of any capital gains distributions received by the shareholder with
respect to such shares.
Ordinary income dividends paid by a Fund to shareholders who are nonresident
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 the applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
Dividends and interest received by the Mercury International Index Fund and
the Mercury Aggregate Bond Index Fund may give rise to withholding and other
taxes imposed by foreign countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. Shareholders of the
Mercury International Index Fund may be able to claim U.S. foreign tax credits
with respect to such taxes, subject to certain provisions and limitations
contained in the Code. For example, certain retirement accounts cannot claim
foreign tax credits on investments in foreign securities held by the Fund. The
Mercury International Index Fund expects to be eligible, and intends, to file
an election with the Internal Revenue Service pursuant to which shareholders
of the Fund will be required to include their proportionate share of such
withholding taxes in their U.S. income tax returns as gross income, treat such
proportionate share as taxes paid by them, and deduct such proportionate share
in computing their taxable incomes or, alternatively, subject to certain
limitations, restrictions, and holding period requirements use them as foreign
tax credits against their U.S. income taxes. No deductions for foreign taxes,
however, may be claimed by noncorporation shareholders who do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income
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resulting from a Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign
taxes treated as having been paid by such shareholder. The Mercury
International Index Fund will report annually to its shareholders the amount
per share of such withholding taxes. For this purpose, the Mercury
International Index Fund will allocate foreign taxes and foreign source income
among the Class I and Class A shareholders according to a method similar to
that described above for the allocation of dividends eligible for the
dividends received deduction.
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 basis, and 98% of its capital gains,
determined in general, on an October 31 year end, plus certain undistributed
amounts from previous years. For purposes of determining its distribution
requirements, each Fund will account for its share of items of income, gain,
loss and deductions of the Series as they are taken into account by the
Series. While each Fund intends to distribute its income and capital gains in
the manner necessary to avoid imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund's taxable income and capital
gains will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
Tax Treatment of Options and Futures Transactions
Each Fund may purchase or sell options and 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 such
option or futures contract will be treated as sold for its fair market value
on the last day of the taxable year.
In general, unless such contract is a forward foreign exchange contract, or
is a non-equity or a regulated futures contract for a non-U.S. currency for
which a Fund elects to have gain or loss treated as ordinary gain or loss
under Code Section 988 (as described below), gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Code Section 1259 will require the recognition of gain (but not loss) if a
Fund makes a "constructive sale" of an appreciated financial position (e.g.,
debt instruments and stocks). A Fund generally will be considered to make a
constructive sale of an appreciated financial position if it sells the same or
substantially identical property short, enters into a futures or forward
contract to deliver the same or substantially identical property, or enters
into certain other similar transactions.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of each Fund's transactions in options and futures contracts. Under
Section 1092, a Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with "wash sales," may cause a 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.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether a Series qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to a Series.
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Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts"
and from unlisted options will be treated as ordinary income or loss under
Code Section 988. In certain circumstances, a Series may elect capital gain or
loss treatment for such transactions. In general, however, Code Section 988
gains or losses will increase or decrease the amount of a Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gains. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares.
The Series
The Trust and each Fund have received a private letter ruling from the IRS
in which the IRS ruled that each Series is classified as a partnership for tax
purposes and, based upon that ruling, that each Fund will be entitled to look
to the underlying assets of the Series in which it has invested for purposes
of satisfying the diversification requirements and other 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 revised private letter ruling from the IRS indicating that each
Series will continue to be classified as a partnership, then the Board of
Directors of the Corporation will determine, in its discretion, the
appropriate course of action for the Funds. One possible course of action
would be to withdraw the Funds' investments from the Series and to retain an
investment adviser to manage the Funds' assets in accordance with the
investment policies applicable to the respective Fund. See "Investment
Objectives and Policies."
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, and does
not address the state and local tax, or estate or inheritance tax,
consequences of an investment in a Fund. For the complete provisions,
reference should be made to the pertinent Code sections and the Treasury
regulations promulgated thereunder. The Code and the Treasury regulations are
subject to change by legislative or administrative action either prospectively
or retroactively.
Dividends and gain on the sale or exchange of shares in a Fund may also be
subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes or estate or
inheritance tax. Foreign investors should consider applicable foreign taxes in
their evaluation of an investment in a Fund.
PERFORMANCE DATA
From time to time a Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield
figures are based on a Fund's historical performance and are not intended to
indicate future performance. Average annual total return and yield are
determined separately for Class I and Class A shares of each Fund 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.
Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than
those noted below. Such data will be computed as described above, except that
as required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted.
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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. A Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period.
A Fund's total return and yield 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
investor's shares, when redeemed, may be worth more or less than their
original cost.
Each Fund will generally compare its performance to the index it attempts to
replicate. A Fund may also compare its performance to data contained in
publications such as Lipper Analytical Services, Inc., or performance data
published by Morningstar Publications, Inc. ("Morningstar"), Money Magazine,
U.S. News and World Report, Business Week, CDA Investment Technology, Inc.,
Forbes Magazine and Fortune Magazine or other industry publications. When
comparing its performance to a market index, a Fund may refer to various
statistical measures derived from the historical performances of the Fund and
the index, such as standard deviation and beta. From time to time, a Fund may
include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of a Fund's
relative performance for any future period.
GENERAL INFORMATION
Description of Shares
The Corporation is a Maryland corporation incorporated on July 30, 1999. It
has an authorized capital of 1,000,000,000 shares of Common Stock, par value
$0.0001 per share, divided into 125,000,000 shares each of Class I and Class A
shares for each of the four Funds: Mercury S&P 500 Index Fund, Mercury Small
Cap Index Fund, Mercury Aggregate Bond Index Fund and Mercury International
Index Fund. Class I and Class A shares of a Fund represent interests in the
same assets of the Series and are identical in all respects except that the
Class A shares bear certain expenses related to the account maintenance
associated with such shares. Class A shares have exclusive voting rights with
respect to matters relating to the class' account maintenance expenditures.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of each Fund have equal voting rights, except that
each Fund has exclusive voting rights to matters affecting only such Fund, and
except that as noted above, Class A shares have exclusive voting rights with
respect to matters relating to the class' account maintenance expenditures.
There normally will be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by the shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Corporation will be required to
call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in account maintenance fees or of a
change in fundamental policies, objectives or restrictions. Except as set
forth above, the Directors shall continue to hold office and appoint successor
Directors. Each issued and outstanding share is entitled to participate
equally in dividends and distributions declared and in net assets upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities, except that, as noted above, Class A shares bear certain
additional expenses. Shares issued are fully-paid and non-assessable by the
Fund. Voting rights for Directors are not cumulative.
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The Trust consists of four Series, and is organized as a Delaware business
trust. Whenever a Fund is requested to vote on a fundamental policy of a
Series, the Corporation will hold a meeting of the investing Fund's
shareholders and will cast its vote as instructed by such Fund's shareholders.
FAM provided the initial capital for the Funds by purchasing 2,500 shares of
each of the Funds, for an aggregate of $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. To the extent the
organizational expenses of the Corporation are paid by the Corporation they
will be expensed and immediately charged to net asset value. See
"Determination of Net Asset Value."
Prior to the offering of the Funds' shares, FAM will be the Funds' sole
shareholder and deemed a controlling person of the Funds.
Computation of Offering Price per Share
An illustration of the computation of the offering price for Class I and
Class A shares of each Fund based on the projected value of the Fund's
estimated net assets and projected number of shares outstanding on the date
its shares are offered for sale to public investors is as follows:
[To be inserted]
Independent Auditors
has been selected as the independent auditors of the Corporation and
the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Funds.
Custodian
acts as the custodian of the assets of Mercury International Index
Series. Under its contract with the Trust, is authorized to establish
separate accounts in foreign currencies and to cause foreign securities owned
by the Master International Index Series to be held in its offices outside the
United States and with certain foreign banks and securities depositories. Each
custodian is responsible for safeguarding and controlling cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Transfer Agent of the Corporation. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Corporation and the Trust.
Reports to Shareholders
The fiscal year of the Funds ends on December 31 of each year. The Funds
sends to its shareholders at semi-annually [quarterly?] reports showing the
Funds' portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Corporation has filed with the Commission,
Washington, D.C., under the Securities Act and the Investment Company Act, to
which reference is hereby made.
39
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INDEPENDENT AUDITOR'S REPORT
40
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FINANCIAL STATEMENTS
41
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42
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APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service Inc.'s ("Moody's") Corporate 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 which 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 which 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 which 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 class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating 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
rating category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific
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note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well established industries
--High rates of return on funds employed
--Conservative capitalization structures with moderate reliance on debt and
ample asset protection
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
--Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath
the name of the issuer, or there is a footnote referring the reader to another
page for the name or names of the supporting entity or entities. In assigning
ratings to such issuers, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
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.
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baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length
of time.
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration 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
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
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Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
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 and 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
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
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
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various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
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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 speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protection characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard & Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
[Add Fitch?]
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Code # [ ]
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PART C. OTHER INFORMATION
Item 23. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1 --Articles of Incorporation of Registrant.
2 --By-Laws of Registrant.
3 --Instrument defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
15(a) --Powers of Attorney for Officers, Directors and Trustees.
</TABLE>
Item 24. Persons Controlled By or Under Common Control with Registrant.
Prior to the effective date of this Registration Statement, the Registrant
will sell shares of its series, Mercury S&P 500 Index Fund, Mercury Small Cap
Index Fund, Mercury Aggregate Bond Index Fund and Mercury International Index
Fund to [Mercury Asset Management US, a division of Fund Asset Management,
L.P. ("FAM").]
Item 25. Indemnification.
Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws and Section 2-418 of the Maryland General
Corporation Law.
Article VI of the By-Laws provides that each officer and Director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall
not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office. Absent a court determination
that an officer or Director seeking indemnification was not liable on the
merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, the
decision by the Registrant to indemnify such person must be based upon the
reasonable determination by special legal counsel in a written opinion or the
vote of a majority of a quorum of the Directors who are neither "interested
persons," as defined in Section 2(a)(19) of the Investment Company Act of
1940, as amended, nor parties to the proceeding ("non-party independent
Directors"), after review of the facts, that such officer or Director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Each officer and Director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the Maryland General Corporation Law without a
preliminary determination as to his or her ultimate entitlement to
indemnification (except as set forth below); provided, however, that the
person seeking indemnification shall provide to the Registrant a written
affirmation of his good faith belief that the standard of conduct necessary
for indemnification by the Registrant has been met and a written undertaking
to repay any such advance, if it should ultimately be determined that the
standard of conduct has not been met, and provided further that at least one
of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent Directors, or independent legal counsel in a written opinion,
shall determine, based on a review of facts readily available to the
Registrant at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or Director
protecting such person to the full extent permitted under the Maryland General
Corporation Law, from liability arising from his activities as officer or
Director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or Director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
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The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or Director of the Registrant.
In Section 9 of each Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser.
Mercury Asset Management US (the "Investment Adviser"), a division of Fund
Asset Management ("FAM"), located at P.O. Box 9011, Princeton, New Jersey
08543-9011. FAM also acts as the investment adviser for the following open-end
registered investment companies: CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc.,
Financial Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc. and The Municipal Fund Accumulation Program, Inc.; and the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings
Insured Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Michigan Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings
New York Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
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<PAGE>
Set forth below is a list of each executive officer and partner of FAM
indicating each business, profession, vocation or employment of a substantial
nature in which each such person or entity has been engaged since December 31,
1996 for his or her own account or in the capacity of director, officer,
employer, partner or trustee.
<TABLE>
<CAPTION>
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company;
Limited Partner of Merrill Lynch
-------------
Asset Management, L.P. ("MLAM")
------------------------------
Fund Asset Management,
Inc. .................. Limited Partner Investment Advisory Service
Princeton Services...... General Partner General Partner of MLAM
Jeffrey M. Peek......... President President of MLAM; President and
----
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
-------------
Vice President and Director of the
Global Securities and Economics
division of Merrill Lynch from 1995
-------------
to 1997
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
----
Executive Vice President and
Director of Princeton Services;
President and Director of Princeton
Funds Distributor, Inc.; Director
of FDS; President of Princeton
Administrators, L.P.
Donald C. Burke......... Senior Vice President Senior Vice President and Treasurer
and Treasurer of MLAM since 1999; Senior Vice
----
President and Treasurer of
Princeton Services; Vice President
and Treasurer of Princeton Funds
Distributor, Inc.; First Vice
President of MLAM from 1997 to
----
1999; Vice President of MLAM from
----
1990 to 1997; Director of Taxation
of MLAM since 1990.
Michael G. Clark........ Senior Vice President Senior Vice President of MLAM;
----
Senior Vice President of Princeton
Services
Mark A. Desario......... Senior Vice President Senior Vice President of MLAM;
----
Senior Vice President of Princeton
Services
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM;
----
Senior Vice President of Princeton
Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
----
Senior Vice President of Princeton
Services
Michael J. Hennewinkel.. Senior Vice President, Senior Vice President, Secretary and
Secretary and General General Counsel of MLAM; Senior
Counsel ----
Vice President of Princeton
Services
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- ------------------ ----------------------------------
<S> <C> <C>
Philip L. Kirstein...... Senior Vice President Senior Vice President of MLAM;
Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Debra W. Landsman-
Yaros.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of
Princeton Funds Distributor, Inc.
Stephen M. M. Miller.... Senior Vice President Executive Vice President of
Princeton Administrators; Senior
Vice President of Princeton
Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM;
Jr. ................... Senior Vice President of Princeton
Services
Brian A. Murdock........ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Gregory D. Upah......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
Mr. Glenn is President and Mr. Burke is Treasurer of all or substantially
all of the investment companies described in the following two paragraphs. Mr.
Glenn is director of such companies. Messrs. Giordano, Kirstein, and Monagle
are officers of one or more of such companies.
MLAM, located at P.O. Box 9011, Princeton, New Jersey 08543-9011, an
affiliate of the Investment Adviser, acts as investment adviser for the
following open-end registered investment companies: Merrill Lynch Adjustable
Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill
Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
Item 27. Principal Underwriters
(a) Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("MFD") acts as the principal underwriter for the Registrant and for each
of the following open-end investment companies:
C-4
<PAGE>
Mercury Gold and Mining Fund of Mercury Asset Management Funds, Inc.;
Mercury U.S. Large Cap Fund of Mercury Asset Management Funds, Inc.;
Mercury International Fund of Mercury Asset Management Funds, Inc.; Mercury
Japan Capital Fund of Mercury Asset Management Funds, Inc.; Mercury Pan-
European Growth Fund of Mercury Asset Management Funds, Inc.; Mercury
Global Balanced Fund, Inc.; Mercury Asset Management Funds, Inc.; Summit
Cash Reserves Fund of Financial Institutions Series Trust; Mercury V.I.
Pan-European Growth Fund of Mercury Asset Management V.I. Funds, Inc.;
Mercury V.I. U.S. Large Cap Fund of Mercury Asset Management V.I. Funds,
Inc.
A separate division of Princeton Funds Distributor, Inc. acts as the
principal underwriter of other investment companies.
(b) Set forth below is information concerning each director and officer of
MFD. The principal business address of each such person is Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Breen, Fatseas and WaseI is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) Positions and Offices Positions and Offices
Name with the Distributor with Registrant
- ----- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Michael G. Clark........ Director None
Thomas J. Verage........ Director None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-
Yaros.................. Vice President None
Michelle T. Lau......... Vice President None
Vice President and
Donald C. Burke......... Treasurer Vice President and Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of:
(1) the registrant, Mercury Index Funds, Inc., P.O. Box 9011, Princeton,
New Jersey 08543-9011.
(2) the transfer agent, Financial Data Services, Inc., 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.
(3) the custodian, ;
(4) the investment adviser and administrator, Mercury Asset Management
US, a division of Fund Asset Management, L.P., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Fund--Management and Advisory Arrangments" in the Statement
of Additional Information constituting Part B of the Registration Statement,
the Registrant is not party to any management related service contract.
Item 30. Undertakings.
None.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro, and
State of New Jersey, on the 4th day of October, 1999.
Mercury Index Funds, Inc.
(Registrant)
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director October 4, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
* Treasurer (Principal
______________________________________ Financial Accounting
(Donald C. Burke) Officer) and
Vice President
* Director
______________________________________
(Jack B. Sunderland)
* Director
______________________________________
(Stephen B. Swensrud)
* Director
______________________________________
(J. Thomas Touchton)
*This registration statement has been
signed by each of the persons so
indicated by the undersigned as
Attorney-in-Fact.
/s/ Terry K. Glenn October 4, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-6
<PAGE>
SIGNATURES
Index Master Series Trust has caused this Registration Statement of Mercury
Index Funds, Inc. to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Plainsboro and State of New Jersey on the
4th day of October, 1999.
Index Master Series Trust
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
The registration Statement of Mercury Index Funds, Inc. has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director October 4, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
* Treasurer (Principal
______________________________________ Financial Accounting
(Donald C. Burke) Officer) and Trustee
* Trustee
______________________________________
(Jack B. Sunderland)
* Trustee
______________________________________
(Stephen B. Swensrud)
* Trustee
______________________________________
(J. Thomas Touchton)
*This registration statement has been
signed by each of the persons so
indicated by the undersigned as
Attorney-in-Fact.
/s/ Terry K. Glenn October 4, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 --Articles of Incorporation of Registrant.
2 --By-Laws of Registrant.
15(a) --Powers of Attorney for Officers, Directors and Trustees.
</TABLE>
<PAGE>
Exhibit 1
ARTICLES OF INCORPORATION
MERCURY INDEX FUNDS, INC.
THE UNDERSIGNED, Maria Gattuso, whose post office address is Swidler Berlin
Shereff Friedman, LLP, 919 Third Avenue, New York, New York 10022, being at
least eighteen years of age, does hereby act as an incorporator, under and by
virtue of the General Corporation Laws of the State of Maryland (the "General
Laws") authorizing the formation of corporations and with the intention of
forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is Mercury Index Funds, Inc. (the
"Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed, the powers,
rights and privileges that the Corporation shall be authorized to exercise and
enjoy, and the business or objects to be transacted, carried on and promoted by
it are as follows:
(1) To conduct and carry on business of an investment company of the
management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws and by these
Articles of Incorporation, as its Board of Directors may determine; provided,
however, that the value of the consideration per share to be received by the
Corporation upon the sale or other disposition of any shares of its capital
stock shall not be less than the net asset value per share of such capital stock
outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the designation of, convert,
rename, redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its issued or unissued capital stock of any class
or series, as its Board of Directors may determine, in any manner and to the
extent now or hereafter permitted by the General Laws and by these Articles of
Incorporation.
<PAGE>
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
(6) The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws now or hereafter in force, and the enumeration of the foregoing
purposes, powers, rights and privileges, shall not be deemed to exclude any
powers, rights or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in the
State of Maryland is c/o CSC - Lawyers Incorporating Service Company, 11 E.
Chase Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is CSC - Lawyers Incorporating Service Company, a
corporation of this State, and the post office address of the resident agent is
11 E. Chase Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is One Billion (1,000,000,000) shares, of the par
value of One Hundredth of One Cent ($.0001) per share, and of the aggregate par
value of One Hundred Thousand Dollars ($100,000). The capital stock initially
consists of four series, known as Mercury S&P 500 Index Fund, Mercury Small Cap
Index Fund, Mercury Aggregate Bond Index Fund and Mercury International Index
Fund (collectively, the "Series", and each, a "Series"). Each Series shall
consist, until further changed, of Two Hundred Fifty Million (250,000,000)
shares. The shares of each Series shall consist, until further changed, of two
classes of shares designated Class I shares and Class A shares (the "Classes").
Each Class of each Series shall consist, until further changed, of One Hundred
Twenty Five Million (125,000,000) shares.
(2) Unless otherwise expressly provided in the charter of the Corporation,
the Class I and Class A shares of each Series shall represent an equal
proportionate interest in the assets belonging to that Series (subject to the
liabilities of that Series) and each share of a particular Series shall have
identical voting, dividend, liquidation and other rights; provided, however,
--------
that notwithstanding anything in the charter of the Corporation to the contrary:
(i) The Class I and Class A shares may be issued and sold subject to
such different sales loads or charges, whether initial, deferred or
contingent, or any combination thereof, as the Board of Directors may
from time to time establish in accordance with the Investment Company
Act of 1940, as amended and in effect
2
<PAGE>
from time to time, or any rules, regulations or orders issued
thereunder (collectively, the "Investment Company Act"), and other
applicable law.
(ii) Liabilities of a Series which are determined by or under the
supervision of the Board of Directors to be attributable to a
particular Class of that Series may be charged to that Class and
appropriately reflected in the net asset value of, or dividends
payable on, the shares of that Class of the Series.
(iii) The Class I and Class A shares of a particular Series may have
such different exchange and conversion rights as the Board of
Directors shall provide in compliance with the Investment Company Act.
(3) The Board of Directors may classify and reclassify any unissued shares
of capital stock, of any class or series, into one or more additional or other
classes or series as may be established from time to time by setting or changing
in any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and pursuant to
such classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Dividends on a class or series may be declared or paid
only out of the net assets of that class or series. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular class or series of capital stock may be charged
to and borne solely by such class or series and the bearing of expenses solely
by a class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the net
asset value attributable to, and the dividend, redemption and liquidation rights
of, the shares of each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of the Corporation,
including those matters set forth in Article II, Sections (2) and (4) hereof and
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act or by the General Laws, such requirement
as to a separate vote by that class or series shall apply in lieu of a general
vote of all classes and series as described above, (b) in the event that the
separate vote requirements referred
3
<PAGE>
to in (a) above apply with respect to one or more classes or series, then,
subject to paragraph (c) below, the shares of all other classes and series not
entitled to a separate class vote shall vote as a single class, and (c) as to
any matter which does not affect the interest of a particular class or series,
such class or series shall not be entitled to any vote and only the holders of
shares of the affected classes and series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act), to take such action upon the concurrence of a majority
of the votes entitled to be cast by holders of capital stock of the Corporation
(or a majority of the votes entitled to be cast by holders of a class or series
entitled to vote thereon as a separate class or series).
(7) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, subject to compliance with the requirements of the Investment Company
Act, the Board of Directors shall have the authority to provide that holders of
shares of any class or series shall have the right to convert or exchange said
shares into shares of one or more other classes or series in accordance with
such requirements and procedures as may be established by the Board of
Directors.
(8) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation applicable to that
class or series.
(9) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends; provided, however, that the Corporation shall not be
required to issue share certificates for such fractional shares.
(10) The presence in person or by proxy of the holders of shares entitled
to cast one-third of the votes entitled to be cast shall constitute a quorum at
any meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled to cast one-
third of the votes entitled to be cast by each class entitled to vote as a
separate class shall constitute a quorum.
(11) All persons who shall acquire stock in the Corporation, of any class
or series, shall acquire the same subject to the provisions of the charter and
By-Laws of the Corporation. Any
4
<PAGE>
reference to "shares," "stock" or "shares of stock" in these Articles of
Incorporation shall be deemed to refer, unless the context otherwise requires,
to the shares of each separate class and/or series. As used in the charter of
the Corporation, the terms "charter" and "Articles of Incorporation" shall mean
and include the Articles of Incorporation of the Corporation as amended,
supplemented and restated from time to time by Articles of Amendment, Articles
Supplementary, Articles of Restatement or otherwise.
(12) The Board of Directors may classify and reclassify any issued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely affect
the rights of holders of such issued shares. The Board's authority pursuant to
this paragraph shall include, but not be limited to, the power to vary among all
the holders of a particular class or series (a) the length of time shares must
be held prior to reclassification to shares of another class or series (the
"Holding Period(s)"), (b) the manner in which the time for such Holding
Period(s) is determined and (c) the class or series into which the particular
class or series is being reclassified; provided, however, that, subject to the
first sentence of this section, with respect to holders of the Corporation's
shares issued on or after the date of the Corporation's first effective
prospectus which sets forth Holding Period(s) (the "First Holding Period
Prospectus"), the Holding Period(s), the manner in which the time for such
Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at the
time such shares, which are the subject of the reclassification, were issued.
(13)(a) Each series of capital stock of the Corporation shall relate to a
separate portfolio of investments. All shares of stock in each series shall be
identical except that there may be variations between the different series as to
the purchase price, determination of net asset value, designations, preferences,
conversion or other rights, voting powers, restrictions, special and relative
rights and limitations as to dividends and on liquidation, qualifications or
terms or conditions of redemption of such shares of stock.
(b) Each series of stock of the Corporation shall have the following
powers, preferences and voting or other special rights, and the qualifications,
restrictions and limitations thereof shall be as follows:
(i) All consideration received by the Corporation for the issue
or sale of stock of each series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds received thereon, including any proceeds derived from the sale,
exchange or liquidation thereof, and any assets, funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the
5
<PAGE>
series of stock with respect to which such assets, payments or funds were
received by the Corporation for all purposes, subject only to the rights of
creditors, and shall be so handled in the books of account of the Corporation.
Such assets, funds and payments, including any proceeds derived from the sale,
exchange or liquidation thereof, and any assets, funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, are herein
referred to as "assets belonging to" such series. In the event that there are
any income, earnings, profits, and proceeds thereof, assets, funds or payments
that are not readily identifiable as belonging to any particular series, the
Board of Directors of the Corporation shall allocate them among any one or more
of the series established and designated from time to time in such manner and on
such basis as the Board of Directors, in its sole discretion, deem fair and
equitable. Each allocation by the Board of Directors shall be conclusive and
binding on the stockholders of the Corporation of all series for all purposes.
(ii) The assets belonging to each series of stock shall be charged
with the liabilities in respect of such series, and also shall be charged with
its share of the general liabilities of the Corporation, in proportion to the
asset value of the respective series determined in accordance with the Articles
of Incorporation of the Corporation. The determination of the Board of
Directors shall be conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the same to a given series, and
as to whether the same or general assets of the Corporation are allocable to one
or more series.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three. The names of the directors who shall act until their
successors are duly elected and qualify are:
Terry K. Glenn
Philip K. Kirstein
Ira Shapiro
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such limitations as may be
set forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by
6
<PAGE>
these Articles of Incorporation, or out of any shares of the capital stock of
the Corporation, of any class or series, acquired by it after the issue thereof,
or otherwise) other than such right, if any, as the Board of Directors, in its
discretion, may determine.
(4) Each acting and former director and officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by the General
Laws, subject to the requirements of the Investment Company Act. No amendment
of these Articles of Incorporation or repeal of any provision hereof shall limit
or eliminate the benefits provided to directors and officers under this
provision in connection with any act or omission that occurred prior to such
amendment or repeal. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled.
(5) To the fullest extent permitted by the General Laws, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) The Board of Directors of the Corporation from time to time may change
the Corporation's name, or change the name or other designation of any class or
series of its stock, without the vote or consent of the stockholders of the
Corporation, in any manner and to the extent now or hereafter permitted by the
General Laws and by these Articles of Incorporation.
(8) Notwithstanding any other provision of these Articles of Incorporation
or the By-Laws of the Corporation, or the General Laws, the Board of Directors
of the Corporation may, upon the affirmative vote of the majority of the entire
Board of Directors and without the vote or consent of the stockholders, dissolve
the Corporation in the manner otherwise provided by the laws of the State of
Maryland.
ARTICLE VI
REDEMPTION
----------
(1) Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of such holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the redemption
price of such shares as in effect from time to time as may be determined by the
Board
7
<PAGE>
of Directors of the Corporation in accordance with the provisions hereof,
subject to the right of the Board of Directors of the Corporation to suspend the
right of redemption of shares of capital stock of the Corporation or postpone
the date of payment of such redemption price in accordance with provisions of
applicable law.
(2) All shares of stock of the Corporation shall be redeemable at the
option of the Corporation. The Board of Directors may by resolution from time
to time authorize the Corporation to require the redemption of all or any part
of the outstanding shares of any class or series upon such terms and conditions
as the Board of Directors, in its discretion, shall deem advisable, and upon the
sending of written notice thereof to each holder whose shares are to be
redeemed.
(3) The redemption price of shares of capital stock of the Corporation
shall be the net asset value thereof as determined by the Board of Directors of
the Corporation from time to time in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment of
the redemption price shall be made in cash by the Corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the Corporation.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Articles of Incorporation shall be
effective to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Investment Company Act or of any
8
<PAGE>
valid rule, regulation or order of the Securities and Exchange Commission
thereunder or (b) protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
ARTICLE VII
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of Mercury Index Funds,
Inc. hereby executes the foregoing Articles of Incorporation and acknowledges
the same to be her act and further acknowledges that, to the best of her
knowledge, the matters and facts set forth therein are true in all material
respects under penalties for perjury.
Dated this 27th day of July, 1999
/s/ Maria Gattuso
-----------------------
Maria Gattuso
9
<PAGE>
I hereby consent to my designation in this document as resident agent
for this corporation.
CSC-Lawyers Incorporated
Service Company
Signed: /s/ [Illegible]
-----------------
Resident Agent
<PAGE>
Exhibit 2
BY-LAWS
OF
MERCURY INDEX FUNDS, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of Mercury Index Funds,
----------------
Inc. (the "Corporation") shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. So long as the Corporation is registered as an
--------------
investment company under the Investment Company Act of 1940, as amended (such
term to include the rules and regulations promulgated under the Investment
Company Act of 1940, as amended (collectively, the "Investment Company Act"),
unless otherwise specified or the context otherwise requires), annual meetings
of the stockholders shall not be held, except where required to be held by the
Investment Company Act or by the Maryland General Corporation Law or when called
by the Board of Directors or by an officer or officers of the Corporation
authorized to take such action by the Board of Directors. If in any calendar
year the Corporation is required or elects to hold an annual meeting, the
meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as
the Board of Directors or the officer or officers calling the meeting may
prescribe. At each such annual meeting, the stockholders shall elect a Board of
Directors and transact such other business as may properly come before the
meeting. The provisions of these By-Laws which contemplate the holding of an
annual meeting of stockholders shall be suspended during any calendar year in
which no annual meeting of stockholders is held.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President of the Corporation, or on the
written request of the holders of at least 10% of the outstanding shares of
capital stock of the Corporation entitled to vote at such meeting
<PAGE>
if they comply with the applicable requirements of the Maryland General
Corporation Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be held
-----------------
at such place within the United States as the Board of Directors may from time
to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each stockholders' meeting and, if the meeting
is a special meeting, the purpose or purposes of the special meeting, shall be
given personally or by mail, not less than ten nor more than ninety days before
the date of such meeting, to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 5. Quorum. At all meetings of the stockholders, the holders of
------
shares of stock of the Corporation entitled to cast one-third of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more series or classes of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate series or class shall constitute a quorum. In
the absence of a quorum no business may be transacted, except that the holders
of a majority of the shares of stock present in person or by proxy and entitled
to vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
The absence from any meeting, in person or by proxy, of holders of the number of
shares of stock of the Corporation in excess of a majority thereof which may be
required by the Maryland General Corporation Law, the Investment Company Act, or
other applicable statute, the Articles of Incorporation, or these By-Laws, for
action upon any given matter shall not prevent action at such meeting upon any
other matter or matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the number of shares
of stock of the Corporation required for action in respect of such other matter
or matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board
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<PAGE>
(if one has been designated by the Board), or in his absence or inability to
act, the President of the Corporation, or in the absence or inability to act of
the Chairman of the Board and the President of the Corporation, a Vice President
of the Corporation, shall act as chairman of the meeting. The Secretary of the
Corporation, or in his absence or inability to act, any person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have been
so fixed, then at the later of (i) the close of business on the day on which
notice of the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
any corporate action to be taken by vote of the stockholders (other than the
election of directors, which shall be by plurality vote) may be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than ninety nor
less than ten days before the date of the meeting of the stockholders. All
persons who were holders of record of shares at such time, and not others, shall
be entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
----------
stockholders,
3
<PAGE>
appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may, and on the request of
any Stockholder entitled to vote thereto shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, may be required to
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his ability. The
inspectors may be empowered to determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Articles
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
-------------------
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors; provided, however, that the number of
directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease.
4
<PAGE>
Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held for that purpose. The term
of office of each director shall be from the time of his election and
qualification until the election of directors next succeeding his election and
until his successor shall have been elected and shall have qualified, or until
his death, or until he shall have resigned or until December 31 of the year in
which he shall have reached seventy-two years of age, or until he shall have
been removed as hereinafter provided in these By-Laws, or as otherwise provided
by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed, with or without cause, by the stockholders by a vote of a majority of
the votes entitled to be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any other
cause, may be filled by a vote of the majority of the Board of Directors then in
office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a special meeting
of the stockholders shall be held as promptly as possible and in any event
within sixty days, for the purpose of filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be called
----------------
by two or more directors of the Corporation or by the Chairman of the Board or
the President of the Corporation.
5
<PAGE>
Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, addressed to him at his residence or usual place of business, at least
three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of the
-----------------
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act, or other applicable
statute, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board. In the absence of a quorum
at any meeting of the Board, a majority of the directors present thereat may
adjourn such meeting to another time and place until a quorum shall be present
thereat. Notice of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the adjournment and,
unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board may, by resolution adopted by a
------------
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President of the Corporation
or, in his absence or inability to act, another director chosen by a majority of
the directors present, shall act as chairman of the meeting and preside thereat.
The Secretary of the Corporation (or, in his absence or inability to act, any
person appointed by the Chairman) shall act as secretary of the meeting and keep
the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to
-------------------------------------------------
the provisions
6
<PAGE>
of the Investment Company Act, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writings or writing are filed with the
minutes of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation,
as filed from time to time with the Securities and Exchange Commission and as
required by the Investment Company Act. The Board however, may delegate the
duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof, of
the Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by resolution adopted by a
-------------------
majority of the entire board, designate an Executive Committee consisting of two
or more of the directors of the corporation, which committee shall have and may
exercise all the powers and authority of the Board with respect to all matters
other than:
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act, or the taking of any other action required to be taken by the Board of
Directors by the Investment Company Act;
7
<PAGE>
(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(f) the amendment or repeal of any resolution of the Board unless by its
terms any such resolution may be amended or repealed by such Executive
Committee;
(g) the declaration of dividends and the issuance of capital stock of the
Corporation; and
(h) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may from
-----------------------------
time to time, by resolution adopted by a majority of the whole Board, designate
one or more other committees of the Board, each such committee to consist of
two or more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of
-------
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation, except as may be prescribed by the Board.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number, Qualification, Election and Tenure. The officers of
------------------------------------------
the Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of
8
<PAGE>
Directors may elect or appoint one or more Vice Presidents and may also appoint
such other officers, agents and employees as it may deem necessary or proper.
Any two or more offices may be held by the same person, except the offices of
President and Vice President, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity. Such officers shall be elected
by the Board of Directors each year at a meeting of the Board of Directors, each
to hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices for
such terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or Secretary of the Corporation. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President of the Corporation shall be the chief
---------
executive officer of the Corporation. In the absence of the Chairman of the
Board (or if there be none), he
9
<PAGE>
shall preside at all meetings of the stockholders and of the Board Directors. He
shall have, subject to the control of the Board of Directors, general charge of
the business and affairs of the Corporation. He may employ and discharge
employees and agents of the Corporation, except such as shall be appointed by
the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President of the Corporation shall
--------------
have such powers and perform such duties as the Board of Directors or the
President of the Corporation may from time to time prescribe.
Section 9. Treasurer. The Treasurer of the Corporation shall
---------
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed in
the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust company
or member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
(c) cause all moneys and other valuables of the Corporation to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the
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seal to all stock certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under the Maryland General Corporation
Law, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Corporation to indemnify such person
must be based upon the reasonable determination by special legal counsel in a
written opinion or the vote of a majority of a quorum of the directors who are
neither "interested persons," as defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the proceeding ("non-party independent directors"),
after review of the facts, that such officer or director is not guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the Maryland General Corporation Law without a preliminary
determination as to his or her ultimate entitlement to indemnification (except
as set forth below); provided, however, that the person seeking indemnification
shall provide to the Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met and a written undertaking to repay any such
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advance, if it should ultimately be determined that the standard of conduct has
not been met, and provided further that at least one of the following additional
conditions is met: (a) the person seeking indemnification shall provide a
security in form and amount acceptable to the Corporation for his undertaking;
(b) the Corporation is insured against losses arising by reason of the advance;
(c) a majority of a quorum of non-party independent directors, or independent
legal counsel in a written opinion, shall determine, based on a review of facts
readily available to the Corporation at the time the advance is proposed to be
made, that there is reason to believe that the person seeking indemnification
will ultimately be found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law, from liability arising from his activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. The Corporation shall not issue stock
------------------
certificates.
Section 2. Books of Account and Record of Stockholders. There shall be
-------------------------------------------
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland General Corporation Law, a record containing the number
of shares of stock issued during a specified period not to exceed twelve months
and the consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
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without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the Maryland General Corporation Law.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
-------------------------------------------------------
Board may fix, in advance, a date not more than ninety days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-Laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its principal
office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any
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other emblem or device approved by the Board of Directors, the name of the
Corporation, the year of its incorporation and the words "Corporate Seal" and
"Maryland." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall be as determined by the Board of Directors from time to time.
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors may from time to
time determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safe keeping of such banks or other companies as the Board of
Directors may from time to time determine. Every arrangement entered into with
any bank or other company for the safe keeping of the securities and investments
of the Corporation shall contain provisions complying with the Investment
Company Act.
ARTICLE XI
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer of the
Corporation or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
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ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and, if
required by the provisions of the Investment Company Act, ratified by the
stockholders.
ARTICLE XIII
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be available at
the annual meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days after the end
of the fiscal year), be placed on file at the Corporation's principal office.
Each such report shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such
report shall also show the Corporation's income and expenses for the period from
the end of the Corporation's preceding fiscal year to the close of the annual or
quarterly period covered by the report and any other information required by the
Investment Company Act, and shall set forth such other matters as the Board or
such firm of independent public accountants shall determine.
ARTICLE XIV
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
Board of Directors. The stockholders shall have no power to make, amend, alter
or repeal By-Laws.
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Exhibit 15(a)
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name
appears below, being a Director and/or officer of Mercury Index Funds, Inc. (the
"Corporation") hereby nominates, constitutes and appoints Terry K. Glenn, Donald
C. Burke and Ira P. Shapiro (with full power of each of them to act alone) his
true and lawful attorney-in-fact and agent, for him and on his behalf and in his
place and stead and in any and all capacities, to make, execute and sign the
Registration Statement on Form N-1A under the Securities Act of 1933 and the
Investment Company Act of 1940 of the Corporation and all amendments and
supplements thereto, and to file the same with the Securities and Exchange
Commission, and any other regulatory authority having jurisdiction over the
offer and sale of shares of common stock, par value $0.0001 per share, of the
Corporation, and any and all exhibits and other documents requisite in
connection therewith, granting unto said attorneys and each of them, full power
and authority to perform each and every act and thing requisite and necessary to
be done in and about the premises as fully to all intents and purposes as the
undersigned himself might or could do.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day
of September, 1999. This document may be executed by the signatories hereto on
any number of counterparts, all of which shall constitute one and the same
instrument.
/s/ Terry K. Glenn /s/ J. Thomas Touchton
- ----------------------------- ---------------------------------
Terry K. Glenn J. Thomas Touchton
President and Director Director
/s/ Jack B. Sunderland /s/ Donald C. Burke
- ----------------------------- ---------------------------------
Jack B. Sunderland Donald C. Burke
Director Vice President and Treasurer
/s/ Stephen B. Swensrud /s/ Ira P. Shapiro
- ----------------------------- ---------------------------------
Stephen B. Swensrud Ira P. Shapiro
Director Secretary
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose name
appears below, being a Trustee and/or officer of Index Master Series Trust,
hereby nominates, constitutes and appoints Terry K. Glenn, Donald C. Burke and
Ira P. Shapiro (with full power of each of them to act alone) his true and
lawful attorney-in-fact and agent, for him and on his behalf and in his place
and stead and in any and all capacities, to execute and sign the Registration
Statement on Form N-1A under the Investment Company Act of 1940 of Mercury Index
Funds, Inc. (the "Corporation") and all amendments and supplements thereto, and
to file the same with the Securities and Exchange Commission, and any other
regulatory authority having jurisdiction over the offer and sale of shares of
common stock, par value $0.0001 per share, of the Corporation, and any and all
exhibits and other documents requisite in connection therewith, granting unto
said attorneys and each of them, full power and authority to perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully to all intents and purposes as the undersigned himself might or could
do.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day
of September, 1999. This document may be executed by the signatories hereto on
any number of counterparts, all of which shall constitute one and the same
instrument.
/s/ Terry K. Glenn /s/ J. Thomas Touchton
- ------------------------------- ---------------------------------
Terry K. Glenn J. Thomas Touchton
President and Trustee Trustee
/s/ Jack B. Sunderland /s/ Donald C. Burke
- ------------------------------- ---------------------------------
Jack B. Sunderland Donald C. Burke
Trustee Vice President and Treasurer
/s/ Stephen B. Swensrud /s/ Ira P. Shapiro
- ------------------------------- ---------------------------------
Stephen B. Swensrud Ira P. Shapiro
Trustee Secretary
