<PAGE>
As filed with the Securities and Exchange Commission on June 8, 2000
Securities Act File No. 333-88405
Investment Company Act File No. 811-09605
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 1 [X]
(Check appropriate box or boxes)
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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.
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Copies to:
Counsel for the Fund: and
JOEL H. GOLDBERG, Esq.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP IRA P. SHAPIRO, Esq.
The Chrysler Building P.O. Box 9011
405 Lexington Avenue Princeton, New Jersey 08543-9011
New York, New York 10174
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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.
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Quantitative Master Series Trust has also executed this Registration
Statement.
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<PAGE>
Prospectus
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M E R C U R Y
ASSET MANAGEMENT
----------------
Mercury Index Funds, Inc.
[GRAPHIC]
June 8, 2000
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>
[GRAPHIC]
FUND FACTS
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About Mercury Index Funds................................................ 2
Fees and Expenses........................................................ 8
[GRAPHIC]
ABOUT THE DETAILS
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How the Funds Invest.................................................... 11
Investment Risks........................................................ 16
[GRAPHIC]
ACCOUNT CHOICES
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Pricing of Shares....................................................... 24
How to Buy, Sell, Transfer and Exchange Shares.......................... 26
Fee-Based Programs...................................................... 31
[GRAPHIC]
THE MANAGEMENT TEAM
--------------------------------------------------------------------------------
Management of the Funds................................................. 33
Master/Feeder Structure................................................. 34
[GRAPHIC]
TO LEARN MORE
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Shareholder Reports............................................. Back Cover
Statement of Additional Information............................. Back Cover
</TABLE>
MERCURY INDEX FUNDS, INC.
<PAGE>
[GRAPHIC] Fund Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
Prospectus in the sidebar.
Common Stock -- shares of ownership of a corporation.
Bonds -- debt obligations issued by governments, corporations and other
issuers.
ABOUT 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 Europe, Asia and
Far East 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.
MERCURY INDEX FUNDS, INC.
2
<PAGE>
[GRAPHIC] Fund 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 Quantitative 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 in which a
Fund invests.
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.
3
<PAGE>
[GRAPHIC] Fund Facts
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.
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. The value changes in the equity
investments of the Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and
Mercury International Index 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. If the value of a Fund's investments goes down, you
may lose money.
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
maturities will
MERCURY INDEX FUNDS, INC.
4
<PAGE>
[GRAPHIC] Fund Facts
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.
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 mortgage-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 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 exchange rates, political and economic developments
and U.S. and foreign laws relating to 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 Fund will attempt
to track its target index as closely as possible, it will tend to underperform
the index to some degree over time.
MERCURY INDEX FUNDS, INC.
5
<PAGE>
[GRAPHIC] Fund Facts
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.
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 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, 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, 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
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
MERCURY INDEX FUNDS, INC.
6
<PAGE>
[GRAPHIC] Fund Facts
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, 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.
7
<PAGE>
[GRAPHIC] Fund Facts
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed
below are some of the main types of expenses, which the Funds may charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these fees include sales charges and redemption fees, which
you may pay when you buy or sell shares of 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 Investment 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.
Service (Account Maintenance) Fees -- fees used to compensate dealers for
account maintenance activities.
FEES AND EXPENSES
--------------------------------------------------------------------------------
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.
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 investment) S&P 500 Small Cap Bond International
(a): 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(b) 0.25% 0.50% 0.25% 0.50%
-----------------------------------------------------------------
Exchange Fee None None None None
-----------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(c):
-----------------------------------------------------------------
Management
Fee(d) 0.05% 0.08% 0.06% 0.01%
-----------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(e) None None None None
-----------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(f) 0.525% 0.57% 0.55% 0.67%
Administrative
Fees(g) 0.245% 0.29% 0.19% 0.34%
----- ---- ---- ----
Total Other
Expenses 0.77% 0.86% 0.74% 1.01%
-----------------------------------------------------------------
Total Annual
Fund Operating
Expenses(h) 0.82% 0.94% 0.80% 1.02%
-----------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
8
<PAGE>
[GRAPHIC] Fund Facts
Class A Shares
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid Mercury
directly from Mercury Mercury Aggregate Mercury
your investment) S&P 500 Small Cap Bond International
(a): 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(b) 0.25% 0.50% 0.25% 0.50%
-----------------------------------------------------------------
Exchange Fee None None None None
-----------------------------------------------------------------
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)(c):
-----------------------------------------------------------------
Management
Fee(d) 0.05% 0.08% 0.06% 0.01%
-----------------------------------------------------------------
Distribution
and/or Service
(12b-1) Fees(e) 0.25% 0.25% 0.25% 0.25%
-----------------------------------------------------------------
Other Expenses
(including
transfer agency
fees)(f) 0.525% 0.57% 0.55% 0.67%
Administrative
Fees(g) 0.245% 0.29% 0.19% 0.34%
----- ---- ---- ----
Total Other
Expenses 0.77% 0.86% 0.74% 1.01%
-----------------------------------------------------------------
Total Annual
Fund Operating
Expenses(h) 1.07% 1.19% 1.05% 1.27%
-----------------------------------------------------------------
</TABLE>
(a) In addition, certain securities dealers may charge a fee to process a
purchase or sale of shares.
(b) You will pay a Redemption Fee on your Fund shares if you redeem or exchange
your shares within ninety days of your purchase.
(c) With respect to each Fund, fees and expenses include the expenses of both
the Fund and the Fund's pro rata share of the expenses of the Series in
which it invests.
(d) Paid by the Series. The Investment Adviser of the Series has entered into a
contractual arrangement to provide that the management fee for the Series,
when combined with administrative fees of certain funds that invest in the
Series, will not exceed specific amounts. As a result of this contractual
arrangement, the Investment Adviser of the S&P 500 Index Series, Small Cap
Index Series and Aggregate Bond Index Series currently receives management
fees of 0.005%, 0.01% and 0.01%, respectively. This arrangement has a one-
year term and is renewable. The Investment Adviser has not entered into a
similar arrangement with the Series in which the Mercury International
Index Fund invests.
(e) 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.
(f) 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 a fee for each shareholder account and reimburses it for out-of-
pocket expenses. The fee ranges from $11.00 to $20.00 per account
(depending on the level of services required) but is set at 0.10% for
certain accounts, that participate in certain fee based programs. In
addition, in connection with the Fund's self-custody arrangements, each
Series pays the Transfer Agent an annual fee at the annual rate of 0.05% of
the Series' 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 Quantitative Master Series Trust Transfer Agency Agreement.
The Investment Adviser or its affiliate provides accounting services to
each Series at its cost.
(g) Paid by the Funds.
(h) The Investment Adviser has agreed to voluntarily waive management fees
and/or reimburse expenses of the Fund and/or the corresponding Series in
which it invests, except with respect to the Series in which the Mercury
International Index Fund invests. The 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: 0.775% for Class I shares and 1.025% for Class A shares
MERCURY INDEX FUNDS, INC.
9
<PAGE>
[GRAPHIC] Fund Facts
(Footnotes continued from previous page)
of the Mercury S&P 500 Index Fund; 0.87% for Class I shares and 1.12% for
Class A shares of the Mercury Small Cap Index Fund; and 0.75% for Class I
shares and 1.00% for Class A shares of the Mercury Aggregate Bond Index Fund.
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 $ 84 $ 96 $ 82 $104
-------------------------------------------------------------
Three Years $262 $300 $255 $325
-------------------------------------------------------------
</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 $109 $121 $107 $129
-------------------------------------------------------------
Three Years $340 $378 $334 $403
-------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
10
<PAGE>
[GRAPHIC] About the Details
About the Portfolio Managers -- The Mercury S&P 500 Index Fund and the Mercury
Small Cap 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.
About the Investment Adviser -- The Funds are managed by Mercury Asset
Management US, a division of Fund Asset Management, L.P.
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 buy or sell securities only 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, under normal circumstances, 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 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
MERCURY INDEX FUNDS, INC.
11
<PAGE>
[GRAPHIC] About the Details
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.
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.
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
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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 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
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[GRAPHIC] About the Details
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.
. 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.
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
MERCURY INDEX FUNDS, INC.
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[GRAPHIC] About the Details
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, Sweden, Switzerland and the
United Kingdom. The weighting of the EAFE Index among these countries is based
upon each country's relative market capitalization and not its 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 these
countries 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.
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[GRAPHIC] About the Details
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 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 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 market in one or more country in
which a Fund invests will go down in value, including the possibility that one
or more 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.
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[GRAPHIC] About the Details
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.
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
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[GRAPHIC] About the Details
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 (including foreign states, provinces and
municipalities) 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 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
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[GRAPHIC] About the Details
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 U.S. This reduces the amount a Fund can
earn on its investments.
Mercury International Index 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.
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
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[GRAPHIC] About the Details
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 reduce
trade barriers between themselves and eliminate fluctuations in their
currencies. EMU established a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro.
These securities trade and make dividend and other payments only in euros. Like
other
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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.
investment companies and business organizations, including the companies in
which the Fund invests, the Fund could be adversely affected:
. If the transition to euro, or EMU as a whole, does not continue to
proceed as planned.
. If a participating country withdraws from EMU.
Mercury Small Cap Index Fund
Small Cap Risk
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 may allow a Fund to increase or decrease its level of 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.
Derivatives are volatile and involve significant risks, which may include:
. Leverage risk -- the risk associated with certain types of
investments or trading strategies that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the
amount originally invested.
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. 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 obligation to a Fund.
. Currency risk -- the risk that changes in the exchange rate
between currencies will adversely affect the value (in U.S. dollar
terms) of an investment.
. Liquidity risk -- the risk that certain securities may be
difficult 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. Derivatives may not always
be available or cost efficient. If a Fund invests in derivatives, the
investments may not be effective as a hedge against price movements and can
limit potential for growth in Fund share value.
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 a
Fund's shares and in the yield on a Fund's portfolio. Borrowing will cost a
Fund interest expense and other fees. The cost of borrowing may reduce a Fund's
return. Certain securities that a Fund buys may create leverage, including, for
example, derivative securities.
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.
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[GRAPHIC] About The Details
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.
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
If you would like further information about the Funds, including how they
invest, please see the Statement of Additional Information.
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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 or exchange 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.
After a Fund commences operations, its shares can be purchased on each business
day.
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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 investors including: Generally available
through selected
. Current Class I shareholders securities dealers.
. Certain Retirement Plans
. Participants of certain sponsored
programs
. Certain affiliates or customers of
selected securities dealers
-----------------------------------------------------------------------------------
Initial Sales No. Entire purchase price is invested in No. Entire purchase
Charge? shares of the Fund. price is invested in
shares of the Fund.
-----------------------------------------------------------------------------------
Deferred Sales No. No.
Charge?
-----------------------------------------------------------------------------------
Account No. 0.25% Account
Maintenance and Maintenance Fee.
Distribution No Distribution Fee.
Fees?
-----------------------------------------------------------------------------------
Redemption Fee? 0.25% Redemption Fee for shares of the 0.25% Redemption Fee for
Mercury S&P 500 Index Fund and the shares of the Mercury
Mercury Aggregate Bond Index Fund held S&P 500 Index Fund and
less than ninety days. the Mercury
International Index Fund
held less than ninety
days.
------------------------------------------------------------------------
0.50% Redemption Fee for shares of the 0.50% Redemption Fee for
Mercury Small Cap Index Fund and the shares of the Mercury
Mercury International Index Fund held Small Cap Index Fund and
less than ninety days. the Mercury
International Index Fund
held less than ninety
days.
-----------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
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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 a 0.25% account maintenance fee,
while Class I shares are not.
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 compensate dealers for account maintenance activities.
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.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through certain securities dealers. You may also buy shares through the
Transfer Agent. To learn more about buying shares through the Transfer Agent,
call 1-888-763-2260. Because the selection of a mutual fund involves many
considerations, your financial consultant may help you with this decision. The
Funds do not issue share certificates.
MERCURY INDEX FUNDS, INC.
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<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
-------------------------------------------------------------------------------
<C> <C> <S>
Buy shares First, select the share Refer to the pricing of shares
class appropriate for you table on page 25. Be sure to read
this Prospectus carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for
amount of your investment a Fund is $1,000 for all accounts
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
consultant or securities on the next calculation of net
dealer submit your asset value after your order is
purchase order placed. Any purchase orders placed
prior to the close of business on
the New York Stock Exchange
(generally 4:00 p.m. Eastern time)
will be priced at the net asset
value determined that day.
Purchase orders placed 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 To purchase shares directly, call
Agent the Transfer Agent at 1-888-763-
2260 and request a purchase
application. Mail the completed
purchase application to the
Transfer Agent at the address on
the inside back cover of this
Prospectus.
-------------------------------------------------------------------------------
Add to your Purchase additional The minimum investment for
investment shares additional purchases is generally
$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 shares All dividends are automatically
through the automatic reinvested without a sales charge.
dividend reinvestment
plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount in
automatic investment plan a Fund on a periodic basis through
your securities dealer:
. The current minimum for such
automatic investments is $100.
The minimum may be waived or
revised under certain
circumstances.
-------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
27
<PAGE>
[GRAPHIC] Account Choices
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
-------------------------------------------------------------------------------
<C> <C> <S>
Transfer shares Transfer to a To transfer your Fund shares to
to another participating securities another securities dealer,
securities dealer authorized dealer agreements must
dealer be in place between the Distributor
and the transferring securities
dealer and the Distributor and the
receiving securities dealer.
Certain services may not be
available for the transferred
shares. You may only purchase
additional shares of funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
--------------------------------------------------------------------
Transfer to a non- You must either:
participating securities
dealer
. Transfer your shares to an
account with the Transfer Agent;
or
. Sell your shares.
-------------------------------------------------------------------------------
Sell your Have your financial The price of your shares is based
shares consultant or securities on the next calculation of net
dealer submit your sales asset value after your order is
order placed. 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 prior to that day's close of
business on the New York Stock
Exchange (generally, 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.
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. No processing fee
is charged if you sell shares
directly through the Transfer
Agent. The fees charged by other
securities dealers may be higher or
lower.
A Fund may reject an order to sell
shares under certain circumstances.
--------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the
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. A
signature guarantee will generally
be required but may be waived in
certain limited circumstances. You
can obtain a signature guarantee
from a bank, securities dealer,
securities broker, credit union,
savings association, national
securities exchange and registered
securities association. A notary
public seal will not be acceptable.
Depending on the type of account
and/or type of distribution,
certain additional documentation
may be required. The Transfer Agent
will normally mail redemption
proceeds within seven days
following receipt of a properly
completed request. If you make a
redemption request before the Fund
has collected payment for the
purchase of shares, the Fund or the
Transfer Agent may delay mailing
your proceeds. This delay usually
will not exceed ten days.
-------------------------------------------------------------------------------
</TABLE>
MERCURY INDEX FUNDS, INC.
28
<PAGE>
[GRAPHIC] Account Choices
<TABLE>
<CAPTION>
Information important for you to
If you want to Your choices know
-------------------------------------------------------------------------------
<C> <C> <S>
Sell shares Participate in a Fund's You can choose to receive
systematically Systematic Withdrawal systematic payments from your Fund
Plan account either by check or through
direct deposit to your bank account
on a monthly or quarterly basis.
You can generally arrange through
your selected dealer for systematic
sales of shares of a fixed dollar
amount on a monthly, bi-monthly,
quarterly, semi-annual or annual
basis, subject to certain
conditions. You must have dividends
automatically reinvested. Ask your
financial consultant for details.
-------------------------------------------------------------------------------
Exchange your Select the Fund into If you are a participant in certain
shares which you want to fee-based programs or retirement
exchange. Be sure to read plans, you can exchange your shares
that fund's prospectus. of a Fund for shares of another
Fund.
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>
Because of the high cost of maintaining
smaller shareholder accounts, the Funds may
redeem the shares in your account if the net
asset value of your account falls below $500
due to redemptions you have made. You will be
notified that the value of your account is
less than $500 before the Funds make an
involuntary redemption. You will then have 60
days to make an additional investment to
bring the value of your account to at least
$500 before the Funds take any action. This
involuntary redemption does not apply to
retirement plans or Uniform Gifts or
Transfers to Minors Act accounts.
MERCURY INDEX FUNDS, INC.
29
<PAGE>
[GRAPHIC] Account Choices
Net Asset Value -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
--------------------------------------------------------------------------------
When you buy shares, you pay the net asset value. 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 after the close
of business on the Exchange, based on prices at the time of closing. The
Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used
in determining 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 or exchanged within ninety days
of purchase will have a lower net asset value because a redemption fee is
charged on such shares.
MERCURY INDEX FUNDS, INC.
30
<PAGE>
[GRAPHIC] Account Choices
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
FEE-BASED PROGRAMS
--------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Mercury or an
affiliate of Mercury, or by selected dealers that have an agreement with
Mercury, you may be able to buy Class I shares 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 shares of a Fund. Any 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 AND TAXES
--------------------------------------------------------------------------------
The Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund and Mercury
International Index Fund will distribute at least annually net investment
income. The Mercury Aggregate Bond Index Fund will distribute on a monthly
basis net investment income. The Funds will distribute at least annually any
net realized long or short-term capital gains. 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 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 pay dividends that will either be taxed as ordinary income or capital
MERCURY INDEX FUNDS, INC.
31
<PAGE>
[GRAPHIC] Account Choices
"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. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax advisor.
gains. Capital gain dividends 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 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 or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in 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.
MERCURY INDEX FUNDS, INC.
32
<PAGE>
[GRAPHIC] The Management Team
MANAGEMENT OF THE FUNDS
--------------------------------------------------------------------------------
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 Quantitative Master Series
Trust. The Investment Adviser has the responsibility for making all investment
decisions for the Series.
The investment professionals 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 and Mercury Small Cap Index Fund. Mr.
Mitofsky has been a First Vice President of the Investment Adviser and certain
of its affiliates since 1997 and was a Vice President of the Investment Adviser
and certain of its affiliates from 1992 to 1997.
Richard Vella, Senior 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 and certain of its affiliates since 1999, a Managing
Director of Global Index Funds of Bankers Trust from 1997 to 1999, a Managing
Director of International Index Funds of Bankers Trust from 1995 to 1999, a
Vice President of International Index Funds of Bankers Trust from 1990 to 1995,
an Assistant Vice President of International Index Funds of Bankers Trust from
1987 to 1990 and an Assistant Treasurer of Bankers Trust from 1985 to 1986.
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 and certain of its affiliates since 1997, a
Vice President of the Investment Adviser and certain of its affiliates from
1985 to 1997 and a Portfolio Manager of the Investment Adviser and certain of
its affiliates since 1984.
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 and certain of its affiliates since
1998 and was a Vice President of the Investment Adviser and certain of its
affiliates 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 and certain of its affiliates since 1998, a
Vice President of the Investment Adviser and certain of its affiliates from
1989 to 1998 and Portfolio Manager of the Investment Adviser and certain of its
affiliates since 1985.
MERCURY INDEX FUNDS, INC.
33
<PAGE>
[GRAPHIC] The Management Team
The Funds do not have an investment adviser since each Fund's assets are
invested in its corresponding Series. The Funds have hired Mercury Asset
Management US as administrator of the Funds to provide administrative services
to the Funds. For providing management services to the Series and
administrative services to the Funds, Mercury Asset Management US is paid at
the rates shown in the following table, although these rates may be lower as a
result of certain voluntary fee waivers agreed to by Mercury Asset Management
US:
<TABLE>
<CAPTION>
Total
Management and
Management Administrative Administrative
Fund Fee (a) 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...... 0.01% 0.34% 0.35%
</TABLE>
--------
(a) Paid by the Series. The Investment Adviser of the Series has entered into a
contractual arrangement to provide that the management fee for the Series,
when combined with administrative fees of certain funds that invest in the
Series, will not exceed specific amounts. As a result of this contractual
arrangement, the Investment Adviser of the S&P 500 Index Series, Small Cap
Index Series and Aggregate Bond Index Series currently receives management
fees of 0.005%, 0.01% and 0.01%, respectively. This arrangement has a one-
year term and is renewable. The Investment Adviser has not entered into a
similar arrangement with the Series in which the Mercury International
Index Fund invests.
Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management, L.P. is part of the Asset Management Group, which had
approximately $561 billion in investment company and other portfolio assets
under management as of April 2000. This amount includes assets managed for
affiliates of the Investment Adviser.
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 Quantitative
Master Series Trust. Investors in each Fund will acquire an indirect interest
in the respective underlying Series.
MERCURY INDEX FUNDS, INC.
34
<PAGE>
[GRAPHIC] The Management Team
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
As the year 2000 began, there were few problems caused by the inability of
certain computer systems to tell the difference between the year 2000 and the
year 1900 (commonly known as the "Year 2000 Problem"). It is still possible
that some computer systems could malfunction in the future because of the Year
2000 Problem or as a result of actions taken to address the Year 2000 Problem.
Fund management does not anticipate that its services or those of the Funds'
other service providers will be adversely affected, but Fund management will
continue to monitor the situation. If malfunctions related to the Year 2000
Problem do arise, the Funds and their investments could be negatively affected.
MERCURY INDEX FUNDS, INC.
35
<PAGE>
[This page intentionally left blank]
<PAGE>
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.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
(888-763-2260)
Independent Auditors
Deloitte & Touche LLP
Princeton Forrestal Village
116-300 Village Boulevard
Princeton, New Jersey 08540-6400
Distributor
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian for Master International Index Series
The Chase Manhattan Bank
4 Chase MetroTech, 18th Floor
Brooklyn, New York 11245
Custodian for Master S&P 500 Index Series,
Master Small Cap Index Series and
Master Aggregate Bond Index Series
Merrill Lynch Trust Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
MERCURY INDEX FUNDS, INC.
<PAGE>
[GRAPHIC] To Learn More
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 strate-
gies 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 finan-
cial consultant or, if none, write to the Transfer Agent at its mailing ad-
dress. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call your finan-
cial 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 45289, Jacksonville, Florida
32232-5289 or by calling 1-888-763-2260.
Contact your financial consultant or the Funds at the telephone number or ad-
dress 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 1-202-942-8090 for information on the operation of the Public Refer-
ence Room. This information is also available on the EDGAR Database on the
SEC's Internet site at http://www.sec.gov and copies may be obtained upon pay-
ment of a duplicating fee by electronic request at the following e-mail ad-
dress: [email protected], or by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE INFORMA-
TION CONTAINED IN THIS PROSPECTUS.
Investment Company Act File #811-09605.
Code # 19106-0600.
(C)Mercury Asset Management US, a division of Fund Asset Management, L.P.
Prospectus
----------------
M E R C U R Y
ASSET MANAGEMENT
----------------
[GRAPHIC]
Mercury Index
Funds, Inc.
June 8, 2000
<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 seeks to achieve its investment objective by
investing all of its assets in the series (collectively, the "Series," and
each, a "Series") of Quantitative 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 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.
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 June
8, 2000 (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. The Prospectus is incorporated by
reference to this Statement of Additional Information and this Statement of
Additional Information has been incorporated by reference to the Prospectus.
The Series' audited financial statements are incorporated into this Statement
of Additional Information by reference to their 1999 annual reports
to shareholders. You may request copies of the annual and semi-annual reports
at no charge by calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00
p.m. on any business day.
----------------
Mercury Asset Management US -- Investment Adviser
Mercury Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is June 8, 2000.
<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.............................. 5
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................................................. 18
Portfolio Turnover...................................................... 20
Management of the Funds................................................... 20
Directors and Officers.................................................. 20
Compensation of Directors/Trustees...................................... 22
Administration Arrangements............................................. 23
Management and Advisory Arrangements.................................... 24
Code of Ethics.......................................................... 26
Purchase of Shares........................................................ 26
Account Maintenance Plan................................................ 27
Redemption of Shares...................................................... 28
Redemption.............................................................. 28
Repurchase.............................................................. 29
Redemption Fee.......................................................... 29
Portfolio Transactions and Brokerage...................................... 29
Pricing of Shares......................................................... 31
Determination of Net Asset Value........................................ 31
Shareholder Services...................................................... 32
Investment Account...................................................... 32
Automatic Investment Plan............................................... 33
Automatic Dividend Reinvestment Plan.................................... 33
Systematic Withdrawal Plan.............................................. 33
Retirement and Education Savings Plans.................................. 34
Exchange Privilege...................................................... 34
Fee-Based Programs...................................................... 35
Dividends and Taxes....................................................... 35
Dividends............................................................... 35
Taxes................................................................... 35
Tax Treatment of Options and Futures Transactions....................... 37
Special Rules for Certain Foreign Currency Transactions................. 37
The Series.............................................................. 38
Performance Data.......................................................... 38
General Information....................................................... 40
Description of Shares................................................... 40
Computation of Offering Price Per Share................................. 40
Independent Auditors.................................................... 41
Custodian............................................................... 41
Transfer Agent.......................................................... 41
Legal Counsel........................................................... 42
Reports to Shareholders................................................. 42
Additional Information.................................................. 42
Financial Statements...................................................... 42
Independent Auditors' Report.............................................. 43
Statements of Assets and Liabilities...................................... 44
Appendix
Ratings of Fixed Income Securities...................................... A-1
</TABLE>
<PAGE>
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 seeks to achieve its investment objective by investing all of its
assets in the series of the 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 are 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 "About the Details--How the
Funds Invest" and "About the Details--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 (the "NYSE"). 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 linked to the Aggregate
Bond Index based on the Investment Adviser's optimization process, a
statistical sampling technique that aims to create a portfolio that will match
approximately the performance of the index with less transaction costs than
would be incurred through full replication. 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--Investment in Fixed-Income Securities." The Mercury
Aggregate Bond Index Fund may also engage in securities lending. See "Other
Investment Policies, Practices and Risk Factors--Securities Lending."
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
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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.
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"),
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 based on the Investment
Adviser's optimization process, a statistical sampling technique that aims to
create a portfolio that will match approximately the performance of the index
with less transaction costs than would be incurred through full replication.
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--Securities Lending."
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 the United Kingdom. The weighting of the EAFE
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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 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
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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 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,
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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, 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, certain types of mortgage-
backed securities may be paid off more slowly, 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
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interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints
to which a governmental entity may be subject. In certain countries,
governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal of interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.
Holders of sovereign debt, including the Mercury Aggregate Bond Index Fund,
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. 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"). EMU established a single common European currency
(the "euro") that was introduced on January 1, 1999 and is expected to replace
the existing national currencies of all EMU participants by July 1, 2002. EMU
took effect for the initial EMU participants on January 1, 1999. Certain
securities issued in participating EU countries (beginning with government and
corporate bonds) will be redenominated in the euro, and are listed, are traded
and make dividend and other payments only in euros.
No assurance can be given that EMU will continue to proceed as planned, that
the changes planned for the EU can be successfully implemented, or that 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 a 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.
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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.
Warrants. A warrant gives a Fund the right to buy a quantity of stock. The
warrant specifies the amount of underlying stock, the purchase (or "exercise")
price, and the date the warrant expires. A Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises it before it expires. If the
price of the underlying stock does not rise above the exercise price before
the warrant expires, the warrant generally expires without any value and the
Fund loses any amount it paid for the warrant. Thus, investments in warrants
may involve substantially more risk than investments in common stock. Warrants
may trade in the same markets as their underlying stock; however, the price of
the warrant does not necessarily move with the price of the underlying stock.
Buying a warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no right to dividends or votes on the underlying
stock. A warrant does not carry any right to assets of the issuer, and for
this reason investments in warrants may be more speculative than other equity-
based investments.
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 sold in private placement
transactions between issuers and their purchasers and may be neither listed on
an exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by a Fund or less than
their fair market value.
In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately
placed securities held by 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
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Directors have determined to treat as liquid Rule 144A securities that are
either freely tradeable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and procedures adopted
by the Directors. The Directors have adopted guidelines and delegated to the
Investment Adviser the daily function of determining and monitoring liquidity
of restricted securities. The 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
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, will 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 Mercury 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
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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 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
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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 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 "Investment 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 Mercury 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
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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 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
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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.
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" 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.
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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 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." 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.
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Additional Risk Factors of OTC Transactions
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.
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 S&P, a division of the McGraw Hill Companies, Inc. S&P
makes no representation regarding the advisability of investing in the Fund or
the Series. S&P 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. S&P's only relationship to the Fund and the Series
is the licensing of certain trademarks and trade names of S&P and of the S&P
500 which is determined, composed and calculated by S&P without regard to the
Fund and the Series. S&P 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. S&P 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.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund and the Series.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein, and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P 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. S&P 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 S&P have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
16
<PAGE>
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.
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.
17
<PAGE>
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 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 Registration
Statement, as it may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) 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 Registration Statement,
as it may be amended from time to time, in connection with hedging
transactions, short sales, when issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as 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 Registration Statement, as it may be amended from time to time, and
without registering as a commodity pool operator under the Commodity
Exchange Act.
In addition, 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
18
<PAGE>
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 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 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) 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 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.
(c) 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 nor 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
which are held by such Fund or Series, the market value of the underlying
securities covered by OTC call options currently outstanding which 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 which 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
19
<PAGE>
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 which is generally based on a multiple of the
premium received for the option, plus the amount by which the option is "in-
the-money." This policy as to OTC options is not a fundamental policy of 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, general partners, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under the Investment
Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with 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 consist of eight individuals, six of whom are not "interested
persons" of the Corporation as defined in the Investment Company Act (the
"non-interested Directors"). 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.
Terry K. Glenn (59)--President and Director(1)(2)--Executive Vice President
of FAM and certain of its affiliates (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 since 1988.
20
<PAGE>
M. Colyer Crum (67)--Director(2)(3)--104 Westcliff Road, Weston,
Massachusetts 02193. Currently James R. Williston Professor of Investment
Management Emeritus, Harvard Business School; James R. Williston Professor of
Investment Management, Harvard Business School from 1971 to 1996; Director of
Cambridge Bancorp.
Laurie Simon Hodrick (37)--Director(2)(3)--809 Uris Hall, 3022 Broadway, New
York, New York 10027. Professor of Finance and Economics, Graduate School of
Business, Columbia University since 1998; Associate Professor of Finance and
Economics, Graduate School of Business, Columbia University from 1996 to 1998;
Associate Professor of Finance, J.L. Kellogg Graduate School of Management,
Northwestern University from 1992 to 1996.
Jack B. Sunderland (71)--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 (66)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since
1996; Principal of Fernwood Associates (financial consultant) since 1975.
J. Thomas Touchton (61)--Director(2)--Suite 3405, One Tampa City Center, 201
North Franklin Street, 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).
Fred G. Weiss (58)--Director(2)(3)--16450 Maddalena Place, Delray Beach,
Florida 33446. Director of Watson Pharmaceutical, Inc. since 2000; Director of
Parkinsons Advocacy Network since 1999; Managing Director of FGW Associates
since 1997; Vice President of Planning Investment and Development of Warner
Lambert Co. from 1979 to 1997.
Arthur Zeikel (67)--Director(2)(3)--Chairman of the Manager and FAM from
1997 to 1999 and President thereof from 1977 to 1997; Director thereof from
1993 to 1999 and President thereof from 1993 to 1997; Executive Vice President
of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to 1999.
Robert C. Doll (45)--Senior Vice President(1)(2)--Senior Vice President of
FAM and certain of its affiliates since 1999; Senior Vice President of
Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds,
Inc. in 1999 and Executive Vice President thereof from 1991 to 1999.
Phillip Green (36)--Senior Vice President(1)(2)--Senior Vice President of
FAM and certain of its affiliates since 1999; Managing Director and Portfolio
Manager of Global Institutional Services at Bankers Trust from 1997 to 1999;
Vice President of Quantitative Equities at Bankers Trust in 1996; Vice
President of Asset Allocations Strategies at Bankers Trust from 1994 to 1996;
Vice President of Foreign Exchange and Currency Overlay Strategies at Bankers
Trust from 1988 to 1999; Assistant Treasurer of Asset Management Group at
Bankers Trust from 1985 to 1988.
Joseph T. Monagle, Jr. (51)--Senior Vice President(1)(2)--Senior Vice
President of FAM and certain of its affiliates since 1990; Department Head of
the Global Fixed Income Division of FAM and certain of its affiliates since
1997; Senior Vice President of Princeton Services since 1993.
Christopher G. Ayoub (44)--Senior Vice President and Co-Portfolio Manager of
the Mercury Aggregate Bond Index Fund(1)(2)--First Vice President of FAM and
certain of its affiliates since 1998; Vice President of FAM and certain of its
affiliates from 1985 to 1998.
Dean D'Onofrio (41)--Senior Vice President(1)(2)-- 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 from 1981 to 1996; Analyst of Quantitative Investments Group of
Bankers
21
<PAGE>
Trust from 1981 to 1982; Portfolio Manager of Quantitative Investments Group
of Bankers Trust from 1983 to 1984; Head of Qualitative Investments Group of
Bankers Trust from 1985 to 1989; Head of U.S. Equity Derivatives Marketing
Group of Bankers Trust from 1990 to 1993; Head of Hedge Funds and Arbitrage
Trading Group of Bankers Trust from 1994 to 1996.
Jeffrey B. Hewson (48)--Vice President and Co-Portfolio Manager of the
Mercury Aggregate Bond Index Fund(1)(2)--Director (Global Fixed Income) of FAM
and certain of its affiliates since 1998; Vice President of FAM and certain of
its affiliates from 1989 to 1998; Portfolio Manager of FAM and certain of its
affiliates since 1985.
Gregory Mark Maunz (47)--Senior Vice President and Co-Portfolio Manager of
the Mercury Aggregate Bond Index Fund(1)(2)--First Vice President of FAM and
certain of its affiliates since 1997; Vice President of the FAM and certain of
its affiliates from 1985 to 1997; Portfolio Manager of FAM and certain of its
affiliates since 1984.
Eric S. Mitofsky (45)--Senior Vice President and Portfolio Manager of the
Mercury S&P 500 Index Fund and Mercury Small Cap Index Fund(1)(2)--First Vice
President of FAM and certain of its affiliates since 1997; Vice President of
FAM and certain of its affiliates from 1992 to 1997.
Frank Salerno (40)--Senior Vice President(1)(2)--First Vice President of FAM
and certain of its affiliates since 1999; Managing Director and Chief
Investment Officer of Structured Investments at Bankers Trust from 1995 to
1999; Managing Director and head of Structured Investments at Bankers Trust
from 1993 to 1995; Domestic Head of Structured Investments at Bankers Trust
from 1991 to 1993; Assistant Vice President of Structured Investments at
Bankers Trust from 1985 to 1991.
Richard Vella (42)--Senior Vice President and Portfolio Manager of the
Mercury International Index Fund(1)(2)--First Vice President of FAM and
certain of its affiliates since 1999; Managing Director of Global Index Funds
of Bankers Trust from 1997 to 1999; Managing Director of International Index
Funds of Bankers Trust from 1995 to 1999; Vice President of International
Index Funds of Bankers Trust from 1990 to 1995; Assistant Vice President of
International Index Funds of Bankers Trust from 1987 to 1990; Assistant
Treasurer of Bankers Trust from 1985 to 1986.
Donald C. Burke (39)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of FAM and certain of its affiliates since 1999;
Senior Vice President and Treasurer of Princeton Services since 1999; Vice
President of PFD since 1999; First Vice President of FAM and certain of its
affiliates from 1997 to 1999; Director of Taxation of FAM and certain of its
affiliates since 1990; Vice President of FAM and certain of its affiliates
from 1990 to 1997.
Ira P. Shapiro (37)--Secretary(1)(2)--First Vice President of FAM and
certain of its affiliates since 1998; Director (Legal Advisory) of FAM and
certain of its affiliates from 1997 to 1998; Vice President of FAM and certain
of its affiliates from 1996 to 1997; Attorney with FAM and certain of its
affiliates 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 or its affiliates act as investment
adviser.
(3) Became Director on March 30, 2000.
As of June 1, 2000, the officers and Directors as a group (twenty persons)
owned an aggregate of less than 1% of the outstanding shares of Common Stock
of ML & Co. and owned an aggregate of less than 1% of the outstanding shares
of any of the Funds.
Compensation of Directors/Trustees
The Trust expects to pay each individual who serves as a Director/Trustee
not affiliated with FAM or an affiliate of FAM (each a "non-affiliated
Director/Trustee") for services to all funds that invest in the Trust and all
series of the Trust a fee of $5,000 per year plus $500 per Board meeting
attended, together with such individual's
22
<PAGE>
actual out-of-pocket expenses relating to attendance at meetings. The Trust
also expects to compensate members of the Audit and Nominating Committee (the
"Committee"), which consists of all of the non-affiliated Directors/Trustees
of the funds and the series, with a fee of $1,000 per year for services to all
funds that invest in the Trust and all series of the Trust. Through investment
in the Trust, the Corporation pays its pro rata share of the fees paid by the
Trust to non-affiliated Directors/Trustees.
The following table sets forth the aggregate compensation the Trust paid to
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 Trust
Retirement and FAM and
Aggregate Benefits Accrued Affiliates Advised
Compensation as Part of Trust Funds Paid to
Name of Director/Trustee From Trust Expenses Directors/Trustees(1)
------------------------ ------------ ---------------- ---------------------
<S> <C> <C> <C>
Jack B. Sunderland...... $8,000 None $137,100
Stephen B. Swensrud..... $8,000 None $199,083
J. Thomas Touchton...... $8,000 None $137,100
</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).
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 arrangements by the Investment Adviser and the Administrator.
The Administration Agreement obligates the Administrator to provide certain
management and administrative services to the Corporation and the Funds and to
pay, or cause its affiliate to pay, for maintaining its staff and personnel
necessary to perform its obligations under the Administration Agreement 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
compensation of those officers and Directors/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 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
23
<PAGE>
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 Funds 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 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 will automatically terminate in the event of
its assignment. In addition, such contract may be terminated with respect to
one or more Funds by the Directors or with respect to a Fund by the vote of a
majority of the outstanding voting securities of such Fund, or by the
Administrator, without penalty on 60 days' written notice to the other party.
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 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 a Series or other clients or funds for
which the Investment Adviser or an affiliate acts as manager, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or an
affiliate during the same period may increase the demand for securities being
purchased or the supply of securities being sold there may be an adverse
effect on price.
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: (i) without taking account of certain
voluntary fee waivers as set forth in the "Contractual Management Fee" column,
and (ii) after taking account of certain voluntary fee waivers agreed to by
the Investment Adviser as set forth in the "Management Fee Net of Fee Waiver"
column, in each case, as follows:
<TABLE>
<CAPTION>
Contractual Management
Management Fee Net of
Name of Series Fee Fee Waiver
-------------- ----------- ----------
<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 (Capitalization Weighted) Index
Series................................................ 0.01% 0.01%
</TABLE>
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
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<PAGE>
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. The
Trust pays, or causes to be paid, all other expenses incurred in the operation
of the Trust and 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 (if any), shareholder
reports, copies of the Registration Statements, charges of the custodian and
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 expenses of non-interested
Trustees, accounting and pricing costs (including the daily calculation of net
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable
by the Trust or a Series. Accounting services are provided to the Trust and
the Series by the Investment Adviser, and the Trust reimburses the Investment
Adviser for its costs in connection with such services. The Distributor will
pay certain promotional expenses of the Series incurred in connection with the
continuous offering of shares of each of the Series. Certain expenses will be
financed by a Series pursuant to account maintenance plans in compliance with
Rule 12b-1 under the Investment Company Act. See "Purchase of Shares--Account
Maintenance Plan."
Organization of the Investment Adviser. Mercury Asset Management US, a
division of FAM, is located at 800 Scudders Mill Road, Plainsboro, NJ 08536.
FAM is a limited partnership, the partners of which are ML & Co., a financial
services holding company and the parent of Merrill Lynch, and Princeton
Services. ML & Co. and Princeton Services are "controlling persons" of FAM as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will continue 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 of the Trust or
with respect to any Series by the vote of a majority of the outstanding voting
securities of such Series and (b) by a majority of the Trustees who are not
parties to the Management Agreement or interested persons (as defined in the
Investment Company Act) of any such party. The Management Agreement is not
assignable and will automatically terminate in the event of its assignment. In
addition, such contract may be terminated with respect to a Series by the vote
of a majority of the outstanding voting securities of such series, or by the
Investment Adviser, without penalty on 60 days' written notice.
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 a fee for each shareholder account and reimburses it for out-
of-pocket expenses. The fee ranges from $11.00 to $20.00 per account
(depending on the level of services required) but is set at 0.10% for certain
accounts that participate in certain fee based programs. For purposes of the
Transfer Agency Agreement, the term "account" includes any shareholder
account.
Distribution Expenses. The Corporation, on behalf of each Fund, has entered
into a distribution agreement with the Distributor with respect to each class
of Fund shares in connection with the continuous offering of such class of
shares of each Fund (each a "Distribution Agreement"). Each Distribution
Agreement obligates the Distributor to pay certain expenses in connection with
the offering of the applicable class 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. Each Distribution
Agreement is subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
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<PAGE>
Code of Ethics
The Board of Directors of the Corporation has 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 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).
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.
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."
Distribution Services. 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--
Management and Advisory Arrangements--Distribution Expenses."
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. Any order may be rejected by a Fund or the Distributor. 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 sale of shares. For example, the fee charged by Merrill
Lynch, Pierce, Fenner & Smith Incorporated is currently $5.35. Purchases made
directly through the Transfer Agent are not subject to a processing fee.
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
26
<PAGE>
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
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 or customers of certain selected
dealers. Class I shares may also be offered at net asset value to certain
accounts over which the Investment Adviser or an affiliate exercises
investment discretion.
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. Information with respect to the
account maintenance-related expenses is presented to the Directors 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 non-interested Directors shall be committed to the discretion of
the non-interested Directors then in office. In approving the Account
Maintenance Plan in accordance with Rule 12b-1, the non-interested 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 any or all of the Funds
without penalty, by the vote of a majority of the non-interested Directors or
by the vote of the holders of a majority of the outstanding Class A voting
securities of the applicable Fund or Funds. The Account Maintenance Plan
cannot be amended to increase materially the amount to be spent by a Fund
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 non-interested 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.
27
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Account Choices--How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.
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.
Because of the high cost of maintaining smaller shareholder accounts, the
Funds may redeem the shares in your account if the net asset value of your
account falls below $500 due to redemptions you have made. You will be
notified that the value of your account is less than $500 before the Funds
make an involuntary redemption. You will then have 60 days to make an
additional investment to bring the value of your account to at least $500
before the Funds take any action. This involuntary redemption does not apply
to retirement plans or Uniform Gifts or Transfers to Minors Act accounts
("UGMA/UTMA accounts").
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the NYSE is restricted as determined by the Commission or
during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of 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 market value of the securities
held by a Fund 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 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Redemption requests should not be sent to the
Corporation. The redemption request in either event requires the signature(s)
of all persons in whose name(s) the shares are registered, signed exactly as
such name(s) appear(s) on the Transfer Agent's register. The signature(s) on
the redemption request 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. In the event a
signature guarantee is required, notarized signatures are not sufficient. In
general, signature guarantees are waived on redemptions of less than $50,000
as long as the following requirements are met: (i) all requests require the
signature(s) of all persons whose name(s) shares are recorded on the Transfer
Agent's register, (ii) all checks must be mailed to the stencil address of
record on the Transfer Agent's register and (iii) the stencil address must not
have changed within 30 days. Certain rules may apply regarding certain account
types such as, but not limited to, UGMA/UTMA accounts, Joint Tenancies With
Rights of Survivorship, contra broker transactions, and institutional
accounts. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as 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 (e.g., cash, Federal funds or certified check
drawn on a U.S. bank). A Fund may delay or cause to be delayed the mailing of
a redemption check until such time as good payment (e.g., cash, Federal funds
or certified check drawn on a U.S. bank) has been collected for the purchase
of such Fund shares, which will usually not exceed 10 days.
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<PAGE>
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 value
next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received provided that the
request for repurchase is submitted to the dealer prior to the close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time)
and such request is received by a 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 contingent deferred
sales charge ("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 Funds 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 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 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, and 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.
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, 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 or group of brokers in the execution
of transactions in portfolio securities and does not use any particular broker
or dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Series, taking into
account such factors as price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonable
competitive commission rates, the Series do not necessarily pay the lowest
spread or commission available. In addition, consistent with the Conduct Rules
of the NASD and policies established by the Board of Trustees, the Investment
Adviser may consider sales of shares of the Series as a factor in the
selection of brokers or dealers to execute portfolio transactions for the
Trust; however, whether or not a particular broker or dealer sells shares of a
Series neither qualifies not disqualifies such broker or dealer to execute
transactions for the Trust.
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<PAGE>
Subject to obtaining the best net results, brokers who provide supplemental
investment research services to the Investment Adviser may receive orders for
transactions by the Trust. Such supplemental research services ordinarily
consist of assessments and analysis of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to
and not in lieu of the services required to be performed by the Investment
Adviser under its 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 benefit from supplemental research services, the Investment Adviser
is authorized to pay brokerage commissions to a broker furnishing such
services that are in excess of commissions that another broker may have
charged for effecting the same transaction. Certain supplemental research
services may primarily benefit one or more other investment companies or other
accounts for which the Investment Adviser exercises investment discretion.
Conversely, the Trust may be the primary beneficiary of the supplemental
research services received as a result of portfolio transactions effected for
such other accounts or investment companies.
The Trust anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States, if any,
generally will be conducted primarily on the principal stock exchanges of such
countries. Brokerage commissions and other transaction costs on foreign stock
exchange transactions generally are higher than in the United States, although
the Trust will endeavor to achieve the best net results in effecting its
portfolio transactions. There generally is less government supervision and
regulation of foreign stock exchanges and brokers than in the United States.
The Trust may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with the Trust and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Trust as principal in the purchase and sale
of securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts, the
Trust will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated
person of the Trust may serve as its broker in OTC transactions conducted on
an agency basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair compared to the fee
or commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Trust may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures 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. See "Investment Objectives and
Policies--Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply
to Merrill Lynch acting as a broker for the Trust in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Trust and annual statements
as to aggregate compensation will be provided to the Trust.
The Board of Trustees of the Trust has considered the possibility of seeking
to recapture for the benefit of the Series brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the advisory fee paid
by the Series to the Investment Adviser. After considering all factors deemed
relevant, the Board of Trustees of the Trust made a determination not to seek
such recapture. The Trustees will reconsider this matter from time to time.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that
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would involve the Trust or other clients or funds for which the Investment
Adviser or an affiliate acts as manager, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Investment Adviser or an affiliate during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "Account Choices--How Shares are Priced" in the
Prospectus.
The net asset value of the shares of all classes of each Fund is determined
once daily Monday through Friday after the close of business on the NYSE on
each day the NYSE is open for trading based on prices at the time of closing.
The NYSE generally closes at 4:00 p.m., Eastern time. Any assets or
liabilities 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 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 of the Trust as
the primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price or yield equivalent obtained from one
or more dealers or pricing services approved by the Board of Trustees of the
Trust. Short positions in securities traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and
most representative market. When 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 ask 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. The value
of swaps, including interest rate swaps, caps and floors, will be determined
by obtaining dealer quotations. Other investments, including financial futures
contracts and related options, are stated at market value. Obligations
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with remaining maturities of 60 days or less are valued at amortized cost
unless the Investment Adviser believes that this method no longer produces
fair valuations. Repurchase agreements will be valued at cost plus accrued
interest. Securities and assets for which market quotations are not readily
available are 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 of the Trust.
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 of the Trust. The Board of
Trustees of the Trust 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 may not be reflected in the computation of a Fund's net asset
value.
Each investor in the Trust may add to or reduce its investment in any Series
on each day the NYSE is open for trading. The value of each investor's
(including the respective Fund's) interest in a Series will be determined
after the close of business on the NYSE (generally 4:00 p.m., Eastern 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 after the close of business of the NYSE on the next
determination of net asset value of the Series.
SHAREHOLDER SERVICES
The Funds offer 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 Funds, 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 dividends. The
statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
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The Funds do not issue share certificates. Shareholders may transfer their
Class I or Class A shares to another securities dealer that has entered into a
selected dealer agreement with the Distributor. Certain shareholder services
may not be available for the transferred Class I or Class A shares. After the
transfer, the shareholder may purchase additional shares of funds owned before
the transfer and all future trading of these assets must be coordinated by the
new firm. If a shareholder wishes to transfer his or her Class I or Class A
shares to a securities dealer that has not entered into a selected dealer
agreement with the Distributor, the shareholder must either (i) redeem his or
her Class I or Class A shares, paying any applicable CDSC, if any, or (ii)
continue to maintain an Investment Account at the Transfer Agent for those
shares. The shareholder may also request the new securities dealer to maintain
the Class I or Class A shares in an account at the Transfer Agent registered
in the name of the securities dealer for the benefit of the shareholder
whether the securities dealer has entered into a selected dealer agreement or
not.
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, paying any
applicable CDSC, if any, 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) or Class A shares
at the applicable public offering price. These purchases may be made 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 $100. This minimum may be waived or
revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, if any, in
additional full and fractional shares of a Fund. Such reinvestment will be at
the net asset value of shares of a Fund as determined after the close of
business on the NYSE on the monthly payment date for such dividends.
Shareholders may, at any time, by written notification to their selected
dealer if the shareholder's account is maintained with a selected dealer, or
by written notification or by telephone (1-888-763-2260), if the account is
maintained with the Transfer Agent, elect to have subsequent dividends paid in
cash, rather than reinvested in shares of a Fund or vice versa provided that,
in the event that a payment in an account maintained at the Transfer Agent
would amount to $10.00 or less, a shareholder will not receive such payment in
cash and such payment will automatically be reinvested in additional shares).
Commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. 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 dividend checks. Cash payments can also be
directly deposited to the shareholder's bank account.
Systematic Withdrawal Plan
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
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specify the dollar amount and class of shares to be redeemed. With respect to
shareholders who hold accounts directly at the Transfer Agent, redemptions
will be made at net asset value as determined as described herein on the 24th
day of each month or the 24th day of the last month of each quarter, whichever
is applicable. With respect to shareholders who hold accounts with their
broker-dealer, redemptions will be made at net asset value determined as
described herein on the first, second, third or fourth Monday of each month,
or the first, second, third or fourth Monday of the last month of each
quarter, whichever is applicable. If the NYSE is not open for business on such
date, the shares will be redeemed at the net asset value determined as of the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for withdrawal payment will be
made on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in shares of 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 and Education Savings Plans
The minimum initial purchase to establish a retirement or an education
savings plan is $100. Dividends received in each of the plans are exempt from
Federal taxation until distributed from the plans. Different tax rules apply
to Roth IRA plans and education savings plans. Investors considering
participation in any retirement or education savings plan should review
specific tax laws relating thereto and should consult their attorneys or tax
advisors with respect to the establishment and maintenance of any such plan.
Exchange Privilege
U.S. shareholders of each class of shares of a Fund have an exchange
privilege with the other Funds. 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 Fund. If the Class I
shareholder wants to exchange Class I shares for shares of a second Fund, but
does not hold Class I shares of the second Fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class I shares
of the second Fund, the shareholder will receive Class A shares of the second
Fund as a result of the exchange. Class A shares also may be exchanged for
Class I shares of a second Fund at any time as long as, at the time of the
exchange, the shareholder is eligible to acquire Class I shares of any Fund.
Class A shares are exchangeable with shares of the same class of the other
Funds.
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 Fund,
("new Class I or Class A shares") are transacted on the basis of relative net
asset value per Class I or Class A share.
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 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
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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 of a Fund 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, if any, 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 of
the Fund purchased (which may involve the imposition of initial or deferred
sales charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
certain specific Programs offered through particular selected dealers
(including charges and limitations on transferability applicable to shares
that may be held in such Program) is available in the Program's client
agreement and from the shareholder's selected dealer.
DIVIDENDS AND TAXES
Dividends
It is the Corporation's intention to distribute substantially 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 may be reinvested automatically in
shares of the Funds. Shareholders may elect in writing to receive any such
dividends 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 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.
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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 holding period requirements 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 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
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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.,
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.
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
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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.
Ordinary income and capital gain dividends 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. Dividends paid by a Fund with respect to all
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by the
class. A Fund will include performance data for both classes of shares of that
Fund in any advertisement or information including performance data of the
Fund.
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Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted.
Actual annual or annualized total return data generally will be lower than
average annual total return data since the average rates of return reflect
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. In addition, from time to
time, a Fund may include its Fund's Morningstar risk-adjusted performance
ratings in advertisements or supplemental sales literature. A Fund may from
time to time quote in advertisement or other materials other applicable
measures of performance and may also make references to awards that may be
given to the Investment Adviser. As with other performance data, performance
comparisons should not be considered indicative of a Fund's relative
performance for any future period.
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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, of which the Corporation is authorized to issue 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 of
the Corporation (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 of Class I and Class A
Common Stock is entitled to participate equally in dividends declared and in
net assets upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except for any expenses which may be attributable to
only one class. Shares issued are fully-paid and non-assessable by the Fund.
Voting rights for Directors are not cumulative.
The Trust consists of eight 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 "Pricing of
Shares--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:
Mercury S&P 500 Index Fund
<TABLE>
<CAPTION>
Class I Class A
------- -------
<S> <C> <C>
Net Assets............................................... $13,081 $13,074
======= =======
Number of Shares Outstanding............................. 1,250 1,250
======= =======
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................... $ 10.46 $ 10.46
------- -------
Offering Price........................................... $ 10.46 $ 10.46
======= =======
</TABLE>
40
<PAGE>
Mercury Small Cap Index Fund
<TABLE>
<CAPTION>
Class I Class A
------- -------
<S> <C> <C>
Net Assets............................................... $11,783 $11,776
======= =======
Number of Shares Outstanding............................. 1,250 1,250
======= =======
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................... $ 9.43 $ 9.42
------- -------
Offering Price........................................... $ 9.43 $ 9.42
======= =======
</TABLE>
Mercury Aggregate Bond Index Fund
<TABLE>
<CAPTION>
Class I Class A
------- -------
<S> <C> <C>
Net Assets............................................... $12,691 $12,688
======= =======
Number of Shares Outstanding............................. 1,265 1,265
======= =======
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................... $ 10.03 $ 10.03
------- -------
Offering Price........................................... $ 10.03 $ 10.03
======= =======
</TABLE>
Mercury International Index Fund
<TABLE>
<CAPTION>
Class I Class A
------- -------
<S> <C> <C>
Net Assets............................................... $12,216 $12,209
======= =======
Number of Shares Outstanding............................. 1,250 1,250
======= =======
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................... $ 9.77 $ 9.77
------- -------
Offering Price........................................... $ 9.77 $ 9.77
======= =======
</TABLE>
Independent Auditors
Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village
Boulevard, Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Corporation and the Trust. The independent
auditors are responsible for auditing the annual financial statements of the
Funds.
Custodian
Merrill Lynch Trust Company, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, acts as custodian of the assets of the Master S&P 500 Index Series,
Master Small Cap Index Series and the Master Aggregate Bond Index Series. The
Chase Manhattan Bank ("Chase"), 4 Chase MetroTech, 18th Floor, Brooklyn, New
York 11245, acts as the custodian of the assets of Mercury International Index
Series. Under its contract with the Trust, Chase is authorized, among other
things, 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 the Series' cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on investments. The Funds
have implemented self-custody procedures, pursuant to which each Fund's
holdings of the applicable Series are custodied with the Series' Transfer
Agent.
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
41
<PAGE>
shares and the opening, maintenance and servicing of shareholder accounts. See
"Account Choices--How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
To facilitate custody of each Fund's interests in the applicable Series
without the need of a separate custodian for the Funds, the Trust has
appointed the Transfer Agent as the transfer agent for the Series.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405 Lexington
Avenue, New York, New York 10174, 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
Corporation sends to its shareholders at least 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. Under a separate agreement, FAM has granted
the Corporation, on its own behalf and on behalf of the Funds, the right to
use the "Mercury" name and has reserved the right to withdraw its consent to
the use of such name by the Corporation and the Funds at any time or to grant
the use of such name to any other company.
FINANCIAL STATEMENTS
The Series' audited financial statements are incorporated into this
Statement of Additional Information by reference to their 1999 annual reports
to shareholders. You may request copies of the annual and semi-annual reports
by calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
Mercury Index Funds, Inc.:
We have audited the accompanying statements of assets and liabilities of
Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund, Mercury Aggregate
Bond Index Fund, and Mercury International Index Fund (the "Funds"), all
series of the Mercury Index Funds, Inc. as of April 30, 2000. These financial
statements are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such statements of assets and liabilities present fairly, in
all material respects, the financial position of Mercury S&P 500 Index Fund,
Mercury Small Cap Index Fund, Mercury Aggregate Bond Index Fund, and Mercury
International Index Fund of the Mercury Index Funds, Inc. as of April 30,
2000, in accordance with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
June 8, 2000
43
<PAGE>
MERCURY INDEX FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
As of April 30, 2000
<TABLE>
<CAPTION>
Mercury Mercury Mercury Mercury
S&P 500 Small Cap Aggregate Bond International
Index Fund Index Fund Index Fund Index Fund
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Quantitative
Master Series Trust
(Note 1)*.................. $ 26,181 $ 23,583 $ 25,421 $ 24,452
Prepaid Registration Fees
(Note 1c).................. 79,201 79,201 79,201 79,201
Prepaid Offering Costs (Note
1c)........................ 80,712 80,712 80,712 80,712
Other assets................ 10,820 10,823 11,734 10,823
-------- -------- -------- --------
Total assets.............. 196,914 194,319 197,068 195,188
-------- -------- -------- --------
LIABILITIES
Payables:
Dividends to Shareholders.. -- -- $ 31 --
Administrative fees........ $ 13 $ 15 10 $ 17
Distributor................ 6 6 7 6
Accrued expenses and other
liabilities................ 170,740 170,739 171,641 170,740
-------- -------- -------- --------
Total liabilities......... 170,759 170,760 171,689 170,763
-------- -------- -------- --------
NET ASSETS.................... $ 26,155 $ 23,559 $ 25,379 $ 24,425
======== ======== ======== ========
NET ASSETS CONSIST OF:
Class I Shares of Common
Stock, $.0001 par value,
125,000,000 shares
authorized................. -- + -- + -- + -- +
Class A Shares of Common
Stock, $.0001 par value,
125,000,000 shares
authorized................. -- + -- + -- + -- +
Paid-in capital in excess of
par........................ $ 25,000 $ 25,000 $ 25,315 $ 25,000
Undistributed investment
income--net................ 35 59 -- 76
Accumulated realized capital
gains/losses on investments
from the Series--net....... (110) 803 (352) (42)
Unrealized
appreciation/depreciation
on investments from the
Series--net................ 1,230 (2,303) 416 (609)
-------- -------- -------- --------
NET ASSETS.................... $ 26,155 $ 23,559 $ 25,379 $ 24,425
======== ======== ======== ========
NET ASSET VALUE:
Class I:
Net Assets................. $ 13,081 $ 11,783 $ 12,691 $ 12,216
======== ======== ======== ========
Shares outstanding......... 1,250 1,250 1,265 1,250
======== ======== ======== ========
Net Asset Value............ $ 10.46 $ 9.43 $ 10.03 $ 9.77
======== ======== ======== ========
Class A:
Net Assets................. $ 13,074 $ 11,776 $ 12,688 $ 12,209
======== ======== ======== ========
Shares outstanding......... 1,250 1,250 1,265 1,250
======== ======== ======== ========
Net Asset Value............ $ 10.46 $ 9.42 $ 10.03 $ 9.77
======== ======== ======== ========
* Identified Cost............. $ 24,951 $ 25,886 $ 25,005 $ 25,061
======== ======== ======== ========
</TABLE>
+Amount is less than $1.00.
See Notes to Financial Statements
44
<PAGE>
MERCURY INDEX FUNDS, INC.
1. Significant Accounting Policies:
Mercury Index Funds, Inc. (the "Corporation") was organized as a Maryland
corporation on July 30, 1999 and consists of four portfolios or series:
Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund, Mercury Aggregate
Bond Index Fund and Mercury International Index Fund (the "Funds"). The
Corporation is registered under the Investment Company Act of 1940 as a non-
diversified mutual fund. Prior to commencement of operations on February 15,
2000, the Corporation had no operations other than those relating to
organizational matters and the sale of 5,000 Class I shares and 5,000 Class A
shares of Common Stock (1,250 shares of each class of each Fund) to Mercury
Asset Management US, a division of Fund Asset Management L.P. (the
"Administrator") for $100,000 ($25,000 for each Fund). The Funds' financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which may require the use of
management accruals and estimates. Mercury S&P 500 Index Fund, Mercury Small
Cap Index Fund, Mercury Aggregate Bond Index Fund and Mercury International
Index Fund seek to achieve their investment objective by investing all of
their assets in the Master S&P 500 Index Series, Master Small Cap Index
Series, Master Aggregate Bond Index Series and Master International
(Capitalization Weighted) Series (the "Series"), respectively, of the
Quantitative Master Series Trust, which has the same investment objective as
the Funds. The value of each Fund's investments in their respective Series
reflects each Fund's proportionate interest in the net assets of each of their
respective Series. The performance of each Fund is directly affected by the
performance of each of their respective Series. The financial statements of
each Series, including the Schedule of Investments, should be read in
conjunction with each of their respective Fund's financial statements. Each
Fund offers two classes of shares, Class I and Class A. Shares of Class I and
Class A are sold without the imposition of a front-end or deferred sales
charge. Both classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that Class A shares
bear certain expenses related to the account maintenance of such shares and
has exclusive voting rights with respect to matters relating to its account
maintenance expenditures. The following is a summary of significant accounting
policies followed by the Funds.
(a) Income--The Funds' net investment income consists of each Fund's pro
rata share of the net investment income of their respective Series, less all
actual and accrued expenses of each Fund determined in accordance with
accounting principles generally accepted in the United States of America.
(b) Income taxes--It is the Funds' policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no Federal income tax provision is required.
(c) Prepaid registration fees and offering costs--Prepaid registration fees
are charged to income as the related shares are issued. Prepaid offering costs
consist of legal and printing fees related to preparing the initial
registration statement, and will be amortized over a 12 month period beginning
with the commencement of operations of the Funds. The Administrator, on behalf
of the Funds, will incur organization costs estimated at $262,180.
(d) Dividends and distributions--Dividends and distributions paid by each
Fund are recorded on the ex-dividend dates.
(e) Investment transactions--Investment transactions are accounted for on a
trade date basis.
2. Transactions with Affiliates:
The Corporation has entered into an Administration Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services,
Inc. ("PSI"), a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner. Mercury S&P 500 Index Fund,
Mercury Small Cap Index Fund, Mercury Aggregate Bond Index Fund and Mercury
International Index Fund pay a monthly fee at an annual rate of .245%, .29%,
.19% and .34% of each Fund's average daily net assets, respectively, for the
performance of administrative services (other than investment advice and
related portfolio activities) necessary for the operation of the Funds. FAM
reimbursed Mercury S&P 500 Index Fund, Mercury Small Cap Index Fund, Mercury
Aggregate Bond Index Fund and Mercury International Index Fund $10,820,
$10,823, $11,734, and $10,823, respectively, in additional expenses.
45
<PAGE>
The Corporation has also entered into a Distribution Agreement and
Distribution Plan with Merrill Lynch Funds Distributor ("MLFD" or the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), which
is a wholly-owned subsidiary of Merrill Lynch Group, Inc. Pursuant to the
Distribution Plan adopted by the Corporation in accordance with Rule 12b-1
under the Investment Company Act of 1940, the Funds pay the Distributor an
ongoing account maintenance fee. The fee is accrued daily and paid monthly at
the annual rate of .25% based upon the average daily net assets of Class A
shares of each Fund.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance services to the Funds. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A shareholders.
Financial Data Services, Inc. ("FDS"), an indirect wholly-owned subsidiary
of ML & Co., is the Funds' transfer agent.
Accounting services are provided to the Funds by FAM at cost.
Certain officers and/or directors of the Corporation are officers and/or
directors of FAM, PSI, PFD, FDS, and/or ML & Co.
46
<PAGE>
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 (the "Securities Act").
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act, nor does it represent
that any specific note is a
A-1
<PAGE>
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.
A-2
<PAGE>
baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length
of time.
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration 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.
A-3
<PAGE>
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions 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
A-4
<PAGE>
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.
A-5
<PAGE>
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.
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<PAGE>
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<PAGE>
Code # 19107-0600
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1 --Articles of Incorporation of Registrant./1/
2 --By-Laws of Registrant./1/
3 --Instrument defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
4 --Not applicable.
5(a) --Form of Class I Shares Distribution Agreement between Registrant and
Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc., and Form of Class I Shares of Common Stock Selected Dealer
Agreement.
5(b) --Form of Class A Shares Distribution Agreement between Registrant and
Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc., and Form of Class A Shares of Common Stock Selected Dealer
Agreement.
6 --None.
7 --Not Applicable.
8(a) --Administration Agreement between Registrant and Mercury Asset
Management US, a division of Fund Asset Management, L.P.
8(b) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.
8(c) --License Agreement relating to Use of Name among Mercury Asset
Management International Ltd., Mercury Asset Management Group Ltd.
and Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc./2/
8(d) --License Agreement relating to Use of Name between Fund Asset
Management, L.P., and Registrant.
9 --Opinion and consent of Swidler Berlin Shereff Friedman, LLP, counsel
for Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --Certificate of Fund Asset Management, L.P.
13 --Form of Class A Account Maintenance Plan and Form of Class A Shares
Account Maintenance Plan Sub-Agreement.
14(a) --Rule 18f-3 Plan.
14(b) --Power of Attorney./1/
14(c) --Power of Attorney for Officers, Directors and Trustees.
15 --Not Applicable.
16 --Code of Ethics.
</TABLE>
----------
/1/Incorporated by reference to identically numbered exhibit to Registrant's
initial Registration Statement on Form N-1A (File Nos. 333-88405 and 811-
09605).
/2/Incorporated by reference to Exhibit No. 8(c) to Pre-Effective Amendment
No. 1 of Mercury Pan-European Growth Fund of Mercury Asset Management Funds,
Inc.'s Registration Statement on Form N-1A (File Nos. 333-56205 and 811-
08797).
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.
("Investment Adviser"). Accordingly, prior to the offering of each Fund's
shares, the Investment Adviser will be each Fund's sole shareholder and deemed
to be a controlling person of each Fund.
The Investment Adviser is a Delaware limited partnership and an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. and Princeton Services.
Therefore, prior to the offering of each Fund's shares, the Funds, the
Registrant and the Investment Adviser will be under common control.
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<PAGE>
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 V of the Articles of Incorporation provides that each acting and
former Director and officer of the Registrant shall be indemnified by the
Registrant to the full extent permitted by the Maryland General Corporation
Law, subject to the requirements of the Investment Company Act of 1940, as
amended.
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.
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 and hold harmless 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, or annual or
interim reports.
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
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<PAGE>
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.
The address of Mercury Asset Management US (the "Investment Adviser"), a
division of Fund Asset Management ("FAM"), is P.O. Box 9011, Princeton, New
Jersey 08543-9011. FAM, doing business as FAM or Mercury Asset Management US,
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, Mercury Master U.S. Small Cap Growth Portfolio of
Mercury Asset Management Master Trust, Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Focus Twenty Fund, Inc., Merrill Lynch Funds for Institutions Series,
Merrill Lynch Large Cap Series Funds, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Premier Growth Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Florida Insured Fund V,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Insured Fund III, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund IV, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniHoldings New York Insured Fund III, Inc., Muniholdings New
York Insured Fund IV, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Quantitative Master
Series Trust, and Worldwide DollarVest Fund, Inc.
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,
1997 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>
Merrill Lynch & Co., Limited Partner Financial Services Holding Company;
Inc. .................. Limited Partner of Merrill Lynch
Asset Management, L.P. ("MLAM")
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
---- ------------------ ----------------------------------
<S> <C> <C>
Fund Asset Management, Limited Partner
Inc. .................. 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.
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.
Gregory A. Bundy........ Chief Operating Officer Chief Operating Officer and Managing
and Managing Director Director of MLAM and FAM; Chief
Operating Officer and Managing
Director of Princeton Services; Co-
CEO of Merrill Lynch Australia from
1997 to 1999.
Donald C. Burke......... Senior Vice President Senior Vice President and Treasurer
and Treasurer of FAM; Senior Vice President and
Treasurer of MLAM since 1999;
Senior Vice President and Treasurer
of Princeton Services; Vice
President 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; Director and Treasurer of
Princeton Funds Distributor, Inc.
Robert C. Doll.......... Senior Vice President Senior Vice President of MLAM and
FAM; Senior Vice President of
Princeton Services; Chief
Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive
Vice President thereof from 1991 to
1999.
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services.
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
---- ------------------ ----------------------------------
<S> <C> <C>
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.
Philip L. Kirstein...... Senior Vice President Senior Vice President of MLAM;
Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services.
Debra W. Landsman- Senior Vice President Senior Vice President of MLAM;
Yaros.................. 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 Vice President and Treasurer of all
or substantially all of the investment companies described in the following
two paragraphs. Mr. Glenn is director of such companies. Messrs. Doll,
Giordano, and Monagle are officers of one or more of such companies.
MLAM, with an address at P.O. Box 9011, Princeton, New Jersey 08543-9011, an
affiliate of the Investment Adviser, acts as investment adviser for the
following open-end registered investment companies: Merrill Lynch Adjustable
Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill
Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Growth Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global
Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II, Inc. MLAM also
acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill
Lynch Basic Value Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
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<PAGE>
Mercury Asset Management International Ltd., an affiliate of MLAM, acts as
the investment adviser for the following open-end registered investment
companies: Mercury Master Global Balanced Portfolio of Mercury Asset
Management Master Trust (the "Trust"); Mercury Master Gold and Mining
Portfolio of the Trust; Mercury Master International Portfolio of the Trust;
Mercury Master Pan-European Growth Portfolio of the Trust; Mercury Master U.S.
Large Cap Portfolio of the Trust and Mercury V.I. U.S. Large Cap Fund of
Mercury Asset Management V.I. Funds, Inc.
Item 27. Principal Underwriters
(a) Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("MFD" or the "Distributor") acts as the principal underwriter for the
Registrant and for each of the following open-end investment companies:
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
Pan-European Growth Fund of Mercury Asset Management Funds, Inc.; Mercury
Global Balanced Fund of Mercury Asset Management Funds, Inc.; Mercury U.S.
Small Cap Growth Fund of Mercury Asset Management Funds, Inc.; Summit Cash
Reserves Fund of Financial Institutions Series Trust; Mercury V.I. U.S.
Large Cap Fund of Mercury Asset Management V.I. Funds, Inc.
A separate division of Princeton Funds Distributor, Inc. acts as the
principal underwriter of other investment companies.
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O.
Box 9081, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Crook, 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 and Treasurer 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
Donald C. Burke......... Vice President 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, for the Master S&P 500 Index Series, the Master Small
Cap Index Series and the Master Aggregate Bond Index Series, Merrill Lynch
Trust Company, 800 Scudders Mill Road, Plainsboro, New Jersey 08536 and for
the Master International Index Series, the Chase Manhattan Bank, 4 Chase
MetroTech, 18th Floor, Brooklyn, New York 11245.
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<PAGE>
(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 Arrangements" in the
Statement of Additional Information constituting Part B of the Registration
Statement, the Registrant is not party to any management related service
contract.
Item 30. Undertakings.
None.
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<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 Pre-Effective Amendment No. 1 to the 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 8th day of June, 2000.
Mercury Index Funds, Inc.
(Registrant)
/s/ Donald C. Burke
By: __________________________________
(Donald C. Burke, Vice President
and Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to the 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>
* President and Director
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
* Vice President and
______________________________________ Treasurer (Principal
(Donald C. Burke) Financial Accounting
Office and Principal
Accounting Officer)
* Director
______________________________________
(M. Colyer Crum)
* Director
______________________________________
(Laurie Simon Hodrick)
* Director
______________________________________
(Jack B. Sunderland)
* Director
______________________________________
(Stephen B. Swensrud)
* Director
______________________________________
(J. Thomas Touchton)
* Director
______________________________________
(Fred G. Weiss)
* Director
______________________________________
(Arthur Zeikel)
*This registration statement has been
signed by each of the persons so
indicated by the undersigned as
Attorney-in-Fact.
/s/ Donald C. Burke June 8, 2000
*By: _________________________________
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
SIGNATURES
Quantitative Master Series Trust has caused this Pre-Effective Amendment No.
1 to the 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 8th day of June, 2000.
Quantitative Master Series Trust
/s/ Donald C. Burke
By: __________________________________
(Donald C. Burke, Treasurer)
The Pre-Effective Amendment No. 1 to 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>
* President and Trustee
______________________________________ (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/ Donald C. Burke June 8, 2000
*By: _________________________________
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
C-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
5(a) --Form of Class I Shares Distribution Agreement between Registrant and
Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc., and Form of Class I Shares of Common Stock Selected Dealer
Agreement.
5(b) --Form of Class A Shares Distribution Agreement between Registrant and
Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc., and Form of Class A Shares of Common Stock Selected Dealer
Agreement.
8(a) --Administration Agreement between Registrant and Mercury Asset
Management US, a division of Fund Asset Management, L.P.
8(b) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.
8(d) --License Agreement relating to Use of Name among Fund Asset
Management, L.P., and Registrant.
9 --Opinion and consent of Swidler Berlin Shereff Friedman, LLP, counsel
for Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --Certificate of Fund Asset Management, L.P.
13 --Form of Class A Account Maintenance Plan and Form of Class A Shares
Account Maintenance Plan Sub-Agreement.
14(a) --Rule 18f-3 Plan.
14(c) --Power of Attorney for Officers, Directors and Trustees.
16 --Code of Ethics.
</TABLE>
