<PAGE>
As filed with the Securities and Exchange Commission on October 12, 1999
Securities Act File No.
Investment Company Act File No. 811-09617
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
_________________________________________
Mercury Life Strategy Series Fund, Inc.
(Exact name of Registrant as specified in charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code (888) 763-2260
TERRY K. GLENN
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
Copies to:
Counsel for the Fund: and MICHAEL J. HENNEWINKEL, ESQ.
JOEL H. GOLDBERG, ESQ. P.O. Box 9011
Swidler Berlin Shereff Friedman, LLP Princeton, New Jersey 08543-9011
919 Third Avenue
New York, New York 10022
_________________________________________
It is proposed that this filing will become effective
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
- --------------------------------------------------------------------------------
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is prohibited.
- -------------------------------------------------------------------------------
PROSPECTUS
MERCURY LIFE STRATEGY BALANCED FUND
MERCURY LIFE STRATEGY GROWTH AND INCOME FUND
MERCURY LIFE STRATEGY GROWTH FUND
AND
MERCURY LIFE STRATEGY AGGRESSIVE GROWTH FUND
OF
MERCURY LIFE STRATEGY SERIES FUND, INC.
_________________, 1999
A subscription period for shares of each fund will end on [__________],
unless extended.
This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
FUND FACTS................................................................. 3
ABOUT THE MERCURY LIFE STRATEGY SERIES FUND, INC...................... 3
FEES AND EXPENSES..................................................... 8
ABOUT THE DETAILS.......................................................... 15
HOW THE FUNDS INVEST.................................................. 15
INVESTMENT RISKS...................................................... 19
ACCOUNT CHOICES............................................................ 27
PRICING OF SHARES..................................................... 27
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES........................ 32
HOW SHARES ARE PRICED................................................. 38
FEE-BASED PROGRAMS.................................................... 38
DIVIDENDS, CAPITAL GAINS AND TAXES.................................... 39
THE MANAGEMENT TEAM........................................................ 40
MANAGEMENT OF THE FUNDS............................................... 40
TO LEARN MORE.............................................................. 43
SHAREHOLDER REPORTS................................................... 43
STATEMENT OF ADDITIONAL INFORMATION................................... 43
2
<PAGE>
FUND FACTS
----------
ABOUT THE MERCURY LIFE STRATEGY SERIES FUND, INC.
What is each Fund's objective?
- -----------------------------
Mercury Life Strategy Balanced Fund
The Fund's investment objective is to provide a combination of current income
and long-term capital growth.
Mercury Life Strategy Growth and Income Fund
The Fund's investment objective is to provide long-term capital growth and,
secondarily, moderate current income.
Mercury Life Strategy Growth Fund
The Fund's investment objective is to provide long-term capital growth and,
secondarily, some current income.
Mercury Life Strategy Aggressive Growth Fund
The Fund's investment objective is to provide long-term capital growth.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Fixed Income Security - security that pays a fixed rate of interest or a fixed
dividend.
Equity security - security that represents a unit of ownership of a corporation.
Investment Grade - any of the four highest debt obligations ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.
Bonds - debt obligations issued by corporations, governments and other issuers.
Derivatives - a contract, such as an option, future or swap, whose value is
based on the performance of an underlying asset.
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) to or from another
party at a specified price within a specified time period.
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.
- --------------------------------------------------------------------------------
What are each Fund's main investment strategies?
- -----------------------------------------------
The Funds are intended for investors who prefer to have their asset allocation
decisions made by professional money managers. Each Fund invests in a mix of
underlying funds managed or distributed by the Investment Adviser or one of its
affiliates. Each Fund starts with a target strategic allocation among
underlying funds that invest primarily in equity securities or in fixed-income
securities. Those assets allocated to underlying funds that invest primarily in
equity securities will be allocated among underlying funds that each reflect a
specific equity market segment and those assets allocated to fixed income funds
are expected to be allocated primarily to an underlying fund that reflects a
broad range of dollar-denominated investment grade bonds. The Investment
Adviser will deviate from the target strategic allocation within the ranges
shown below, in light of a Fund's investment objective and in response to market
conditions. The allocation process seeks to add value by overweighting
attractive markets and underweighting unattractive markets, while maintaining a
diversified portfolio within specific allocation parameters. The Investment
Adviser may also invest a Fund's assets directly in individual securities and
other financial instruments such as derivative instruments including options,
futures
3
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
and swaps. The Investment Adviser may use derivatives to seek to reduce the
effect of currency fluctuations on securities held by underlying funds that are
denominated in currencies other than the U.S. dollar, and to seek to gain
exposure to certain markets or groups of securities that would otherwise be
unavailable if the Funds were limited to investing in the underlying funds.
Target Strategic Allocations
----------------------------
Fund Target Range
Mercury Life Strategy Balanced Fund
Equity 50% 40%-60%
Fixed-Income 50% 40%-60%
Mercury Life Strategy Growth and Income Fund
Equity 70% 60%-80%
Fixed-Income 30% 20%-40%
Mercury Life Strategy Growth Fund
Equity 85% 75%-95%
Fixed-Income 15% 5%-25%
Mercury Life Strategy Aggressive Growth Fund
Equity 100% 100%
Fixed-Income 0% 0%
The Investment Adviser will invest in particular underlying funds based on
various criteria. Among other things, the Investment Adviser will analyze the
underlying funds' investment objectives, policies and investment strategies in
order to determine which underlying funds, in combination with other underlying
funds, are appropriate in light of a Fund's investment objective. A Fund's
investment in an underlying fund may exceed 25% of the Fund's total assets.
The particular underlying funds in which each Fund may invest, the target
strategic allocation and allocation ranges, and the investment policies of each
underlying fund may be changed from time to time without shareholder approval.
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. Because the Funds invest in
the underlying funds, you will be affected by the investment policies of the
underlying funds in direct proportion to the amount of assets the Funds allocate
to those underlying funds. If the value of a Fund's investments goes down, you
may lose money.
4
<PAGE>
Changes in the value of a Fund's investment in an underlying equity fund may
occur because a particular stock market is rising or falling. At other times,
there are specific factors that may affect an underlying fund's performance or
affect the value of particular investments held by an underlying fund. For
example, an underlying fund's investments may include smaller capitalization
companies. Smaller capitalization companies' securities generally trade in lower
volumes and are subject to greater, less predictable price changes than the
securities of more established companies. Each Fund may also invest in
underlying funds that in turn may invest in foreign securities, including
securities denominated in foreign currencies. Investments in foreign securities
involve special risks, including the possibility of substantial volatility due
to adverse political, economic or other developments. Foreign securities may
also be less liquid and harder to value than U.S. securities. In addition,
foreign securities may be subject to changes in value due to movements in
exchange rates--generally, when a currency appreciates (or depreciates) versus
the U.S. dollar, securities denominated in that currency appreciate (or
depreciate) in U.S. dollar terms.
A Fund's investment in an underlying fixed-income fund is subject to interest
rate and credit 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 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 of principal when
due. The degree of credit risk depends on both the financial condition of the
issuer and the terms of the obligation.
The Funds are also subject to the risk that the Investment Adviser may do a poor
job of deciding on allocations among underlying funds. This could cause a Fund
to underperform compared to other funds with similar investment objectives.
Although the Funds will invest primarily in underlying funds, each Fund may
invest a portion of its assets directly. It is expected that each Fund may from
time to time invest directly in currency contracts for hedging purposes and in
derivative instruments such as futures, options and swaps. Such instruments may
expose a Fund to substantial risks, including currency risks, credit risk,
leverage risk, liquidity risk and correlation risk.
In managing the Funds, the Investment Adviser will have the authority to select
and substitute underlying funds. The Investment Adviser is subject to conflicts
of interest in allocating Fund assets among the various underlying funds both
because the fees payable to it and/or its affiliates by some underlying funds
are higher than the fees payable by other underlying funds and because the
Investment Adviser and its affiliates are also responsible for managing each of
the underlying funds. The directors and officers of the Funds may also be
directors and officers of some of the underlying funds and thus may have
conflicting interests in fulfilling their fiduciary duties to both the Funds and
the underlying funds.
By investing in the underlying funds indirectly through one of the Funds, you
will incur not only a proportionate share of the expenses of the underlying
funds held by the Fund (including operating costs
5
<PAGE>
and investment management fees), but also expenses of the Fund. Additionally,
one underlying fund may buy the same securities that another underlying fund
sells. You would indirectly bear the costs of these trades without accomplishing
any investment purpose. Also, you may receive taxable gains from portfolio
transactions by the underlying fund, as well as taxable gains from transactions
in shares of the underlying funds by a Fund.
Who should invest?
- -----------------
The Mercury Life Strategy Balanced Fund may be an appropriate investment for you
if you:
. Are looking for both current income and long-term capital growth, and
are willing to accept less of each in seeking a balance between the
two.
. Want a professionally managed portfolio.
The Mercury Life Strategy Growth and Income Fund may be an appropriate
investment for you if you:
. Are investing with long term goals in mind, such as retirement or
funding a child's education.
. Want a professionally managed portfolio.
. Are willing to accept the risk that the value of your investment may
fluctuate over the short term in order to seek potentially higher
long-term returns.
. Are looking for a moderate amount of current income.
The Mercury Life Strategy Growth Fund may be an appropriate investment for you
if you:
. Are investing with long term goals in mind, such as retirement or
funding a child's education.
. Want a professionally managed portfolio.
. Are willing to accept the risk that the value of your investment may
fluctuate over the short-term in order to seek potentially higher
long-term returns.
. Are looking for some current income.
The Mercury Life Strategy Aggressive Growth Fund may be an appropriate
investment for you if you:
6
<PAGE>
. Are investing with long term goals in mind, such as retirement or
funding a child's education.
. Want a professionally managed portfolio.
. Are willing to accept the risk that the value of your investment may
fluctuate over the short term in order to seek potentially higher
long-term returns.
. Are not looking for a significant amount of current income.
7
<PAGE>
- --------------------------------------------------------------------------------
UNDERSTANDING EXPENSES
- ----------------------
Fund Investors Pay Various Expenses, Either Directly or Indirectly. Listed below
Are Some of the Main Types of Expenses, Which All Mutual Funds May Charge:
Expenses paid directly by the shareholder:
- ------------------------------------------
Shareholder fees - these fees include sales charges and redemption fees, which
you may pay when you buy or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
- --------------------------------------------
Annual fund operating expenses - expenses that cover the costs of operating the
Fund.
Management fee - a fee paid to the Investment Adviser for managing the Fund.
Distribution fees - fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants for advertising and
promotion.
Service (account maintenance) fees - fees used to compensate dealers for account
maintenance activities.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your financial consultant can
help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of each Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Class I Shares
Mercury Life Mercury Life
Mercury Life Strategy Mercury Life Strategy
Strategy Growth and Strategy Aggressive
Balanced Fund IncomeFund Growth Fund Growth Fund
<S> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from
your investment):
- --------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on 5.25% 5.25% 5.25% 5.25%
purchases (as a percentage of offering price)(b)
- --------------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None None None None
percentage of original purchase price or
redemption proceeds, whichever is lower) (c)
- --------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- --------------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- --------------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- --------------------------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- --------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (d):
- --------------------------------------------------------------------------------------------------------------------------
Management Fee (for asset allocation) (e) 0.60% 0.60% 0.60% 0.60%
- --------------------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None None None None
- --------------------------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g)
- --------------------------------------------------------------------------------------------------------------------------
Underlying Fund Expenses (h)
- --------------------------------------------------------------------------------------------------------------------------
Administration Fees % % % %
-- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Other Expenses
- --------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Class A Shares
Mercury Life Mercury Life
Mercury Life Strategy Mercury Life Strategy
Strategy Growth and Strategy Aggressive
Balanced Fund Income Fund Growth Fund Growth Fund
<S> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from
your investment):
- -----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on 5.25% 5.25% 5.25% 5.25%
purchases (as a percentage of offering price)(b)
- -----------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None None None None
percentage of original purchase price or
redemption proceeds, whichever is lower) (c)
- -----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (d):
- -----------------------------------------------------------------------------------------------------------------------
Management Fee (for asset allocation) (e) 0.60% 0.60% 0.60% 0.60%
- -----------------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) 0.25% 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g)
- -----------------------------------------------------------------------------------------------------------------------
Underlying Fund Expenses (h)
- -----------------------------------------------------------------------------------------------------------------------
Administration Fees % % % %
-- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Other Expenses
- -----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Class B(a) Shares
Mercury Life Mercury Life
Mercury Life Strategy Mercury Life Strategy
Strategy Growth and Strategy Aggressive
Balanced Fund Income Fund Growth Fund Growth Fund
<S> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from
your investment):
- -----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a 4.00% 4.00% 4.00% 4.00%
percentage of original purchase price or
redemption proceeds, whichever is lower)(c)
- -----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (d):
- -----------------------------------------------------------------------------------------------------------------------
Management Fee (for asset allocation) (e) 0.60% 0.60% 0.60% 0.60%
- -----------------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) 1.00% 1.00% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g)
- -----------------------------------------------------------------------------------------------------------------------
Underlying Fund Expenses (h)
- -----------------------------------------------------------------------------------------------------------------------
Administration Fees % % % %
-- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Other Expenses
- -----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Class C Shares
Mercury Life Mercury Life
Mercury Life Strategy Mercury Life Strategy
Strategy Growth and Strategy Aggressive
Balanced Fund Income Fund Growth Fund Growth Fund
<S> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from
your investment):
- --------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
purchases (as a percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a 1.00% 1.00% 1.00% 1.00%
percentage of original purchase price or
redemption proceeds, whichever is lower)(b)
- --------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- --------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- --------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- --------------------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- --------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) (d):
- --------------------------------------------------------------------------------------------------------------------
Management Fee (for asset allocation) (e) 0.60% 0.60% 0.60% 0.60%
- --------------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) 1.00% 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g)
- --------------------------------------------------------------------------------------------------------------------
Underlying Fund Expenses (h)
- --------------------------------------------------------------------------------------------------------------------
Administration Fee % % % %
-- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total Other Expenses
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class A shares about eight years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) In addition, certain securities dealers may charge a fee to process a
purchase or sale of shares.
(e) The Investment Adviser provides accounting services to the Fund at its cost.
(f) 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. If you hold Class B or C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would have
paid if you had bought one of the other classes. Class B and C shares pay a
Distribution Fee of 0.75% and a Service (Account Maintenance) Fee of 0.25%.
Class A shares pay only a Service (Account Maintenance) Fee of 0.25%.
11
<PAGE>
(g) Based on estimated amounts for the current fiscal year. The Transfer Agent
is an affiliate of the Investment Adviser. The Funds pay the Transfer Agent a
fee for each shareholder account and reimburses it for out-of-pocket expenses.
The fee ranges from $11.00 to $23.00 per account (depending on the level of
services required), but is set at 0.10% for certain accounts that participate in
certain fee-based programs.
(h) "Underlying Fund Expenses" for each Fund are based upon the projected
initial allocation of each Fund's investment among the underlying funds and upon
the actual total operating expenses of the underlying funds (including any
current waivers and expense limitations of the underlying funds). Actual
Underlying Fund Expenses incurred by each Fund may vary with changes in the
allocation of each Fund's assets among the underlying funds and with other
events that directly affect the expenses of the underlying funds.
Example
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in a Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that 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:
Expenses if you did redeem your shares:
---
Class I Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class A Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class B Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
12
<PAGE>
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class C Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class A Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class B Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
Class C Shares 1 Year 3 Years
- --------------------------------------------------------------------------------
Mercury Life Strategy Balanced Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income Fund
- --------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth Fund
- --------------------------------------------------------------------------------
13
<PAGE>
Mercury Life Strategy Growth Fund
- --------------------------------------------------------------------------------
14
<PAGE>
ABOUT THE DETAILS
-----------------
HOW THE FUNDS INVEST
General Investment Management Approach
Mercury Asset Management US, a division of Fund Asset Management, L.P., serves
as Investment Adviser to the four asset allocation Life Strategy Funds. The
Funds are intended for investors who prefer to have their asset allocation
decisions made by professional money managers. As described above, each Fund
seeks to achieve its objective by investing in a combination of underlying funds
managed or distributed by the Investment Adviser or one of its affiliates, some
that invest primarily in fixed-income securities and others that invest
primarily in equity securities. In addition to investing in these underlying
funds, the Investment Adviser may, for each Fund, invest in individual
securities and other financial instruments, such as derivative instruments
including options, futures and swaps in order to seek to reduce the effect of
currency fluctuations on securities denominated in currencies other than the
U.S. dollar held by underlying funds and to seek to gain exposure to certain
markets or groups of securities that would otherwise be unavailable if the Funds
were limited to investing in the underlying funds.
- --------------------------------------------------------------------------------
About the Portfolio Management Team - [to be provided by MLAM].
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
About the Investment Adviser - Mercury Asset Management US, a division of Fund
Asset Management, L.P., is the Investment Adviser.
- --------------------------------------------------------------------------------
An investor may choose to invest in one or more of the Funds based on individual
investment goals, risk tolerance, and financial circumstances.
The Investment Adviser's Life Strategy Funds' Asset Allocation Investment
Philosophy and Process
Each Fund starts with a strategic target allocation among various asset classes.
The Investment Adviser may deviate from the strategic target allocation based on
its evaluation of the relative attractiveness of various asset classes in light
of the Fund's investment objective and prevailing economic conditions (except
for the Mercury Life Strategy Aggressive Growth Fund which will not deviate from
its strategic target allocation and will invest, under normal circumstances,
100% of its assets in the equity asset class). The allocation process seeks to
add value by overweighting attractive markets and underweighting unattractive
markets. The Investment Adviser's risk control process seeks to balance the
amount any asset class can be overweighted against the amount of risk added by
that deviation from the strategic target allocation. Finally, the Investment
Adviser may seek to further adjust a Fund's allocation by investing in
individual securities and in other financial instruments such as derivative
instruments in order to gain exposure to certain additional markets or groups of
securities and to hedge currency risk.
Description of the Underlying Funds
15
<PAGE>
The following is a concise description of the investment objectives and
strategies for each of the underlying funds that are available for investment by
the Funds as of the date of this Prospectus. A Fund may invest in other
underlying funds not listed below that may become available for investment in
the future at the discretion of the Investment Adviser without shareholder
approval. No offer is made in this Prospectus of any of the underlying funds.
Additional information regarding the investment practices of each underlying
fund is provided in the Statement of Additional Information.
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index - composed primarily of dollar-denominated
investment grade bonds of different types.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underlying Fund Investment Objective
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Master Aggregate Bond Index to match the performance of the Lehman Brothers
Series of [Index] Master Series Aggregate Bond Index as closely as possible before
Trust the deduction of expenses
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] Large Cap primarily to provide long-term growth of capital,
Series of [Index] Master Series and secondarily to provide dividend income
Trust
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] Large Cap primarily to provide long-term growth of capital,
Value Series of [Index] Master and secondarily to provide dividend income
Series Trust
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] Large Cap to provide long-term growth of capital
Growth Series of [Index] Master
Series Trust
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] Mid Cap to provide long-term growth of capital
Series of [Index] Master Series
Trust
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] Small Cap to provide long-term growth of capital
Series of [Index] Master Series
Trust
- ---------------------------------------------------------------------------------------------------------
Master [Quantitative] International primarily to provide long-term growth of capital,
Series of [Index] Master Series and secondarily to provide dividend income
Trust
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Master Aggregate Bond Index Series will normally invest in a sample of the
bonds included in the Lehman Brothers Aggregate Bond Index, or in a sample of
bonds not included in the index but correlated with bonds that are in the index,
as well as derivative instruments based on the fund's investment adviser's
optimization process. This optimization process is a statistical sampling
technique that aims to create a portfolio that will match approximately the
performance of the Lehman Brothers Aggregate Bond Index with less transaction
costs than would be incurred through full replication.
The investment strategy for each of the underlying ["Quantitative"] funds listed
above (except the Master [Quantitative] International Series) is to invest,
under normal circumstances, at least 65% of its
16
<PAGE>
total assets in equity securities of U.S. issuers, including foreign issuers
that are traded in the United States. The Master [Quantitative] International
Series will invest, under normal circumstances, at least 65% of its total assets
in equity securities of companies whose primary trading markets are located
outside of the United States.
The Investment Adviser seeks to maximize each underlying fund's expected return
by constructing a portfolio of investments that have risk and style
characteristics similar to those of a particular market segment. The Investment
Adviser principally will use two strategies for selection of investments for
each underlying fund. The primary strategy involves the evaluation and
selection of stocks based on fundamental measures, such as
. earnings (surprises and analysts' revisions)
. momentum (price and earnings)
. valuation (enterprise value, price versus cash flows, and dividend
discount models)
For each underlying fund, the Investment Adviser will emphasize identifying and
purchasing those stocks that it believes are priced most attractively and which
appear to present good opportunities for gain, based on its fundamental
research.
Secondarily, the Investment Adviser will use portfolio construction techniques
that seek to maintain a disciplined and style controlled strategy for each
underlying fund. This means that the Investment Adviser will seek to identify
and purchase stocks that help to build a portfolio that is representative of
each underlying fund's respective market segment. The Investment Adviser will
employ fundamental research and portfolio construction techniques together in
order to seek underlying fund performance that exceeds that of the particular
market segment.
- -------------------------------------------------------------------------------
Index - an index measures the market prices of a specific group of securities in
a particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
- -------------------------------------------------------------------------------
Warrant - a security that entitles the holder to buy a proportionate amount of
common stock at a specified price within a specified time period.
Convertible bonds - bonds that are exchangeable for a fixed number of other
securities (usually common stock) at a set price or formula.
- --------------------------------------------------------------------------------
In addition, to achieve further efficiencies in, and/or add value to, an
underlying fund, each underlying fund will also invest in derivative instruments
that it believes may serve as substitutes for individual securities in an
attempt to broadly represent a particular market or market segment. The
derivative instruments in which each Fund may invest include the purchase and
writing of options on securities indices, the writing of covered call options on
stocks or derivative instruments correlated with an index or components of the
index rather than securities represented in the index. Each Fund will normally
invest a substantial portion of its assets in options and futures contracts
correlated with an index representing the Fund's particular market segment.
Derivatives allow the Funds to increase exposure to the index quickly and at
less cost than buying or selling stocks. Each 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. Each Fund will also invest in
derivatives whenever the Investment Adviser believes a derivative (including
futures, total return index swaps, options, warrants and convertible bonds)
presents price or return characteristics superior to those of stocks represented
in the index. The underlying Master [Quantitative] International Series fund
will use futures as an efficient and less costly way of emphasizing or de-
emphasizing
17
<PAGE>
investment in particular countries represented in its market segment. The
underlying funds will consider derivatives that provide exposure to equity
indices of individual stocks to be equity securities for purposes of the
percentages described above.
- --------------------------------------------------------------------------------
Short sale - sale of a security or commodity futures contract not owned by the
seller; a technique used to take advantage of an anticipated decline in price.
- --------------------------------------------------------------------------------
Each underlying fund may engage in certain types of investment transactions,
including short-term trading opportunities, that seek to profit from differences
in price when the same (or a similar) security, currency or commodity is traded
in two or more markets. For example, the underlying funds may attempt to
exploit discrepancies between (i) the value of a futures contract (such as an S
& P 500 futures contract) or other derivatives and the value of a particular
index, (ii) the implied value of an option embedded in a convertible bond and
the actual value of the option, (iii) the value of different share classes of a
company or in a single share class listed on more than one exchange, and (iv)
the value of the stock of a company subject to an announced but not yet
completed Merger, takeover or other significant corporate event and the
expected value of the stock upon completion of such event. Each underlying fund
may also enter into short sales of various types of securities and financial
instruments, including securities and financial instruments not represented in
an index correlating with the underlying fund's particular market segment, in
connection with such transactions.
It is expected that each Fund will normally allocate a significant portion of
its equity allocation among the following underlying funds
. Master [Quantitative] Large Cap Series
. Master [Quantitative] Large Cap Value Series
. Master [Quantitative] Large Cap Growth Series
. Master [Quantitative] Mid Cap Series
. Master [Quantitative] Small Cap Series and
. Master [Quantitative] International Series.
and a significant portion of its fixed income allocation to Master Aggregate
Bond Index Series.
A Fund's investment in an underlying fund may, and in some cases is expected to,
exceed 25% of the Fund's total assets.
The particular underlying funds in which each Fund may invest, the target
strategic allocation and allocation ranges, and the investment policies of each
underlying fund may be changed from time to time without shareholder approval.
Each Fund's investment objective and all policies not specifically designated as
fundamental in this Prospectus or the Statement of Additional Information are
non-fundamental and may be changed without shareholder approval. If there is a
change in a Fund's investment objective, you should consider whether that Fund
remains an appropriate investment in light of your then current financial
position and needs.
18
<PAGE>
Each Fund will normally invest almost all of its assets as described above. The
Fund may, however, invest in short-term instruments, such as money market
securities and repurchase agreements, to meet redemptions. The Funds may also
invest in short-term instruments, fixed-income securities or buy or sell
derivatives when a Fund believes it is advisable to do so for temporary
defensive purposes. Short-term investments and temporary defensive positions
may limit the potential for growth in the value of your shares and/or may reduce
the level of current income.
A Fund may purchase or sell securities to: (a) accommodate purchases and sales
of its shares; (b) change the percentages of its assets invested in each of the
underlying funds in response to economic or market conditions; and (c) maintain
or modify the allocation of its assets among the underlying funds within the
percentage ranges described above.
INVESTMENT RISKS
This section contains a summary discussion of the general risks that apply to
the underlying funds, and thus indirectly to the Funds. It also describes risks
that apply directly to the Funds. 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.
Risks that Apply to the Fund
Correlation with Similar Funds Risk
The investment objectives and policies of the Funds are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser and its affiliates manages. Although the objectives and policies may be
similar, the investment results of each Fund may be higher or lower than the
results of such other mutual funds. The Investment Adviser cannot guarantee,
and makes no representation, that the investment results of similar funds will
be comparable even though the funds have the same investment adviser.
Non-Diversification Risk
Each Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, a Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps a Fund's
performance when its investments are successful, but also hurts a Fund's
performance when its investments are unsuccessful. However, while the Funds are
technically non-diversified because the majority of their assets are invested in
a small number of securities (generally, the underlying funds) the Funds will
have a diverse exposure to the market because the underlying funds invest in, or
allow for exposure to, a large number of securities.
19
<PAGE>
Risks that Apply to Both the Underlying Funds and the Funds
These risks apply to each Fund and to some or all of the underlying funds. In
the section below, the term "Fund" refers to both the Mercury Life Strategy
Series Funds and the underlying funds.
Stock Market Risk
Stock market risk is the risk that the stock market will go down in value,
including the possibility that the market will go down sharply and
unpredictably.
Selection Risk
Selection risk for the underlying funds is the risk that investments that
management selects may perform differently from securities in the particular
market segment overall.
Selection risk for the Funds is the risk that the investments (including in the
underlying funds) that Investment Adviser selects will underperform the stock or
bond market or other funds with similar investment objectives and investment
strategies.
- --------------------------------------------------------------------------------
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 on futures - an option where the underlying asset is a futures contract.
- --------------------------------------------------------------------------------
Indexed securities - debt obligations that return a variable amount of principal
or interest based on the value of an index at a specified time.
- --------------------------------------------------------------------------------
Derivatives
Derivatives allow a Fund to increase or decrease its risk exposure more quickly
and efficiently than other types of instruments. A Fund may use a variety of
derivative instruments including: 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.
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.
20
<PAGE>
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
A Fund may use derivatives for anticipatory hedging and for non-hedging
purposes. 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 them. An
underlying fund may use derivatives for anticipatory hedging in order to gain
exposure efficiently to its market segment in the event the Fund receives cash
inflows. Each Fund may also use derivatives in connection with the investment
strategy that seeks to profit from differences in price when the same (or a
similar) security, currency or commodity is traded in two or more markets.
Borrowing and Leverage
A Fund 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 the yield on a Fund's investments. Borrowing will cost a Fund
interest expense and other fees. These costs may reduce the Fund's return.
Certain securities that a Fund buys may create leverage, including, for example,
derivative securities. Like borrowing, these investments may increase a Fund's
exposure to risk.
Securities Lending
A 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 could 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.
Illiquid Securities
Each Fund may invest up to 15% of its net assets in illiquid securities that it
cannot easily resell within seven days at current value or that have contractual
or legal restrictions on resale. If a Fund buys illiquid securities it may be
unable to quickly resell them or may be able to sell them only at a price below
current value.
Restricted Securities
Restricted securities have contractual or legal restrictions on their resale.
They include private placement securities that a Fund buys directly from the
issuer. Private placement and other restricted securities may not be listed on
an exchange and may have no active trading market.
21
<PAGE>
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 or the Investment Adviser
receives material adverse 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.
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.
Correlation Risk
Each Fund may purchase an asset and concurrently sell that asset in a
different market, or sell a related asset, in order to capture small price
discrepancies between markets or related assets. This strategy involving related
assets carries the risk that the value of the related assets will not track or
affect each other in the manner anticipated by the Investment Adviser. This
strategy generally assumes that the price of related assets will converge to
some historic or quantitative relationship, and that price discrepancies from
this relationship will disappear. In the event the price discrepancies do not
disappear or widen, however, a Fund could lose money on a transaction.
Merger Transaction Risk
A Fund may buy stock of the target company in an announced merger
transaction prior to the consummation of that transaction. In that circumstance,
the Fund would expect to receive an amount (whether in cash, stock of
the acquiring company or a combination of both) in excess of the purchase price
paid by the Fund for the target company's stock. This strategy is subject to the
risk that the merger transaction may be canceled, delayed or restructured in
which case the Fund's holding of the target company's stock may not result in
any profit for the Fund and may lose significant value.
Risks that Apply to the Underlying Funds
These risks apply to some or all of the underlying funds.
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. The underlying funds can hold
bonds of any maturity. As a result, if an underlying fund invests a large amount
in long-term bonds, the underlying fund's value could change significantly in
response to a relatively small change in interest rates. Stripped securities may
be highly sensitive to changes in interest rates.
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
22
<PAGE>
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.
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 underlying funds' 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. Investing in small caps securities requires a long-term view.
When selling a large quantity of a particular stock, the underlying fund may
have to sell at a discount from quoted prices or may have to make a series of
small sales over an extended period of time due to the more limited trading
volume of smaller company stocks.
Volatility
Stocks of small and medium sized companies tend to be more volatile than stocks
of larger companies and can be particularly sensitive to expected changes in
interest rates, borrowing costs and earnings.
Foreign Government Debt
The underlying funds 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 an underlying 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 that the underlying fund can use to collect
payments on debt securities that a government entity has not repaid.
Foreign Market Risk
Foreign security investment involves special risks not present in U.S.
investments that can increase the chances that an underlying fund will lose
money. In particular, an underlying fund is subject to the risk that because
there are generally fewer investors on foreign exchanges and a smaller number of
securities traded each day, it may be difficult for the underlying fund to buy
and sell certain securities on those
23
<PAGE>
exchanges. In addition, prices of foreign securities may fluctuate more than
prices of securities traded in the United States.
Foreign Economy Risk
The economies of certain foreign markets often do not compare favorably with
that of the United States 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 restrictions on foreign investing
in their capital markets or in certain industries. Any of these actions could
severely affect security prices, impair the underlying funds' ability to
purchase or sell foreign securities or transfer the underlying funds' assets or
income back into the United States, or otherwise adversely affect the underlying
funds' 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 United States or other foreign countries.
Governmental Supervision and Regulation/Accounting Standards
Many foreign governments supervise and regulate stock exchanges, brokers and the
sale of securities less than the United States does. Other countries may not
have laws to protect investors the way that the United States' 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). Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as United States accounting standards, it may be harder for the
underlying funds' portfolio manager to completely and accurately determine a
company's financial condition. Also, brokerage commissions and other costs of
buying or selling securities often are higher in foreign countries than they are
in the United States. This reduces the amount the underlying fund can earn on
its investments.
Certain Risks of Holding Fund Assets Outside the United States
The Master [Quantitative] International Series generally holds the foreign
securities and cash in which it invests outside the United States in foreign
banks and securities depositories. Certain of these foreign
24
<PAGE>
banks and securities depositories may be recently organized or new to the
foreign custody business and/or may have operations subject to limited or no
regulatory oversight. Also, the laws of some countries may put limits on the
Master [Quantitative] International Series' 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 is likely to be more expensive for the Fund to buy,
sell, and hold securities in some foreign markets than in the United States
market due to higher brokerage, transaction, custody and/or other costs. The
increased expense to invest in foreign markets reduces the amount the Master
[Quantitative] International Series can earn on its investments and typically
results in a higher operating expense ratio for it than for investment companies
invested only in the United States.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. 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 United States and emerging market
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 an underlying fund to carry out transactions.
If the underlying fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and some of its
assets may be uninvested for some period. If the underlying fund cannot settle
or is delayed in settling a sale of securities, it may lose money if the value
of the security 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 United States tax
considerations may apply.
European Economic and Monetary Union ("EMU")
Certain European countries have entered into EMU in an effort to, 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 countries. 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 EMU participants by July 1,
2002. Certain securities (beginning with government and corporate bonds) were
redenominated in the euro, and are listed, trade and make dividend and other
payments only in euros. Although EMU is generally expected to have a beneficial
effect, it could negatively affect the underlying funds in a number of
situations, including as follows:
. If the transition to euro, or EMU as a whole, does not proceed as
planned, the underlying fund's investments could be adversely
affected. For example, sharp currency fluctuations, exchange rate
volatility and other disruptions of the markets could occur.
25
<PAGE>
. Withdrawal from EMU by a participating country could also have a
negative effect on the underlying fund's investments, for example
if securities redenominated in euros are transferred back into that
country's national currency.
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 underlying funds buy will lose value prior to its
delivery. There also is the risk that the security will not be issued or that
the other party will not meet its obligation. If this occurs the underlying
funds lose both the investment opportunity for the assets they have set aside to
pay for the security and any gain in the security's price.
Mortgage-Backed Securities
Mortgage-backed securities represent the right to receive a portion of principal
and/or interest payments made on a pool of residential or commercial mortgage
loans. 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 underlying 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 will be 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. Stripped
mortgage-backed securities may be highly sensitive to changes in interest rates
and rates of prepayment.
Convertible Securities
Convertible securities, including bonds and preferred stock, are convertible
into common stock. As a result of the conversion feature, the interest or
dividend rate on a convertible security is generally less than would be the case
if the security were not convertible. The value of a convertible security will
be affected both by its stated interest or dividend rate and the value of the
underlying common stock. Therefore, its value will be affected by the factors
that affect both debt securities (such as interest rates) and equity securities
(such as stock market movements generally). Some convertible securities might
require the underlying fund to sell the securities back to the issuer or a third
party at a time that is disadvantageous to the underlying fund.
26
<PAGE>
Dollar Rolls
Dollar Rolls involve the risk that the market value of the securities that the
underlying funds are committed to buy may decline below the price of the
securities the underlying funds have sold. These transactions may involve
leverage. The underlying funds 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.
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the Fund or the underlying funds,
including additional details about how they invest, please see the Statement of
Additional Information.
ACCOUNT CHOICES
---------------
PRICING OF SHARES
Each Fund offers four classes of shares, each with its own sales charge and
expense structure allowing you to invest in the way that best suits your needs.
Each share class of a Fund represents an ownership interest in the same
investment portfolio. The class of shares you should choose will be affected by
the size of your investment and how long you plan to hold your shares. Your
financial consultant can help you determine which pricing option is best suited
to your personal financial goals.
27
<PAGE>
For example, if you select Class I or A shares of a Fund, you generally pay a
sales charge at the time of purchase. If you buy Class A shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge
waiver.
If you select Class B or C shares of a Fund, you will invest the full amount of
your purchase price, but you will be subject to a distribution fee of 0.75% and
an account maintenance fee of 0.25%. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees increase the cost of
your investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
Each Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.
To better understand the pricing of each Fund's shares, we have summarized the
information below:
<TABLE>
<CAPTION>
Class I Class A Class B Class C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability? Limited to certain Generally available Generally available Generally available
investors including: through selected through selected through selected
. Current Class I securities dealers. securities dealers. securities dealers.
shareholders
. Certain
Retirement Plans
. Participants of
certain sponsored
programs
. Certain affiliates
of selected
securities dealers
- ---------------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time Yes. Payable at time No. Entire purchase No. Entire purchase
of purchase. Lower of purchase. Lower price is invested in price is invested in
sales charges sales charges shares of the Fund. shares of the Fund.
available for certain available for certain
larger investments. larger investments.
- ---------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be No. (May be Yes. Payable if you Yes. Payable if you
Charge? charged for charged for redeem within six redeem within one
purchases over $1 purchases over $1 years of purchase. year of purchase.
million that are million that are
redeemed within one redeemed within one
year.) year.)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee. Maintenance Fee. Maintenance Fee.
Distribution Fees? No Distribution Fee. 0.75% Distribution 0.75% Distribution
Fee. Fee.
- ---------------------------------------------------------------------------------------------------------------------
Conversion to No. Not applicable. Yes, automatically No.
Class A shares? after approximately
8 years.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Class I and A Shares -- Initial Sales Charge Options
The public offering price of Class I and Class A shares during the subscription
period is $10.00 per share. If you select Class I or A shares, you will pay a
sales charge at the time of purchase (whether during or after the subscription
period) as shown in the following table. During the subscription period,
securities dealers will receive compensation equal to the entire sales charge
(and therefore, may be deemed to be underwriters). After the subscription
period, the dealer compensation will be as shown in the last column.
<TABLE>
<CAPTION>
Your Investment As a % of As a % of Your Dealer
Offering Price Investment* Compensation
as a % of
Offering Price
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than $50,000 4.75% 4.99% 4.50%
$50,000 but less than $100,000 4.00% 4.17% 3.75%
$100,000 but less than $250,000 3.00% 3.09% 2.75%
$250,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over** 0.00% 0.00% 0.00%
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class I or A shares of a Fund, you may
not pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge is
1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class I and A shares by certain employer sponsored
retirement or savings plans.
No initial sales charge applies to Class I or Class A shares of a Fund that you
buy through reinvestment of dividends.
- --------------------------------------------------------------------------------
Right of Accumulation - permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.
- --------------------------------------------------------------------------------
Letter of Intent - permits you to pay the sales charge that would be applicable
if you add up all shares of Mercury mutual funds that you agree to buy within a
13 month period. Certain restrictions apply.
- --------------------------------------------------------------------------------
A reduced or waived sales charge on a purchase of Class I or A shares of a Fund
may apply for:
- Purchases under a Right of Accumulation or Letter of Intent.
- Certain trusts managed by banks, thrifts or trust companies including
those affiliated with Mercury or its affiliates.
29
<PAGE>
- Certain employer-sponsored retirement or savings plans.
- Certain investors, including directors or trustees of mutual funds
sponsored by Mercury or its affiliates, employees of Mercury and its
affiliates and employees of selected dealers.
- Certain fee-based programs managed by Mercury or its affiliates.
- Certain fee-based programs managed by selected dealers that have an
agreement with Mercury.
- Purchases through certain financial advisers that meet and adhere to
standards established by Mercury.
- Purchases through certain accounts on which Mercury or an affiliate
exercises investment discretion.
Only certain investors are eligible to buy Class I shares, including existing
Class I shareholders of the Fund, certain retirement plans and participants in
certain programs sponsored by Mercury or its affiliates. Your financial
consultant can help you determine whether you are eligible to buy Class I shares
or to participate in any of these programs.
If you decide to buy shares of a Fund under the initial sales charge alternative
and you are eligible to buy both Class I and Class A shares, you should buy
Class I shares since Class A shares are subject to a 0.25% account maintenance
fee, while Class I shares are not.
If you redeem Class I or Class A shares of a Fund and within 30 days buy new
shares of the same class of the same Fund, you will not pay a sales charge on
the new purchase amount. The amount eligible for this "Reinstatement Privilege"
may not exceed the amount of your redemption proceeds. To exercise the
privilege, contact your financial consultant or a Fund's Transfer Agent at 1-
888-763-2260.
Class B and C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that 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 deferred
sales charge and the distribution fees to cover the costs of marketing,
advertising and compensating the financial consultant or other dealer who
assists you in your decision to purchase Fund shares.
30
<PAGE>
Class B Shares
If you redeem Class B shares of a Fund within six years after purchase, you may
be charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
Year Since Purchase Sales Charge*
-----------------------------------------------
0 - 1 4.00%
-----------------------------------------------
1 - 2 4.00%
-----------------------------------------------
2 - 3 3.00%
-----------------------------------------------
3 - 4 3.00%
-----------------------------------------------
4 - 5 2.00%
-----------------------------------------------
5 - 6 1.00%
-----------------------------------------------
6 and after 0.00%
-----------------------------------------------
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired by
dividend or capital gain reinvestment are not subject to a deferred sales
charge. Mercury funds may not all have identical deferred sales charge
schedules. In the event of an exchange for the shares of another Mercury fund,
the higher charge, if any, would apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other retirement plan if
you are over 59 1/2 years old (certain legal documentation may be required
at the time of liquidation establishing eligibility for qualified
distribution).
- Redemption by certain eligible 401(a) and 401(k) plans and
certain retirement plan rollovers.
- Redemption in connection with participation in certain fee-based
programs managed by Mercury or its affiliates.
- Redemption in connection with participation in certain fee-based
programs managed by selected dealers that have agreements with Mercury.
31
<PAGE>
- Withdrawals resulting from shareholder death or disability as long as the
waiver request is made within one year after death or disability or, if
later, reasonably promptly following completion of probate, or in
connection with involuntary termination of an account in which Fund shares
are held (certain legal documentation may be required at the time of
liquidation establishing eligibility for qualified distribution).
- Withdrawal through the Systematic Withdrawal Plan of up to 10%
per year of your account value at the time the plan is established.
Your Class B shares convert automatically into Class A shares of the same Fund
approximately eight years after purchase. Any Class B shares received through
reinvestment of dividends or distributions paid on converting shares will also
convert at that time. Class A shares are subject to lower annual expenses than
Class B shares. The conversion of Class B shares to Class A shares is not a
taxable event for Federal income tax purposes.
Different conversion schedules may apply to Class B shares of different Mercury
mutual funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. In any event, the length of time that you hold the original
and exchanged Class B shares in both funds will count toward the conversion
schedule.
The conversion schedule may be modified in certain other cases as well.
Class C Shares
If you redeem Class C shares of a Fund within one year after purchase, you may
be charged a deferred sales charge of 1.00%. The charge will apply to the lesser
of the original cost of the shares being redeemed or the proceeds of your
redemption. You will not be charged a deferred sales charge when you redeem
shares that you acquire through reinvestment of Fund dividends. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with certain involuntary terminations of an account in which Fund shares are
held and withdrawals through the Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
The chart below summarizes how to buy, sell, transfer and exchange shares
through certain securities dealers. You may also buy shares through the Transfer
Agent. To learn more about buying shares through the Transfer Agent, call 1-888-
763-2260. Because the selection of a mutual fund involves
32
<PAGE>
many considerations, your financial consultant may help you with this decision.
None of the Funds issue share certificates.
<TABLE>
<CAPTION>
If you want to Your Choices Information Important for You to Know
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy shares First, select the share Please refer to the pricing of shares table on
class appropriate for you page [__]. Be sure to read this Prospectus
carefully.
-------------------------------------------------------------------------------------
Next, determine the The minimum initial investment for a Fund is
amount of your $1,000 for all accounts except:
investment - $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be
waived or reduced under certain circumstances.)
- --------------------------------------------------------------------------------------------------------
Have your financial The price of your shares is based on the next
consultant or securities calculation of net asset value after your order is
dealer submit your placed. Any purchase orders placed prior to the
purchase order close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern time)
will be priced at the net asset value determined
that day.
Purchase orders received after that time will be
priced at the net asset value determined on the
next business day. A Fund may reject any order
to buy shares and may suspend the sale of shares
at any time. Certain securities dealers may
charge a fee to process a purchase. For example,
the fee charged by Merrill Lynch, Pierce, Fenner
& Smith Incorporated is currently $5.35. The
fees charged by other securities dealers may be
higher or lower.
-------------------------------------------------------------------------------------
Or contact the Transfer Instead of purchasing through a financial
Agent consultant or securities dealer, you can purchase
shares of a Fund by calling the Transfer Agent to
request an application and mailing a purchase
order directly to the Transfer Agent at the
address on the inside back cover of this
Prospectus.
- --------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
If you want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Add to your Purchase additional shares The minimum investment for additional
investment purchases is $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be
waived under certain circumstances.)
------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested
through the automatic without a sales charge.
dividend reinvestment
plan
------------------------------------------------------------------------------------------
Participate in the You may automatically invest a specific amount
automatic investment in a Fund on a periodic basis through your
plan securities dealer:
- The current minimum for such automatic
investments is $100. The minimum may be
waived or revised under certain circumstances.
------------------------------------------------------------------------------------------
Transfer shares Transfer to a To transfer your shares of a Fund to another
to another participating securities securities dealer, authorized dealer agreements
securities dealer must be in place between the Distributor and the
dealer transferring securities dealer and the Distributor
and the receiving securities dealer. Certain
services may be available for the transferred
shares. All future trading of these shares must be
coordinated by the receiving securities dealer.
------------------------------------------------------------------------------------------
Transfer to a non- You cannot transfer your shares of a Fund to a
participating securities securities dealer that does not have an authorized
dealer dealer agreement with the Distributor. You must
either:
- Transfer your shares to an account with the
Transfer Agent; or
- Sell your shares, paying any applicable CDSC.
- -----------------------------------------------------------------------------------------------------------
Sell your shares Have your financial The price of your shares is based on the next
consultant or securities calculation of net asset value after your order is
dealer submit your sales placed. For your redemption request to be priced
order at the net asset value on the day of your request,
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
If you want to Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
you must submit your request to your dealer
prior to that day's close of business on the
New York Stock Exchange (the New York Stock Exchange
generally closes at 4:00 p.m. Eastern time). Any
redemption request placed after that time will be
priced at the net asset value at the close of business
on the next business day. Dealers must submit redemption
requests to a Fund not more than thirty minutes after
the close of business on the New York Stock Exchange
on the day the request was received.
Certain securities dealers may charge a fee to
process a sale of shares. For example, the fee
charged by Merrill Lynch, Pierce, Fenner &
Smith Incorporated is currently $5.35. The fees
charged by other securities dealers may be
higher or lower.
A Fund may reject an order to sell shares under
certain circumstances.
----------------------------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent
Agent by writing to the Transfer Agent at the address
on the inside back cover of this Prospectus. All
shareholders on the account must sign the letter
and signatures must be guaranteed. Depending
on the type of account and/or type of
distribution, certain additional documentation
may be required. The Transfer Agent will
normally mail sale proceeds within seven days
following receipt of a properly completed
request. If you make a sales order request before
the Fund has collected payment for the purchase
of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay usually
will not exceed ten days.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
If you want to Your Choices Information Important for You to Know
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell shares Participate in a Fund's You can generally arrange through your selected
systematically Systematic Withdrawal dealer for systematic sales of shares of a fixed
Program dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to
certain conditions. You must have dividends and
other distributions automatically reinvested. For
Class B and C shares your total annual
withdrawals cannot be more than 10% of the
value of your shares at the time the Plan is
established. The deferred sales charge is waived
for systematic sales of shares. Ask your financial
consultant for details.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
If you want to Your Choices Information Important for You to Know
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchange your Select the fund into You can exchange your shares of a Fund for
shares which you want to shares of other Mercury mutual funds or for
exchange. Be sure to shares of the Summit Cash Reserves Fund. You
read that fund's must have held the shares used in the exchange
Prospectus. for at least 15 calendar days before you can
exchange to another fund.
Each class of a Fund's shares is generally
exchangeable for shares of the same class of
another Mercury fund. If you own Class I Shares
and wish to exchange into a fund in which you
have no Class I Shares and you are not eligible
to buy Class I Shares, you will exchange into
Class A Shares. If you own Class I or Class A
shares and wish to exchange into Summit, you
will exchange into Class A shares of Summit.
Class B or Class C shares can be exchanged for
Class B shares of Summit.
Some of the Mercury mutual funds may impose
a different initial or deferred sales charge
schedule. If you exchange Class I or Class A
shares for shares of a fund with a higher initial
sales charge than you originally paid, you may
be charged the difference at the time of
exchange. If you exchange Class B or Class C
shares for shares of a fund with a different
deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B
or Class C shares in both funds will count when
determining your holding period for calculating
a deferred sales charge at redemption. Your time
in both funds will also count when determining
the holding period for a conversion from Class B
to Class A shares.
Although there is currently no limit on the
number of exchanges that you can make, the
exchange privilege may be modified or
terminated at any time in the future.
</TABLE>
37
<PAGE>
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. 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 (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 an underlying fund may
trade on weekends or other days when the Funds do not price their shares. As a
result, the underlying fund's net asset value and consequently, a 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 a Fund's net asset value, "fair value" pricing
may be used. This means that the Funds may value an underlying fund's foreign
holdings at prices other than their last closing price, and the Fund's net asset
value will reflect this.
Generally, Class I shares will have the highest net asset value, because that
class has the lowest expenses, and Class A shares will have a higher net asset
value than Class B or Class C shares. Also, dividends paid on Class I and Class
A shares will generally be higher than dividends paid on Class B and Class C
shares because Class I and Class A shares have lower expenses.
FEE-BASED PROGRAMS
If you participate in certain fee-based programs offered by Mercury or an
affiliate of Mercury, or by selected dealers that have an agreement with
Mercury, you may be able to buy Class I shares at net asset value, including
through exchange from other share classes. Sales charges on the shares being
exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into Summit. The class you
receive may be the class you originally owned when you entered the program, or
in certain cases, a different class. If the exchange is into Class B shares, the
period before conversion to Class A shares may be modified. Any redemption or
exchange will be at net asset value. However, if you participate in the program
for less than a specified period, you may be charged a fee in accordance with
the terms of the program.
38
<PAGE>
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your financial
consultant or your selected dealer.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
Dividends - ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
- --------------------------------------------------------------------------------
"Buying a dividend" - Unless your investment is in a tax-deferred account, you
may want to avoid buying shares shortly before a Fund pays a dividend or
distribution. The reason? If you buy shares when a fund has realized but not yet
distributed income or capital gains, you will pay the full price for the shares
and then receive a portion of the price back in the form of a taxable
distribution. Before investing you may want to consult your tax advisor.
- --------------------------------------------------------------------------------
Each Fund will distribute any net investment income and any net realized long or
short-term capital gains at least annually. The Funds may also pay a special
distribution at the end of the calendar year to comply with federal tax
requirements. Dividends may be reinvested automatically in shares of the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a securities dealer that has an agreement with the Fund, contact your
financial consultant about which option you would like. If your account is with
the Transfer Agent, and you would like to receive dividends in cash, contact the
Transfer Agent.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Funds
intend to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends received by individuals are generally
taxed at different rates than ordinary income dividends.
In any year when over 50% of the value of a Fund's assets consists of foreign
securities at its fiscal year end, that Fund will intend to make an election
that results in your being able to claim your share of foreign taxes paid by the
Fund as a deduction or foreign tax credit on your personal income tax return.
The amount of such taxes will also be reported to you as income from the Fund.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
By law, each Fund must withhold 31% of your distributions and redemption
proceeds if you have not provided a taxpayer identification number or social
security number.
This section summarizes some of the consequences under current federal tax law
of an investment in a Fund. It is not a substitute for personal tax advice.
Consult your personal tax advisor about the potential tax consequences of an
investment in a Fund under all applicable tax laws.
39
<PAGE>
THE MANAGEMENT TEAM
-------------------
MANAGEMENT OF THE FUNDS
Mercury Asset Management US, a division of Fund Asset Management, L.P., makes
investments under the overall supervision of the Board of Directors, provides
day-to-day advice as to each Fund's investment transactions, including
determinations concerning changes to (a) the underlying funds in which the Funds
may invest; and (b) the percentage range of assets of any Fund that may be
invested in the underlying equity funds and the underlying fixed income funds as
separate groups. The Investment Adviser has the responsibility for making all
investment decisions for the Fund. Except as noted below, the Investment Adviser
or its affiliates also serves as investment adviser to each underlying fund.
The senior investment professionals in the group that have managed the Funds'
respective portfolios since the Funds started operations include:
Phillip Green is a Senior Vice President of the Funds and Portfolio Manager of
_______________.
Sidney Hoots is a Senior Vice President of the Funds and Portofolio Manager of
_______________.
Frank Salerno is a Senior Vice President of the Funds and the Portfolio Manager
of ___________. Mr. Salerno joined the Investment Adviser and its affiliates in
1999. Prior to joining the Investment Adviser and its affiliates, Mr. Salerno
was a Senior Portfolio Manager for quantitative products and index funds and
Managing Director and Chief Investment Officer of Structured Investments at
Bankers Trust Company. He joined Bankers Trust Company in 1981.
Mercury and its affiliates manage portfolios with over $[___] billion in assets
(as of [_____ 1999]) for individuals and institutions seeking investments
worldwide. This amount includes assets managed for its affiliates. The advisory
agreement between the Fund and the Investment Adviser gives the Investment
Adviser the responsibility for making all investment decisions.
The Investment Adviser is paid at the rate of [ ] of each Fund's
average daily net assets for asset allocation services.
In addition, each Fund, as a shareholder in the underlying funds, will
indirectly bear a proportionate share of any investment advisory fees and other
expenses paid by the underlying funds. Because of this, the expenses associated
with investing in this type of Fund are generally higher than those for
40
<PAGE>
mutual funds that do not invest primarily in other underlying funds. The
following chart shows the current annual fund operating expenses of Class A
shares of each underlying fund in which the Funds may invest after applicable
fee waivers and expense limitations. In addition, the following chart shows the
contractual management fees payable to the Investment Adviser and its affiliates
by the underlying funds and the actual current fee rate (in each case as an
annualized percentage of a fund's average net assets). The actual current fee
rate may increase under certain circumstances but will not be higher than the
contractual management fee that is shown. Any increase in the actual fee rate
would increase the operating expenses of the underlying funds.
<TABLE>
<CAPTION>
Annual
Contractual Actual Fund
Management Current Operating
Underlying Fund Fee Fee Rate Expenses
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Master Aggregate Bond Index Series 0.06% 0.01
Master [Quantitative] Large Cap Series
Master [Quantitative] Large Cap Value Series
Master [Quantitative] Large Cap Growth Series
Master [Quantitative] mid Cap Series
Master [Quantitative] Small Cap Series
Master [Quantitative] International Series
</TABLE>
A Note about Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Funds could be adversely
affected if the computer systems used by the Funds' management or other Fund
service providers do not properly address this problem before January 1, 2000.
Fund management expects to have addressed this problem before then, and does not
anticipate that the services it provides will be adversely affected. The Fund's
other service providers have told the administrator that they also expect to
resolve the Year 2000 Problem, and the administrator will continue to monitor
the situation as the year 2000 approaches. However, if the problem has not been
fully addressed, the Fund could be negatively affected. The Year 2000 Problem
could also have a negative impact on the companies in which the Fund invests.
This negative impact may be greater for companies in foreign markets, since they
may be less prepared for the Year 2000 Problem than domestic companies and
markets. If the companies in which the Fund invests have Year 2000 Problems, the
Fund's returns could be adversely affected.
41
<PAGE>
FUNDS
Mercury Life Strategy Balanced Fund
Mercury Life Strategy Growth and Income Fund
Mercury Life Strategy Growth Fund
Mercury Life Strategy Aggressive Growth Fund
of Mercury Life Strategies Series Fund, Inc.
P.O. Box 9011
Princeton, New Jersey
08543-9011
(888-763-2260)
INVESTMENT ADVISER
Mercury Asset Management US, a division of Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)
INDEPENDENT AUDITORS
DISTRIBUTOR
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>
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
strategies that significantly affected the Funds' performance during its last
fiscal year. You may obtain these reports at no cost by calling 1-888-763-2260.
If you hold your Fund shares through a brokerage account or directly at the
Transfer Agent, you may receive only one copy of each shareholder report and
certain other mailings regardless of the number of Fund accounts you have. If
you prefer to receive separate shareholder reports for each account (or if you
are receiving multiple copies and prefer to receive only one), call your
financial consultant or, if none, write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call your
financial consultant or the Transfer Agent at 1-888-763-2260.
STATEMENT OF ADDITIONAL INFORMATION
The Funds' Statement of Additional Information contains further information
about the Funds and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing or calling the Funds
at Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-
4062 or by calling 1-888-763-2260.
Contact your financial consultant or the Funds at the telephone number or
address indicated on the inside back cover of this Prospectus if you have any
questions.
Information about the Funds (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from the
information contained in this Prospectus.
Investment Company Act File #811-09617.
CODE # [----]
(C) Mercury Asset Management US, a division of Fund Asset Management, L.P.
Prospectus
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Mercury Life Strategy Balanced Fund
Mercury Life Strategy Growth and Income Fund
Mercury Life Strategy Growth Fund
Mercury Life Strategy Aggressive Growth Fund
of Mercury Life Strategy Series Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
Phone No. (888) 763-2260
------------------------
Mercury Life Strategy Balanced Fund, Mercury Life Strategy Growth and
Income Fund, Mercury Life Strategy Growth Fund and Mercury Life Strategy
Aggressive Growth Fund (each a "Fund," and collectively the "Funds") are each
separate series of Mercury Life Strategy Series Fund, Inc. (the "Corporation").
Each Fund is a separate non-diversified series of an open-end investment
company (commonly known as a mutual fund). Each Fund seeks a different
combination of long-term capital growth and income by investing in a mix of
underlying funds managed or distributed by Mercury Asset Management US, a
division of Fund Asset Management, L.P. ("Mercury" or the "Investment Adviser")
or one of its affiliates (the "Underlying Funds"). In addition, each Fund may
invest some of its assets directly in derivative instruments. There can be no
assurance that the investment objective of a Fund will be achieved.
Each Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. This permits an investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances. The Funds'
distributor is Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc. ("MFD" or the "Distributor").
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Corporation, dated [-----], 1999
(the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
the Funds at 888-763-2260 or your financial consultant, or by writing to the
address listed above. 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.
Mercury Asset Management US, a division of Fund Asset Management,
L.P. -- Investment Adviser
Mercury Funds Distributor -- Distributor
------------------------
The date of this Statement of Additional Information is [--], 1999.
<PAGE>
Table of Contents
-----------------
Page
----
INVESTMENT OBJECTIVES AND POLICIES......................................... 1
Description of Other Investment Policies, Practices and Risks..... 2
Risk Factors in Derivatives.......................................20
Investment Restrictions...........................................21
MANAGEMENT OF THE FUND.....................................................23
Directors and Officers............................................23
Compensation of Directors.........................................25
Management and Advisory Arrangements..............................26
Code of Ethics....................................................28
PURCHASE OF SHARES.........................................................28
Initial Sales Charge Alternatives -- Class I and Class A Shares...29
Reduced Initial Sales Charges.....................................30
Distribution Plans................................................32
Limitations on the Payment of Deferred Sales Charges..............34
REDEMPTION OF SHARES.......................................................34
Redemption........................................................35
Repurchase........................................................36
Reinstatement Privilege -- Class I and Class A Shares.............36
Deferred Sales Charges -- Class B and Class C Shares..............36
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................39
DETERMINATION OF NET ASSET VALUE...........................................41
SHAREHOLDER SERVICES.......................................................43
Investment Account................................................43
Automatic Investment Plan.........................................44
Automatic Dividend Reinvestment Plan..............................44
Systematic Withdrawal Plan........................................45
Retirement Plans..................................................46
ii
<PAGE>
Exchange Privilege................................................46
Fee-Based Programs................................................48
DIVIDENDS AND TAXES........................................................48
Dividends.........................................................48
Taxes.............................................................49
Tax Treatment of Options and Futures Transactions.................52
Other Tax Matters.................................................52
PERFORMANCE DATA...........................................................53
GENERAL INFORMATION........................................................54
Description of Shares.............................................54
Computation of Offering Price Per Share...........................55
Independent Auditors..............................................58
Custodian.........................................................58
Transfer Agent....................................................58
Legal Counsel.....................................................58
Reports to Shareholders...........................................58
Additional Information............................................59
APPENDIX A.................................................................A-1
iii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a separately managed, non-diversified mutual fund with its own
investment objective and policies. Each Fund has been constructed as a "fund of
funds," which means that it seeks to achieve its investment objective primarily
through investments in a combination of Underlying Funds. In addition, each Fund
may also invest some of its assets directly in individual securities and other
financial instruments, such as derivative instruments.
The table below lists the investment objective of each Fund
<TABLE>
<CAPTION>
Fund Investment Objective
- -------------------------------------------------------------------------------------
<S> <C>
Mercury Life Strategy Balanced Fund to provide a combination of current
income and long-term capital growth
- -------------------------------------------------------------------------------------
Mercury Life Strategy Growth and Income to provide long-term capital growth and,
Fund secondarily, moderate income
- -------------------------------------------------------------------------------------
Mercury Life Strategy Growth Fund to provide long-term capital growth and,
secondarily, some current income
- -------------------------------------------------------------------------------------
Mercury Life Strategy Aggressive Growth to provide long-term capital growth
Fund
- -------------------------------------------------------------------------------------
</TABLE>
The investment objective of each Fund is not a fundamental policy and may
be changed without shareholder approval. In addition, the Board of Directors of
the Corporation (the "Directors") may change, without shareholder approval, the
particular Underlying Funds in which each Fund may invest, the equity/fixed-
income targets and ranges and the investments in each Underlying Fund.
Reference is made to "How the Fund Invests" in the Prospectus for a discussion
of the investment objective and policies of each Fund.
The following description provides additional information regarding the
Underlying Funds and the types of investments that the Underlying Funds and the
Funds may make.
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Description of Other Investment Policies, Practices and Risks
In this section, "Investment Objectives and Policies," the term "investment
adviser" refers to the investment adviser of the Underlying Funds and Mercury,
and the term "Fund" refers to the Funds and the Underlying Funds.
Cash Management. Generally, the investment adviser will employ futures and
---------------
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the investment adviser, a portion of the Funds'
assets may be invested in certain types of instruments with remaining maturities
of 397 days or less for liquidity
2
<PAGE>
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
the Funds invest 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. A Fund may enter into dollar rolls, in which Fund the 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 Fund
forgoes principal and interest paid on the securities sold. The 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 Fund's forward purchase commitment may decline below the price of
the securities the Fund has sold. In the event the buyer of the securities files
for bankruptcy or becomes insolvent, the 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 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 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 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 or instruments, 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 in an effort to adjust the exposure of the Fund to the target market.
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
3
<PAGE>
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.
Investment in Fixed-Income Securities. Because a Fund may invest in fixed-
-------------------------------------
income securities, the Fund will be subject to the general risks inherent in
such securities, primarily interest rate risk, credit risk and prepayment 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 a Fund
will be unable to make payments of either interest or principal or will be
perceived to have a diminished capacity to make such payments in the future.
The credit risk of a Fund is a function of the diversification and credit
quality of its underlying securities.
A Fund may also be exposed to event risk, which includes the possibility
that fixed-income securities held by a 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 a Fund may be required to reinvest assets
in
4
<PAGE>
securities with lower interest rates. In periods of increasing interest rates,
prepayments generally may decline, with the effect that the mortgage-backed
securities held by a Fund may exhibit price characteristics of longer-term debt
securities.
The corporate substitution strategy used by a Fund may increase or decrease
a Fund's exposure to the foregoing risks relative to those of the Aggregate Bond
Index.
Foreign Investment Risks
------------------------
International Investing. International investments involve certain risks
-----------------------
not typically involved in domestic investments, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other U.S. or non-U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial and social factors. Because a Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments insofar
as U.S. investors are concerned. Foreign currency exchange rates are determined
by forces of supply and demand in the foreign exchange markets. These forces
are, in turn, affected by international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. With respect to certain countries, there may be the possibility of
expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments that could affect
investments in those countries. In addition, certain non-U.S. investments may be
subject to non-U.S. withholding taxes. As a result, management of a Fund may
determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular country.
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce 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 a European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other
things, EMU establishes a single common European currency (the "euro") that was
introduced on January 1, 1999 and has replaced the existing national currencies
of all EMU participants. The use of notes and coins of the relevant national
currencies will be phased out by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were or are being redenominated in the euro, and
thereafter, will be listed, traded, and make dividend and other payments only in
euros.
No assurance can be given that EMU will continue to proceed as planned,
that the changes planned for the EU can be successfully implemented, or that
these changes will result in the economic and monetary unity and stability
intended. There is a possibility that EMU will not be completed, or will
5
<PAGE>
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 a Fund's shareholders under foreign
or, in certain limited circumstances, U.S. tax laws.
Some of the securities held by a Fund will not be registered in the U.S. with
the Commission nor will the issuers thereof be subject to the Commission's
reporting requirements. Accordingly, there may be less publicly available
information about a non-U.S. company than about a U.S. company, and non-U.S.
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those which U.S. companies are subject.
Non-U.S. financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many non-U.S. companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The non-U.S. markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
a Fund having additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon and could cause a Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to the Funds due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Brokerage
commissions and other transaction costs on non-U.S. securities exchanges are
generally higher than in the United States. In some countries, there is less
governmental supervision and regulation of exchanges, brokers and issuers than
there is in the United States.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In accordance with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), a Fund may invest
6
<PAGE>
up to 10% of its total assets in securities of closed-end investment companies,
not more than 5% of which may be invested in any one such company. This
restriction on investments in securities of closed-end investment companies may
limit opportunities for a Fund to invest indirectly in certain smaller capital
markets. Shares of certain closed-end investment companies may at times be
acquired only at market prices representing premiums to their net asset values.
If a Fund acquires shares in closed-end investment companies, shareholders would
bear both their proportionate share of expenses in the Fund including investment
advisory fees) and, indirectly, the expenses of such closed-end investment
companies. A Fund also may seek, at its own cost, to create its own investment
entities under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively-
traded securities. The Investment Company Act limits an Underlying Fund's
ability to invest in any equity security of an issuer that, in its most recent
fiscal year, derived more than 15% of its revenues from "securities related
activities" as defined by the rules thereunder. These provisions may restrict
the Underlying Fund's investments in certain foreign banks and other financial
institutions.
A Fund may invest in a diverse array of countries. The securities markets
of many countries have at times in the past moved relatively independently of
one another due to different economic, financial, political and social factors.
When such lack of correlation or negative correlation in movements of these
securities markets occurs, it may reduce risk for the Fund's portfolio as a
whole. This negative correlation also may offset unrealized gains the Fund has
derived from movements in a particular market. To the extent the various markets
move independently, total portfolio volatility is reduced when the various
markets are combined into a single portfolio. Of course, movements in the
various securities markets may be offset by changes in foreign currency exchange
rates, where the different markets are denominated in different currencies.
Exchange rates frequently move independently of securities markets in a
particular country. As a result, gains in a particular securities market may be
affected by changes in exchange rates.
Investment in Emerging Markets. The Funds have the ability to invest in
------------------------------
the securities of issuers domiciled in various countries with emerging capital
markets. Specifically, an "emerging market country" is any country that the
World Bank, the International Finance Corporation, the United Nations or its
authorities has determined to have a low or middle income economy. A Fund may
invest in countries with emerging capital markets in Eastern Europe.
Investments in the securities of issuers domiciled in countries with
emerging capital markets involve certain additional risks not involved in
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations in
exchange rates, differing legal systems
7
<PAGE>
and the existence or possible imposition of exchange controls, custodial
restrictions or other non-U.S. or U.S. governmental laws or restrictions
applicable to such investments, (iv) national policies that may limit the Fund's
investment opportunities such as restrictions on investment in issuers or
industries deemed sensitive to national interests, and (v) the lack or
relatively early development of legal structures governing private and foreign
investments and private property. In addition to withholding taxes on investment
income, some countries with emerging markets may impose differential capital
gain taxes on foreign investors.
Such capital markets are emerging in a dynamic political and economic
environment brought about by events over recent years that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that these capital markets will continue to present
viable investment opportunities for a Fund. In the past, governments of such
nations have expropriated substantial amounts of private property, and most
claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such event, it is
possible that a Fund could lose the entire value of its investments in the
affected markets.
Also, there may be less publicly available information about issuers in
emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject. In certain countries with emerging capital markets,
reporting standards vary widely. As a result, traditional investment
measurements used in the U.S., such as price/earnings ratios, may not be
applicable. Emerging market securities may be substantially less liquid and
more volatile than those of mature markets and companies may be held by a
limited number of persons. This may adversely affect the timing and pricing of
a Fund's acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because a
Fund will need to use brokers and counterparties that are less well capitalized,
and custody and registration of assets in some countries may be unrealiable.
In Russia, for example, registrars are not subject to effective government
supervision nor are they always independent from issuers. The possibility of
fraud, negligence, undue influence being exerted by the issuers or refusal to
recognize ownership exists, which along with other factors could result in the
registration being completely lost. Therefore, investors should be aware that
the Fund would absorb any loss resulting from
these registration problems and may have no successful claim for compensation.
Some of these concerns may also exist in other emerging capital markets.
When-issued Securities and Forward Commitments. A Fund may purchase or
----------------------------------------------
sell securities that it is entitled to receive on a when-issued basis. A Fund
may also purchase or sell securities through a forward commitment. These
transactions involve the purchase or
8
<PAGE>
sale of securities by a Fund at an established price with payment and delivery
taking place in the future. A Fund enters into these transactions to obtain what
is considered an advantageous price at the time of entering into the
transaction. The Funds have not established any limit on the percentage of its
assets that may be committed in connection with these transactions. When a Fund
is purchasing securities in these transactions, it 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 purchase price. The Fund may bear the risk of
a decline in the value of the security in these transactions and may not benefit
from an appreciation in the value of the security during the commitment period.
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 the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where 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 not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the 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
9
<PAGE>
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. For purposes of this section, the term "Board of Trustees"
---------------
shall be deemed to mean both the Board of Directors of the Funds and the Board
of Trustees of the Underlying Funds.
Each Fund may purchase restricted securities that can be offered and sold
to "qualified institutional buyers" under Rule 144A under the Securities Act.
The Board of Trustees of the Funds has determined to treat as liquid Rule 144A
securities that are either (i) freely tradable in their primary markets offshore
or (ii) non-investment grade debt securities that the investment adviser
determines are as liquid as publicly registered non-investment grade debt
securities. The Board of Trustees of the Funds has adopted guidelines and
delegated to the investment adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board of Trustees of the
Funds however, will retain sufficient oversight and be ultimately responsible
for the determinations. Since it is not possible to predict with assurance
exactly how this market for restricted securities sold and offered under Rule
144A will continue to develop, the Board of Trustees of the Funds will carefully
monitor the Funds' investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Funds to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these securities.
Standby Commitment Agreements. The Funds may enter into standby commitment
-----------------------------
agreements. These agreements commit a 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 Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued. The Fund will enter into such agreements for the purpose of
investing in the security underlying the commitment at a yield and price that is
considered advantageous to the Fund. A 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 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
10
<PAGE>
Underlying 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 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 of the Fund otherwise deems to be creditworthy. 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 a Fund from fluctuations in the
market value of the underlying security during such period. 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 a 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 by the seller under such a repurchase agreement, instead of
the contractual fixed rate of return, the rate of return to a Fund shall be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform.
Convertible Securities. Convertible securities entitle the holder to
----------------------
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion
11
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feature, however, the interest rate or dividend preference on a convertible
security is generally less than would be the case if the securities were issued
in non-convertible form.
In analyzing convertible securities, the investment adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by a Fund are denominated in U.S. dollars, the underlying equity securities
may be quoted in the currency of the country where the issuer is domiciled. With
respect to a convertible security denominated in a currency different from that
of the underlying equity security, the conversion price may be based on a fixed
exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted will
affect the value of the convertible security.
Apart from currency considerations, the value of a convertible security is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
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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.
New Issues. Each Fund may purchase newly issued securities, sometimes with
----------
the intent of quickly selling such securities in the secondary market for an
amount higher than the issue price ("Hot IPOs"). Newly issued securities lack
established trading histories and may be issued by companies with limited
operating histories. The Fund also would bear the risk of the security trading
at a discount to the issue price.
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
a Fund's shares and in the yield on the 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 the Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
investment adviser in its best judgment nevertheless may determine to maintain 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.
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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.
To the extent allowed by law and as permitted by a Fund's investment
policies as set forth in its Prospectus and Statement of Additional Information,
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. An investment in smaller capitalization securities 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, investments in smaller
capitalization securities 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.
While investments in smaller capitalization securities may offer greater
opportunities for capital appreciation than large cap issuers, investments in
smaller companies may involve greater risks and thus may be considered
speculative. Full development of these companies and trends frequently
14
<PAGE>
takes time and, for this reason, any investment in smaller capitalization
securities should be considered as a long-term investment and not as a vehicle
for seeking short-term profits.
The smaller capitalization securities in which the Funds invest 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 a Fund of
portfolio securities, to meet redemptions or otherwise, may require the Fund to
sell these securities at a discount from market prices.
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. With the exception of the Aggressive Growth
--------------------------
Fund, the Funds may invest in mortgage backed securities. 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 a Fund for its mortgage backed securities, the yield a 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 a 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 a 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 a 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, creating maturity extension risk. 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 a
Fund. See "Investment in Fixed-Income Securities" and "Illiquid or Restricted
Securities" above.
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Strategies Involving Options, Futures, Swaps, Indexed Instruments and Foreign
Exchange Transactions
Indexed Securities
The Funds may invest in securities, futures or other instruments 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 or total return swap 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, in the case of a debt
security to reduced or eliminated interest payments or loss of
16
<PAGE>
principal, or, in the case of a total return swap, substantial payments to the
counterparty 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 correlated with securities held in its portfolio. When a Fund
purchases a put option, in consideration for an upfront payment (the "option
premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Funds' 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. 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 correlated to 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. The Funds may
write call options to earn income through the receipt of option premiums. 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
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<PAGE>
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, a Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
Each Fund may also write put options on securities or securities indices.
When a Fund writes a put option, in return for an option premium the Fund gives
another party the right to sell to the Fund a specified security at the exercise
price on or before the expiration date, in the case of an option on a security,
or agrees to pay to another party an amount based on any decline in a specified
securities index below a specified level on or before the expiration date, in
the case of an option on a securities index. The Funds may write put options to
earn income through the receipt of option premiums. In the event the party to
which the Fund has written an option fails to exercise its 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
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. 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
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<PAGE>
subject to greater risk of counterparty default. See "Additional Risk Factors of
OTC Transactions; Limitations on the Use of OTC Derivatives" below.
Futures
Each Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser to
take delivery, and a seller to make delivery, of a specific amount of an asset
at a specified future date at a specified price. An index futures contract is a
contract to buy or sell units of a particular index of securities at a specified
future date at a price agreed upon when the contract is made. Index futures
contracts typically specify that no delivery of the actual securities making up
the index takes place. Instead, upon termination of the contract, final
settlement is made in cash based on the difference between the contract price
and the actual price on the termination date of the units of the index. 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 Merchant (the "FCM") effecting a Fund's transactions or in a
third party account with a 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 contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, a Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
relating to a futures contract, however, a Fund may realize a loss relating to
the futures position.
A Fund will further limit transactions in futures and options on futures to
the extent necessary to prevent the Fund from being deemed a "commodity pool
operator" under regulations of the Commodity Futures Trading Commission. The
Fund will only engage in futures and options transactions from time to time.
The Fund is under no obligation to use such transactions and may choose not to
do so.
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Swaps
The Funds are 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 fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which a swap has more attractive risk
or return characteristics than direct investment or in which direct investment
is restricted by local law or is otherwise impractical.
Foreign Exchange Transactions. A 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. Specifically, the Fund may purchase or sell a
currency to settle a security transaction or sell a currency in which the Fund
has received or anticipates receiving a dividend or distribution.
Risk Factors in Derivatives
The Funds intend to enter into transactions involving derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; "Limitations on the Use of OTC Derivatives," below. However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a derivative or that 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 marked-to-market basis, to the transaction (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund has
assets available to satisfy its obligations with respect to the transaction, but
will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options may be substantially less liquid than other instruments in
which a Fund may invest. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable price.
The absence of liquidity may also make it more difficult for a Fund to ascertain
a market value for such instruments. A Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold, or
(ii) for which the investment adviser to the Fund anticipates the
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Fund can receive on each business day at least two independent bids or offers,
unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
The Funds have therefore adopted an investment policy pursuant to which they
will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transactions, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the securities underlying OTC call options currently outstanding which have
been sold by the Fund, and margin deposits on the Fund's outstanding OTC options
exceeds 15% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund which are deemed to be illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by a Fund to a
dealer in U.S. government securities recognized as a "primary dealer" by the
Federal Reserve Bank of New York and the Fund has the unconditional contractual
right to repurchase such OTC option at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying security minus the option's exercise
price).
Because derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that a Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty, the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party guaranty
or other credit enhancement.
Investment Restrictions
The Corporation has adopted the following restrictions and policies
relating to the investment of each Fund's assets and its activities. The
fundamental restrictions set forth below 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). However, provided that none of the following restrictions
shall prevent a Fund from investing its assets in shares of other registered
investment companies, a Fund may not:
1. 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).
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2. Make investments for the purpose of exercising control or
management. Investments by a Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, a Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that 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 Corporation's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) each 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) each Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) each
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) each Fund
may purchase securities on margin to the extent permitted by applicable
law. No Fund may pledge its assets other than to secure such borrowings
or, to the extent permitted by a Fund's investment policies as set forth in
its Prospectus and Statement of Additional Information, as they may be
amended from time to time, in connection with hedging transactions, short
sales, forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as a Fund
technically may be deemed an underwriter under the Securities Act, in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except
to the extent that a Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, although each Fund is classified as a non-diversified fund
under the Investment Company Act and is not subject to the diversification
requirements of the Investment Company Act, each Fund is required to comply with
certain requirements under the Internal Revenue Code of 1986, as amended (the
"Code"). To ensure that the Funds satisfy these requirements, each Fund will be
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managed in compliance with the Code requirements as though such requirements
were applicable to the Fund. These requirements include limiting the Fund's
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 than 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 and other regulated investment companies are not included
within the definition of "issuer" for purposes of the diversification
requirements of the Code.
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 Underlying Funds have certain investment restrictions which may be more
or less restrictive than those listed above, thereby allowing a Fund to
participate in certain investment strategies indirectly that are prohibited
under the fundamental and non-fundamental restrictions and policies listed
above. The investment restrictions of the Underlying Funds are set forth in
their respective Statements of Additional Information.
Portfolio securities of the Underlying Funds and Funds generally may not be
purchased from, sold or loaned to the investment adviser or its affiliates or
any of their directors, general partners, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under the Investment
Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Underlying Funds
and Funds are prohibited from engaging in certain transactions involving Merrill
Lynch, the Investment Adviser, or any of its affiliates, except for brokerage
transactions permitted under the Investment Company Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
Investment Company Act. See "Portfolio Transactions and Brokerage." Rule 10f-3
under the Investment Company Act sets forth conditions under which the
Underlying Funds and Funds may purchase from an underwriting syndicate of which
Merrill Lynch is a member.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Corporation consist of four individuals, three of whom
are not "interested persons" of the Corporation as defined in the Investment
Company Act. The Directors are responsible for the overall supervision of the
operations of the Funds and perform the various duties imposed on the directors
of investment companies by the Investment Company Act. Information about the
Directors
23
<PAGE>
and executive officers of the Corporation, their ages and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
<TABLE>
<CAPTION>
Position(s) With
Name and Age the Corporation Principal Occupation(s) During Past 5 Years
- ---------------------------- --------------------------- --------------------------------------------------
<S> <C> <C>
Terry K. Glenn, 58 President and Director Executive Vice President of the Investment
(1) (2) Adviser and certain of its affiliates since 1983;
Executive Vice President and Director of
Princeton Services, Inc. ("Princeton Services")
since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director
thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Jack B. Sunderland, 70 Director (2) President and Director of American Independent
P.O. Box 7 Oil Company, Inc. (energy company) since 1987;
West Cornwall, CT 06796 Member of Council on Foreign Relations since
1971.
Stephen B. Swensrud, 66 Director (2) Chairman, Fernwood Advisors (investment
24 Federal Street, Suite 400 adviser) since 1996; Principal, Fernwood
Boston, MA 02110 Associates (financial consultant) since 1975.
J. Thomas Touchton, 60 Director (2) Managing Partner of the Witt-Touchton Company
Suite 3405 and its predecessor The Witt Co. (private
One Tampa City Center investment partnership) since 1972; Trustee
Tampa, FL 33602 Emeritus of Washington and Lee University;
Director of TECO Energy Inc. (electric utility
holding company).
Frank Salerno, 39 Senior Vice President and First Vice President of the Investment Adviser and
Portfolio Manager/(1) (2)/ its affiliate since 1999; Managing Director of
Bankers Trust Company from 1992 to 1999;
Senior Portfolio Manager for quantitative products
and index funds and Chief Investment Officer of
Structured Investments at Bankers Trust Company
from 1989 to 1999.
Sidney Hoots, -- Senior Vice President and
Portfolio Manager (1)(2)
Phillip Green, -- Senior Vice President and
Portfolio Manager/(1) (2)/
Donald C. Burke, 39 Vice President and Senior Vice President and Treasurer of the
Treasurer (1) (2) Investment Adviser and its affiliates since 1999;
Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since
1999; First Vice President of affiliates of the
Investment Adviser from 1997 to 1999; Director
of
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Position(s) With
Name and Age the Corporation Principal Occupation(s) During Past 5 Years
- ---------------------------- --------------------------- --------------------------------------------------
<S> <C> <C>
Taxation of affiliates of the Investment Adviser
since 1990; Vice President of affiliates of the
Investment Adviser from 1990 to 1997.
Allan J. Oster, 36 Secretary (1) (2) Consultant (Legal Advisory) of the Investment
Adviser and its affiliates since 1999; Associate,
Drinker Biddle & Reath LLP, 1996-1999; Senior
Counsel, U.S. Securities and Exchange
Commission, 1991-1996.
</TABLE>
- ----------------
(1) Interested person, as defined in the Investment Company Act, of the
Corporation.
(2) Such Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser or its affiliates
acts as investment adviser.
As of the date of this Statement of Additional Information, the officers
and Directors of the Corporation as a group ([ ] persons) owned an
aggregate of less than 1% of the outstanding shares of common stock of Merrill
Lynch & Co., Inc. ("ML & Co.") and owned an aggregate of less than 1% of the
outstanding shares of any of the Funds.
Compensation of Directors
The Corporation expects to pay each Director not affiliated with the
Investment Adviser or an affiliate of the Investment Adviser (each a "non-
affiliated Director"), for service to the Funds, a fee of [$-----] per year plus
[$-] per in-person meeting attended, together with such individual's actual out-
of-pocket expenses relating to attendance at meetings. The Corporation also
expects to compensate members of the Audit and Nominating Committee, which
consists of all of the non-affiliated Directors, at the rate of [$----] annually
for service to the Funds.
The following table sets forth the aggregate compensation the Corporation
expects to pay to the non-affiliated Directors for their first full fiscal year
and the aggregate compensation paid by all investment companies advised by
Mercury, Fund Asset Management, U.S. ("FAM"), or their affiliates ("Mercury and
Affiliates-Advised Funds") to the non-affiliated Directors for the calendar year
ended December 31, 1998.
<TABLE>
<CAPTION>
Pension or Total Compensation From
Retirement Corporation and
Benefits Accrued as Mercury and Affiliates
Aggregate Compensation Part of Corporation Advised Funds Paid to
Name of Director from Corporation Expenses Directors (1)
- -------------------- ----------------------- -------------------- --------------------------
<S> <C> <C> <C>
Jack B. Sunderland.......... None $133,600
Stephen B. Swensrud......... None $195,583
J. Thomas Touchton.......... None $133,600
</TABLE>
25
<PAGE>
- ----------------
(1) In addition to the Corporation, the Directors serve on other Mercury and
Affiliates-Advised Funds as follows: Mr. Sunderland ([ ] registered
investment company consisting of [ ] portfolios); Mr. Swensrud ([ ]
registered investment companies consisting of [ ] portfolios); and Mr.
Touchton ([ ] registered investment companies consisting of [ ]
portfolios).
The Directors of the Corporation may be eligible for reduced sales charges on
purchases of Class I shares. See "Reduced Initial Sales Charges -- Purchase
Privileges of Certain Persons."
Management and Advisory Arrangements
Management Services. The Investment Adviser provides the Funds with
investment advisory and management services. Subject to the overall supervision
of the Board of Directors, the Investment Adviser provides day-to-day advice as
to each Fund's investment transactions, including determinations concerning
changes to (a) the underlying funds in which the Funds may invest; and (b) the
percentage range of assets of any Fund that may be invested in the underlying
equity funds and the underlying fixed income funds as separate groups. The
Investment Adviser has the responsibility for making all investment decisions
for the Funds. The Investment Adviser also performs certain of the
administrative services for the Funds.
Management Fee. The Corporation on behalf of each Fund has entered into a
management agreement with the Investment Adviser (the "Management Agreement"),
pursuant to which the Investment Adviser receives for its asset allocation
services to each Fund monthly compensation at the annual rate of 0.60% of the
average daily net assets of each Fund.
Payment of Fund Expenses. The Advisory Agreement obligates the Investment
Adviser to provide investment advisory services to the Corporation and to pay
all compensation of and to provide office space for officers and employees of
the Funds connected with investment and economic research, trading and
investment management of the Funds as well as to pay the fees of those Directors
who are affiliated persons of the Investment Adviser or any of its affiliates.
The Corporation pays, or causes to be paid, all other expenses incurred in the
operation of the Corporation and the Fund (except to the extent paid by Mercury
Funds Distributor, a division of Princeton Funds Distributor, Inc.), including,
among other things, taxes, expenses for legal and auditing services, costs of
printing proxies, shareholder reports and prospectuses and statements of
additional information, charges of the custodian, any sub-custodian and
Financial Data Services, Inc. (the "Transfer Agent"), expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under federal, state or non-U.S. laws, fees and actual
out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, or of an affiliate of the Investment Adviser, accounting and
pricing costs (including the daily calculation of net asset value), insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Corporation or a Fund. The
Distributor will pay certain of the expenses of a Fund incurred in connection
with the continuous offering of its shares. Accounting services are provided to
the Corporation and the Funds by the Investment Adviser, and the Corporation
reimburses the Investment Adviser for its costs in connection with such
services.
26
<PAGE>
Organization of the Investment Adviser. Mercury Asset Management US, a
division of FAM, is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536. FAM is an indirect wholly owned subsidiary of ML & Co., a financial
services holding company and the parent of Merrill Lynch. ML & Co. and
Princeton Services are "controlling persons" of FAM as defined under the
Investment Company Act because of their power to exercise a controlling
influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Advisory Agreement will remain in effect for two years from its effective
date. Thereafter, it will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of a Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contract is not assignable and may be terminated with
respect to a Fund without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of a Fund.
The Underlying Funds. Mercury or its affiliate also serves as the
investment adviser to each Underlying Fund pursuant to a management agreement
with each Underlying Fund. The investment adviser to each Underlying Fund
provides each Underlying Fund with investment advisory and management services.
Subject to the supervision of the Board of Directors, the investment adviser to
each Underlying Fund is responsible for the actual management of each Underlying
Fund's portfolio and constantly reviews the Underlying Fund's 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 to each Underlying Fund. The investment
adviser to each Underlying Fund performs certain of the other administrative
services and provides all the office space, facilities, equipment and necessary
personnel for management of the Underlying Fund.
The management agreement with each Underlying Fund obligates the investment
adviser to pay all compensation for officers and employees of the Underlying
Fund connected with investment and economic research, trading and investment
management of the Underlying Fund, as well as the fees of all Trustees or
Directors who are affiliated persons of the investment adviser to the Underlying
Fund or any of their affiliates. Each Underlying Fund pays all other expenses
incurred in the operation of the Underlying Fund, (except to the extent paid by
the placement agent), including, among other things, taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholder reports, copies of the registration statements, charges of the
custodian, any sub-custodian and transfer agent, expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under federal, state or foreign laws, fees and out-of-
pocket expenses of unaffiliated Trustees and Directors, accounting and pricing
costs (including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Underlying Fund. Accounting services
are provided to each Underlying Fund by its investment adviser or an affiliate
of the investment adviser, and the Underlying Fund reimburses the investment
adviser to the Underlying Fund or its affiliate for its costs in connection with
such services.
27
<PAGE>
Code of Ethics
The Board of Trustees or Directors of each Underlying Fund, the Board of
Directors of the Corporation, the investment adviser to each Underlying Fund and
the Investment Adviser have each adopted a Code of Ethics under Rule 17j-1 of
the Investment Company Act (together the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the investment
advisers and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the investment advisers pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees
of the investment advisers include a ban on acquiring any securities in a Hot
IPO 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" that prohibit trading by investment personnel of the Underlying Funds
and Funds within periods of trading by the Underlying Funds and 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
a Fund's shares. Each Fund issues four classes of shares: shares of Class I and
Class A are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Each Class I, Class A, Class B and Class C share of a Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights, except that Class A, Class B and Class C shares bear the
expenses of the ongoing account maintenance fees (also known as service fees)
and Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from the
deferred sales charge arrangements. Class A, Class B and Class C shares each
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which the account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class A distribution
plan). Each class has different exchange privileges. See "Shareholder Services
- -- Exchange Privilege."
MFD, an affiliate of the Investment Adviser and of Merrill Lynch, with
offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: P.O. Box 9081, Princeton, New Jersey 08543-9081) acts as Distributor
for each Fund.
28
<PAGE>
The Corporation has entered into a distribution agreement with the
Distributor in connection with the offering of shares of the Funds (the
"Distribution Agreement"). The Distribution Agreement obligates the Distributor
to pay certain expenses in connection with the offering of the shares of the
Funds. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination provisions
as the Advisory Agreement described above.
A Fund may reject any order to buy shares and may suspend the offering of
its shares at any time.
Initial Sales Charge Alternatives -- Class I and Class A Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class I shares should purchase Class I shares rather than Class A
shares because there is an account maintenance fee imposed on Class A shares.
Eligible Class I Investors. Class I shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class I shares. Investors that currently own Class I shares of a
Fund in a shareholder account are entitled to purchase additional Class I shares
of the Fund in that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class I shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by Mercury or any of its affiliates. Also
eligible to purchase Class I shares at net asset value are participants in
certain investment programs including certain managed accounts for which a trust
institution, thrift, or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases made through
certain financial advisers that meet and adhere to standards established by
Mercury. In addition, Class I shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees, to members of the Boards
of Mercury and Affiliates-Advised investment companies, including the
Corporation, and to employees of certain selected dealers. Class I shares may be
offered at net asset value to certain accounts over which Mercury or an
affiliate exercises investment discretion.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
shares of a Fund, refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company," as that term is
defined in
29
<PAGE>
the Investment Company Act, but does not include purchases by any such company
that has not been in existence for at least six months or which has no purpose
other than the purchase of shares of a Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class I and Class
A shares of the Funds will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
No initial sales charges are imposed upon Class I and Class A shares issued
as a result of the automatic reinvestment of dividends or capital gains
distributions.
Rights of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of a Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other Mercury mutual funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class I or Class A shares of a Fund or any other
Mercury mutual funds made within a 13-month period starting with the first
purchase pursuant to the Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at a Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which affiliates of Mercury provide plan participant record-keeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class I or Class A shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class I and Class A shares of the Funds and of other
Mercury mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total
30
<PAGE>
amount of shares does not equal the amount stated in the Letter of Intent
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the execution of such Letter, the difference between the sales charge on the
Class I or Class A shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class I or Class
A shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intent must
be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to that further reduced percentage
sales charge but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intent will
be deducted from the total purchases made under such Letter. An exchange from
the Summit Cash Reserves Fund ("Summit") into the Fund that creates a sales
charge will count toward completing a new or existing Letter of Intent from the
Fund.
Purchase Privileges of Certain Persons. Directors of the Corporation,
members of the Boards of other investment companies advised by Mercury or its
affiliates, directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes Mercury, FAM
and certain other entities directly or indirectly wholly owned and controlled by
ML & Co.), employees of certain selected dealers, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I
shares of a Fund at net asset value. Under such programs, the Fund realizes
economies of scale by providing incentives to a large group of such individuals
to invest. Furthermore, the individuals who qualify for these programs are
already familiar with the Fund, and, therefore, providing these investment
opportunities to such qualified individuals does not increase the expenditures
of sales-related expenses.
Class A shares of the Funds are offered at net asset value to an investor
who is a former shareholder of The United Kingdom Fund Inc. if the following
conditions are satisfied: first, the investor must purchase Class A shares of
the Fund through a Merrill Lynch Financial Consultant or the Transfer Agent with
proceeds of the liquidation of The United Kingdom Fund Inc.; and second, such
purchase of Class A shares must be made within 60 days after payment of such
proceeds by The United Kingdom Fund Inc.
Class I and Class A shares may also be offered at net asset value to
certain accounts over which Mercury or an affiliate exercises investment
discretion.
Employees and directors or trustees wishing to purchase shares of the Funds
must satisfy the Fund's suitability standards.
Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.
31
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class A shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objectives and
Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class I or Class A shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan and/or the aggregate amount invested by the plan in
specified investments. Certain other plans may purchase Class B shares with a
waiver of the CDSC upon redemption, based on similar criteria. Such Class B
shares will convert into Class A shares approximately ten years after the plan
purchases the first share of any Mercury mutual fund. Minimum purchase
requirements may be waived or varied for such plans. For additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements, call your plan administrator or your selected
dealer.
Purchases Through Certain Financial Advisers. Reduced sales charges may be
applicable for purchases of Class I or Class A shares of the Fund through
certain financial advisers that meet and adhere to standards established by
Mercury from time to time.
Distribution Plans
Reference is made to "Account Choices -- Pricing of Shares" in the
Prospectus for certain information with respect to separate distribution plans
for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the
Investment Company Act of each Fund (each a "Distribution Plan") with respect to
the account maintenance and/or distribution fees paid by a Fund to the
Distributor with respect to such classes.
32
<PAGE>
The Distribution Plan for each of the Class A, Class B and Class C shares
provides that a Fund pays the Distributor an account maintenance fee relating to
the shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to shares
of the relevant class in order to compensate the Distributor and selected
dealers (pursuant to sub-agreements) in connection with account maintenance
activities.
The Distribution Plan for each of the Class B and Class C shares provides
that a Fund also pays the Distributor a distribution fee relating to the shares
of the relevant class, accrued daily and paid monthly, at the annual rate of
0.75% of the average daily net assets of the Fund attributable to the shares of
the relevant class in order to compensate the Distributor and selected dealers
(pursuant to sub-agreements) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class I and Class A
shares of a Fund in that the ongoing distribution fees and deferred sales
charges provide for the financing of the distribution of the Fund's Class B and
Class C shares.
The payments under the Distribution Plans are subject to the provisions of
Rule 12b-1 under the Investment Company Act, and are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors of the Corporation for their consideration in
connection with their deliberations as to the continuance of the Class B and
Class C Distribution Plans. This information is presented annually as of
December 31 of each year on a "fully allocated accrual" basis and quarterly on a
"direct expense and revenue/cash" basis. On the fully allocated basis, revenues
consist of the account maintenance fees, the distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees, the
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
The Funds have no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and selected dealers in
connection with the Class A, Class B and Class C shares, and there is no
assurance that the Directors of the Corporation will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance
33
<PAGE>
fee, the distribution fee and/or the CDSCs received with respect to one class
will not be used to subsidize the sale of shares of another class. Payments of
the distribution fee on Class B shares will terminate upon conversion of those
Class B shares to Class A shares as set forth under "How to Buy, Sell, Transfer
and Exchange Shares" in the Prospectus.
In their consideration of each Distribution Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to each Fund and each related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors") shall be committed to the discretion
of the Independent Directors then in office. In approving each Distribution Plan
in accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit each Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of a Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by a Fund without the approval of the related
class of shareholders, and all material amendments are required to be approved
by the vote of Directors, including a majority of the Independent Directors who
have no direct or indirect financial interest in such Distribution Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further requires that a
Fund preserve copies of each Distribution Plan and any report made pursuant to
such plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to each
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
REDEMPTION OF SHARES
Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the redemption
and purchase of Fund shares.
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
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initial receipt of proper notice of redemption. Except for any CDSC that may be
applicable, there will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the net asset value of the Fund's
shares at such time.
Each Fund reserves the right to terminate any account engaging in market
timing mutual funds. For the purposes of this policy, "market timing" involves
the purchase and sale of shares of mutual funds within short periods of time
with the intention of capturing short-term profits resulting from market
volatility.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so by tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Redemption
requests should not be sent to the Corporation. A redemption request requires
the signature(s) of all persons in whose name(s) the shares are registered,
signed exactly as (his) (her) (their) name(s) appear(s) on the Transfer Agent's
register. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" as such term is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be mailed
within seven days of receipt of a proper notice of redemption.
At various times a Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of a Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of a Fund.
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The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the net asset value of such shares at
such time.
Repurchase
Each Fund will also repurchase shares through a shareholder's listed
securities dealer. The Funds will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, less any applicable CDSC,
provided that the request for repurchase is received by the dealer prior to the
close of business on the NYSE (generally 4:00 p.m., Eastern time) on the day
received and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price. These repurchase arrangements are for
the convenience of shareholders and do not involve a charge by a Fund (other
than any applicable CDSC). Securities firms that do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Certain
securities dealers may charge a processing fee to confirm a repurchase of
shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees
charged by other securities dealers may be higher or lower. Repurchases made
directly through the Transfer Agent, on accounts held at the Transfer Agent are
not subject to the processing fee. The Corporation 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.
Reinstatement Privilege -- Class I and Class A Shares
Shareholders of a Fund who have redeemed their Class I and Class A shares
have a privilege to reinstate their accounts by purchasing Class I or Class A
shares of such Fund, as the case may be, at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's financial consultant within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
Deferred Sales Charges -- Class B and Class C Shares
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Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Mercury mutual funds.
As discussed in the Prospectus under "Account Choices -- Pricing of
Shares--Class B and C Shares -- Deferred Sales Charge Options," while Class B
shares redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an IRA or other retirement plan
or redemption of Class B shares in certain circumstances following the death of
a Class B shareholder. In the case of such withdrawal, reduction or waiver
applies to: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan on
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
life (or life expectancy) or any redemption resulting from the tax-free return
of an excess contribution to an IRA (certain legal documentation may be required
at the time of liquidation establishing eligibility for qualified distribution);
or (b) any partial or complete redemption following the death or disability (as
defined in the Code) of a Class B shareholder (including one who owns the Class
B shares as joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination of disability
or, if later, reasonably promptly following completion of probate or in
connection with involuntary termination of an account in which a Fund's shares
are held (certain legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution).
The charge may also be reduced or waived in other instances, such as: (c)
redemptions by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers; (d) redemptions in connection with participation in certain fee-
based programs managed by the Investment Adviser or its affiliates; (e)
redemptions in connection with participation in certain fee-based programs
managed by selected dealers that have agreements with Mercury; or (f)
withdrawals through the Systematic Withdrawal Plan of up to 10% per year of your
account value at the time the plan is established.
In determining whether a Class B CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore it will be assumed that the redemption is first of
shares held for over six years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the six-year
period. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of shares being redeemed and will not be
applied to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a redemption.
Class C shares are subject only to a one-year 1% CDSC. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with
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participation in certain fee-based programs, involuntary termination of an
account in which fund shares are held, and withdrawals through the Systematic
Withdrawal Plan.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
selected dealers related to providing distribution-related services to a Fund in
connection with the sale of Class B and Class C shares, such as the payment of
compensation to financial consultants for selling Class B and Class C shares,
from its own funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of a Fund to sell Class B and Class C shares without a
sales charge being deducted at the time of purchase.
Conversion of Class B Shares to Class A Shares. As discussed in the
Prospectus under "Account Choices -- Pricing of Shares -- Class B and C
Shares --Deferred Sales Charge Options," Class B shares of equity Mercury mutual
funds convert automatically to Class A shares approximately eight years after
purchase (the "Conversion Period"). Automatic conversion of Class B shares into
Class A shares will occur at least once each month (on the "Conversion Date") on
the basis of the relative net asset value of the shares of the two classes on
the Conversion Date, without the imposition of any sales load, fee or other
charges.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any Mercury mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between Mercury mutual funds and the Class B Retirement Plan was
established), all Class B shares of all Mercury mutual funds held in that Class
B Retirement Plan will be converted into Class A shares of the appropriate
funds. Subsequent to such conversion, that Class B Retirement Plan will be sold
Class A shares of the appropriate funds at net asset value per share.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services --Fee-
Based Programs" below.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the ongoing distribution fee are paid to the Distributor and are used
in whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services to
the Fund in connection with the sale of the Class B and Class C shares, such as
the payment of compensation to
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financial consultants for selling Class B and Class C shares, from the dealers'
own funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Funds to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. See "Distribution
Plans" above. Imposition of the CDSC and the distribution fee on Class B and
Class C shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" above.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible with respect to the Funds (and the
particular investment adviser is responsible with respect to the Underlying
Funds) for making portfolio decisions, placing brokerage business, evaluating
the reasonableness of brokerage commissions and negotiating the amount of any
commissions paid subject to a policy established by their respective Directors.
Neither the Funds nor the Underlying Funds have any obligation to deal with any
broker or group of brokers in the execution of transactions in portfolio
securities. Orders for transactions in portfolio securities are placed for the
Fund and each Underlying Fund with a number of brokers and dealers, including
affiliates of the Investment Adviser. Where possible, the Funds and Underlying
Funds deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. In placing orders, it is the policy of the Funds and
Underlying Funds to obtain the best net results, taking into account various
factors, such as price, commissions, if any, size of the transaction, difficulty
of execution, the firm's general execution and operations facilities and the
firm's risk in positioning the securities involved.
Where applicable, the Investment Adviser of a Fund or the investment
adviser of an Underlying Fund surveys a number of brokers and dealers in
connection with proposed portfolio transactions and selects the broker or dealer
that offers the best price and execution or other services that are of benefit
to the Fund or Underlying Fund. Securities firms also may receive brokerage
commissions on transactions including covered call options written by a Fund or
an Underlying Fund and the sale of underlying securities upon the exercise of
such options. In addition, consistent with the NASD Conduct Rules and policies
established by the respective Trustees and Directors, the investment adviser to
the Underlying Funds and the Investment Adviser may consider sales of shares of
an Underlying Fund or a Fund, respectively as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Underlying Fund or
Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Investment Adviser or to an investment
adviser of an Underlying Fund may receive orders for transactions by the Funds
or Underlying Funds. Such supplemental research services ordinarily consist of
quantitative and modeling information, assessments and analyses of the business
or prospects of a company, industry or economic sector. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Investment Adviser and the investment adviser to the Underlying Funds
under the respective agreements. If in the judgment of the respective investment
adviser, the Underlying Funds or Funds (or other accounts managed by the
respective investment adviser) will be benefitted by supplemental research
services, the respective
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investment adviser is authorized to pay brokerage commissions to a broker
furnishing such services in excess of commissions that another broker may have
charged for effecting the same transaction. The expenses of the investment
adviser to the Underlying Funds and the Investment Adviser will not necessarily
be reduced as a result of the receipt of such supplemental information, and the
investment adviser to the Underlying Funds and the Investment Adviser may use
such information in servicing their other accounts.
The portfolio securities of certain Underlying Funds generally are traded
on a principal basis and normally do not involve brokerage commissions. The cost
of portfolio securities transactions effected on a principal basis primarily
consists of dealer or underwriter spreads. While reasonable competitive spreads
or commissions are sought, the Underlying Funds will not necessarily be paying
the lowest spread or commission available. Transactions with respect to the
securities of small and emerging growth companies in which an Underlying Fund
may invest may involve specialized services on the part of the broker or dealer
and thereby entail higher commissions or spreads than would be the case with
transactions involving more widely trading securities.
The Underlying Funds and Funds invest in certain securities traded in the
over-the-counter market and, where possible, deal directly with dealers who make
a market in the securities involved, except in those circumstances in which
better prices and execution are available elsewhere. Under the Investment
Company Act, persons affiliated with the Underlying Funds and Funds are
prohibited from dealing with the Underlying Funds and Funds, respectively as
principal in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Underlying Funds and
Funds, including Merrill Lynch and any of its affiliates, will not serve as the
Underlying Fund's and Fund's dealer, respectively in such transactions. However,
affiliated persons of the Underlying Funds and Funds, respectively may serve as
broker in over-the-counter 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
Underlying Funds and Funds may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the respective
Directors or Trustees that either comply with rules adopted by the Commission or
with interpretations of the Commission staff.
Pursuant to Section 11(a) of the Exchange Act, Merrill Lynch may execute
transactions for the Underlying Funds and Funds on the floor of any U.S.
national securities exchange provided that (i) prior authorization of such
transactions is obtained; (ii) Merrill Lynch furnishes a statement to the
Underlying Funds and Funds, respectively at least annually setting forth the
compensation it has received in connection with such transactions; and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii).
The respective Trustees and Directors of the Underlying Funds and
Corporation consider the possibility of recapturing for the benefit of the
respective Underlying Funds and Corporation brokerage
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commissions, dealer spreads and other expenses of possible portfolio
transactions, such as underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. For example,
brokerage commissions received by Merrill Lynch could be offset against the
management fee paid by the Underlying Fund to its investment adviser and by the
Funds to the Investment Adviser. After considering all factors deemed relevant,
the Trustees have made a determination not to seek such recapture. The Trustees
and Directors, respectively will consider this matter from time to time.
The portfolio turnover rate is calculated by dividing the lesser of a
fund's annual sales or purchases of portfolio securities (exclusive of purchases
or sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. Each Fund's portfolio turnover rate is generally anticipated to be
under 50% . Each Underlying Fund's portfolio turnover is generally anticipated
to be under [---%]. A high rate of portfolio turnover results in correspondingly
higher brokerage commission expenses and may also result in negative tax
consequences, such as an increase in capital gains dividends or in ordinary
income dividends.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of an investment adviser or an affiliate when
one or more clients of the investment adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Funds or the Underlying Funds, 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.
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus concerning
the determination of net asset value.
The net asset value of the shares of the Funds is determined once daily
Monday through Friday after the close of business on the NYSE on each day the
NYSE is open for trading (a "Pricing Day"). The close of business on the NYSE is
generally 4:00 p.m., Eastern time. Each Fund also will determine its net asset
value on any day in which there is sufficient trading in the portfolio
securities that the net asset value might be affected materially, but only if on
any such day such Fund is required to sell or redeem shares. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The NYSE is not open for trading
on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value is computed by dividing the value of the securities held by
a Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus
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all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Investment
Adviser and the Distributor, and the fees payable indirectly by each Fund as a
shareholder of the Underlying Funds, are accrued daily.
The principal assets of each Fund will normally be its interest in the
Underlying Funds, which will be valued at its net asset value. Net asset value
for the Underlying Funds is computed by dividing the market value of the
securities held by the Underlying 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 its
investment adviser, are accrued daily. In the case of Underlying Funds that are
partnerships for tax purposes, the value of each investor's interest in the
Underlying Fund will be determined after the close of business on the NYSE by
multiplying the net asset value of the Underlying Fund by the percentage,
effective for that day, that represents that investor's share of the aggregate
interests in such Underlying Fund. Any additions or withdrawals to be effected
on that day will then be effected. The investor's percentage of the aggregate
beneficial interests in an Underlying Fund 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 Underlying Fund as of the time of determination on
such day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investor's investment in the Underlying Fund effected on
such day, and (ii) the denominator of which is the aggregate net asset value of
the Underlying Fund 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 Underlying Fund by all investors in the Underlying Fund. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Underlying Fund after the close of business of the
NYSE on the next Pricing Day of the Underlying Fund.
The per share net asset value of Class A, Class B and Class C shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities of the Funds and the Underlying Funds, including ADRs,
EDRs or GDRs, that are traded on stock exchanges are valued at the last sale
price (regular way) on the exchange on which such securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions, and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the respective Board as the primary market. Long
positions in securities traded on the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short positions
in securities traded in the OTC market are valued at the last available ask
price in the
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OTC market prior to the time of valuation. When a Fund or Underlying Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund or Underlying Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by a Fund or Underlying Fund are valued at their last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last bid price. Other investments, including
financial futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available are
generally valued at fair value as determined in good faith by or under the
direction of the respective Board. Such valuations and procedures will be
reviewed periodically by the respective Board.
Bonds held by the Funds are traded primarily on the OTC markets. In
determining net asset value, the Funds and Underlying Funds utilize the
valuations of portfolio securities furnished by a pricing service approved by
the Board of Directors or 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 Funds
or Underlying Funds under the general supervision of the Board of Directors or
Trustees. In each case, the Board of Directors or Trustees has determined in
good faith that the use of a pricing service is a fair method of determining the
valuation of portfolio securities.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Funds' and Underlying
Funds' shares are determined as of such times. Foreign currency exchange rates
are also generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that will not be reflected in the computation of a Fund's
or Underlying Fund's net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the Directors or
Trustees.
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services described below that are
designed to facilitate investment in their shares. Full details as to each such
service and copies of the various plans described below can be obtained from the
Funds, the Distributor or your selected dealer.
Investment Account
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Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders will receive
separate transaction confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
The Funds do not issue share certificates. Shareholders considering
transferring their Class I or Class A shares from a selected dealer to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take delivery
of shares of a Fund, a shareholder either must redeem the Class I or Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class I or Class A shares. Shareholders interested in
transferring their Class B or Class C shares from a selected dealer and who do
not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a tax-
deferred retirement account such as an individual retirement account from a
selected dealer to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of a Fund, a shareholder must either redeem the
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm, or such shareholder must continue to maintain a
retirement account at a selected dealer for those shares.
Automatic Investment Plan
A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if an eligible Class I investor as described in the
Prospectus) or Class A, Class B or Class C shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Transfer Agent, acting as agent for such securities dealer. You
may also add to your account by automatically investing a specific amount in 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
Dividends and distributions from a Fund may be taken in cash or
automatically reinvested in shares of such Fund at net asset value without a
sales charge. You should consult with your financial consultant about which
option you would like. If you choose the reinvestment option, such reinvestment
will be at the net asset value of shares of such Fund, without sales charge, as
of the close
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of business on the ex-dividend date of the dividend or distribution.
Shareholders may elect in writing or by telephone (1-888-763-2260), if the
shareholder's account is maintained with the Transfer Agent, to receive either
their dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date, except
that in all circumstances dividends less than ten dollars will be reinvested.
Shareholders may, at any time, notify their selected dealer in writing if
the shareholder's account is maintained with a selected dealer or notify the
Transfer Agent in writing or by telephone (1-888-763-2260), if the account is
maintained with the Transfer Agent, that they no longer wish to have their
dividend and/or capital gains distributions reinvested in shares of a Fund or
vice versa and, commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. A Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Systematic Withdrawal Plan
A shareholder may elect to make withdrawals from an Investment Account of
Class I, Class A, Class B or Class C shares in the form of payments by check or
through automatic payment by direct deposit to such shareholder's bank account
on either a monthly or quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired shares of a Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with shares having a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. With respect to shareholders who hold accounts
directly at the Transfer Agent, redemptions will be made at net asset value as
determined as described herein on the 24th day of each month or the 24th day of
the last month of each quarter, whichever is applicable. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value determined as described herein on the first, second,
third or fourth Monday of each month, or the first, second, third or fourth
Monday of the last month of each quarter, whichever is applicable. If the NYSE
is not open for business on such date, the shares will be redeemed at the close
of business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit for withdrawal payment will be made on the
next business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment Account
are reinvested automatically in shares of the Funds. A shareholder's systematic
withdrawal plan may be terminated at any time, without a charge or penalty, by
the shareholder, a Fund, the 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
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and tax liabilities. A Fund will not knowingly accept purchase orders for shares
of the Fund from investors who maintain a systematic withdrawal plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Pricing of Shares --Class
B and C Shares --Deferred Sales Charge Options" in the Prospectus. Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class A shares, a shareholder must make a
new election to join the systematic withdrawal program with respect to the Class
A shares. If an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her financial
consultant.
Retirement Plans
The minimum initial purchase to establish a retirement plan is $100.
Capital gains and income received in retirement plans are exempt from Federal
taxation until distributed from the plans. Investors considering participations
in any such plan should review specific tax laws relating thereto and should
consult their attorneys or tax advisors with respect to the establishment and
maintenance of any such plan.
Exchange Privilege
U.S. shareholders of each class of shares of a Fund have an exchange
privilege with other Mercury mutual funds and Summit. The exchange privilege
does not apply to any other funds. Under the Funds' pricing system, Class I
shareholders may exchange Class I shares of a Fund for Class I shares of a
second Mercury mutual fund. If the Class I shareholder wants to exchange Class I
shares for shares of the 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 result of the exchange. Class
A shares also may be exchanged for Class I shares of a second Mercury mutual
fund at any time as long as, at the time of the exchange, the shareholder is
eligible to acquire Class I shares of any Mercury mutual fund. Class A, Class B
and Class C shares are exchangeable with shares of the same class of other
Mercury mutual funds. For purposes of computing the CDSC that may be payable
upon a disposition of the shares acquired in the exchange, the holding period
for the previously owned shares of the Fund is "tacked" to the holding period of
the newly acquired shares of the other fund as more fully described below. Class
I, Class A, Class B and Class C shares also are exchangeable for shares of
Summit, a money market fund specifically designated for exchange by holders of
Class I, Class A,
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Class B or Class C shares. Class I and Class A shares will be exchanged for
Class A shares of Summit, and Class B and Class C shares will be exchanged for
Class B shares of Summit. Summit Class A and Class B shares do not include any
front-end sales charge or CDSC; however, Summit Class B shares pay a 12b-1
distribution fee of 0.75% and are subject to a CDSC payable as if the
shareholder still held shares of the Mercury fund used to acquire the Summit
Class B shares.
Exchanges of Class I or Class A shares outstanding ("outstanding Class I or
Class A shares") for Class I or Class A shares of another Mercury mutual fund,
or for Class A shares of Summit ("new Class I or Class A shares") are transacted
on the basis of relative net asset value per Class I or Class A share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class I or Class A shares and the
sales charge payable at the time of the exchange on the new Class I or Class A
shares. With respect to outstanding Class I or Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class I or
Class A shares in the initial purchase and any subsequent exchange. Class I or
Class A shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the Funds offering Class I or Class A shares. For purposes of
the exchange privilege, dividend reinvestment Class I and Class A shares shall
be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class I or Class A shares on which the dividend was paid.
Based on this formula, Class I and Class A shares of a Fund generally may be
exchanged into the Class I and Class A shares, respectively, of the other funds
with a reduced or without a sales charge.
In addition, each of the Funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively (or, in the case of
Summit, Class B shares) ("new Class B or Class C shares"), of another Mercury
mutual fund or of Summit on the basis of relative net asset value per Class B or
Class C share, without the payment of any CDSC that might otherwise be due on
redemption of the outstanding shares. Class B shareholders of a Fund exercising
the exchange privilege will continue to be subject to a Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the new Class B
shares acquired through use of the exchange privilege. In addition, Class B
shares of a Fund acquired through use of the exchange privilege will be subject
to such Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund from which the exchange has been
made. For purposes of computing the sales charge that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class B
or Class C shares. For example, an investor may exchange Class B shares of a
Fund for those of another Mercury fund ("new Mercury Fund") after having held
such Fund's Class B shares for two-and-a-half years. The 3% CDSC that generally
would apply to a redemption would not apply to the exchange. Four years later
the investor may decide to redeem the Class B shares of the new Mercury Fund and
receive cash. There will be no CDSC due on this redemption since by "tacking"
the two-and-a-half year holding period of the Fund's Class B shares to the four
year holding period for the new Mercury Fund Class B shares, the investor will
be deemed to have held the new Mercury Fund Class B shares for more than six
years.
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Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. To
exercise the exchange privilege, shareholders should contact their financial
consultant, who will advise the Fund of the exchange. Shareholders of 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. The Funds reserve the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the Commission. The Funds reserve
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.
Fee-Based Programs
Certain fee-based programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit the
purchase of Class I shares at net asset value. Under specified circumstances,
participants in certain Programs may deposit other classes of shares, which will
be exchanged for Class I shares. Initial or deferred sales charges otherwise due
in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in certain Programs may result in the redemption of shares held
therein or the automatic exchange thereof to another class at net asset value.
In addition, upon termination of participation in certain Programs, shares that
have been held for less than specified periods within such Program may be
subject to a fee based upon the current value of such shares. These Programs
also generally prohibit such shares from being transferred to another account,
to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may involve
the imposition of initial or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject to Program fees.
Additional information regarding certain specific Programs offered through
particular selected dealers (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in the Program's client agreement and from the shareholder's selected
dealer.
DIVIDENDS AND TAXES
Dividends
The Corporation intends to distribute all of the net investment income of
the Funds, if any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be distributed to
shareholders of the Funds annually. From time to time, a Fund may declare a
special dividend at or about the end of the calendar year in order to comply
with a Federal income tax requirement that certain percentages of its ordinary
income and capital gains be distributed during the calendar year. See
"Shareholder Services --Automatic Dividend Reinvestment Plan" for information
concerning the manner in which dividends and distributions may be reinvested
automatically
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in shares of the Funds. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash. The per share dividends and
distributions on Class B and Class C shares will be lower than the per share
dividends and distributions on Class I and Class A shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares; similarly, the per share
dividends and distributions on Class A shares will be lower than the per share
dividends and distributions on Class I shares as a result of the account
maintenance fees applicable with respect to the Class A shares. See
"Determination of Net Asset Value." Within 60 days after the end of a Fund's
taxable year, each shareholder will receive notification summarizing the
dividends and distributions he or she received that year. This notification will
also indicate whether those distributions should be treated as ordinary income
or long-term capital gains.
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, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class I, Class A, Class B and Class C
shareholders ("shareholders"). The Funds intend to distribute substantially all
of such income. To qualify for this treatment, a Fund must, among other things,
(a) derive at least 90% of its gross income (without offset for losses from the
sale or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of securities or foreign currencies and certain financial
futures, options and forward contracts (the "Income Test"); and (b) diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the value of its assets is represented by (A) cash, U.S. Government
securities and securities of other regulated investment companies and (B) other
securities limited in respect of any one issuer to an amount no greater than 5%
of the value of the assets of the Fund and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
Dividends paid by a Fund from its ordinary income or from an excess of net
realized short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income, whether or not reinvested. Distributions made
from an excess of net long-term capital gains over net-short term capital losses
(including gains or losses from certain transactions in warrants, futures and
options) ("capital gain dividends") are taxable to shareholders as long-term
capital gains, regardless of the length of time the shareholder has owned Fund
shares. The maximum long-term capital gains rate for individuals is 20%. The
maximum capital gains rate for corporate shareholders is currently the same as
the maximum corporate rate for ordinary income.
Not later than 60 days after the close of its taxable year, each Fund will
provide its shareholders with a written notice designating the amounts of any
capital gain or ordinary income
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dividends. A portion of the dividends paid by a Fund out of dividends paid by
certain corporations located in the U.S. may be eligible for the dividends
received deduction allowed to corporations under the Code. If a Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Dividends and interest received by the Funds may give rise to withholding
and other taxes imposed by non-U.S. countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. If more than
50% of the value of a Fund's assets at the close of a taxable year consists of
stock or securities in non-U.S. corporations, shareholders of the Fund may be
able to claim U.S. foreign tax credits with respect to foreign taxes paid by the
Fund, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by a Fund. During each taxable year that
a Fund is eligible, it will intend to file an election with the Internal Revenue
Service ("IRS") pursuant to which shareholders of the Fund will include their
proportionate share of such withholding taxes as gross income for U.S. income
tax purposes, treat such proportionate share as taxes paid by them, and deduct
such proportionate share in computing their taxable incomes or, alternatively,
subject to certain limitations, restrictions, and holding period requirements,
use them as foreign tax credits against their U.S. income taxes. No deductions
for foreign taxes, however, may be claimed by noncorporate shareholders who do
not itemize deductions. A shareholder that is a nonresident alien individual or
a foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class I, Class A, Class B and Class C shareholders.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, a Fund may elect capital gain or loss
treatment for such transactions. In general, however, Code Section 988 gains or
losses will increase or decrease the amount of 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.
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Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by the Funds to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class A shares. A shareholder's basis in
the Class A shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class A shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital gain, taxable at the same rates as ordinary income
if the shares were held for not more than 12 months and capital gain taxable at
the maximum rate of 20% if such shares were held for more than 12 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such loss will be treated as long-term capital
loss if such shares were held for more than 12 months. A loss recognized on the
sale or exchange of shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any long-term capital gains
distribution with respect to such shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring shares of a Fund, then any loss recognized on the exchange will be
reduced (or any gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge that would have been owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales charge will
be treated as an amount paid for the new shares.
Generally, any loss realized on a sale or exchange of shares of a Fund will
be disallowed if other shares of the Fund are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
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The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. Each Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
Tax Treatment of Options and Futures Transactions
Each Fund may purchase or sell options and futures and foreign currency
options and futures, and related options on such futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. In general, unless a special election is made,
gain or loss from transactions in Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss.
A Fund may recognize taxable income or gain prior to the receipt of cash
payments under various provisions of the Code, including those dealing with zero
coupon securities, deferred interest securities, market discount securities and
certain options, futures and forward contracts that are required to be marked to
market. In any such case, the Fund may be required to liquidate portfolio
securities that it might otherwise have elected to hold in order to enable it to
have sufficient cash to meet the distribution requirements, the satisfaction of
which are a condition of continuing qualification of the Fund as a regulated
investment company.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of each Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, a Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts. Similarly, Code
Section 1091, which deals with "wash sales," may cause 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. Code Section 1259, which
deals with "constructive sales" of appreciated financial positions (e.g.,
stock), may treat a Fund as having recognized income before the time that such
income is economically recognized by the Fund.
Other Tax Matters
Each Fund has applied for a private letter ruling from the IRS to the
effect that, because each Series is classified as a partnership for tax
purposes, each Fund will be entitled to look to the underlying assets of the
Series in which it has invested for purposes of satisfying various requirements
of the Code applicable to RICs. If the Funds are unable to obtain the requested
rulings, or the facts upon which the rulings are based subsequently change, 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 Fund's investments from the Series and to retain an
investment adviser to manage the Fund's 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 the Treasury regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the
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Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
Dividends and gains on the sale or exchange of shares in a Fund may also be
subject to state and local taxes.
Shareholders are urged to consult their own tax advisors regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment in
the Fund.
PERFORMANCE DATA
From time to time a Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return is based on a Fund's historical
performance and is not intended to indicate future performance. Average annual
total return is determined separately for Class I, Class A, Class B and Class C
shares 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, including the maximum sales charge in the case of Class I and Class A
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
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 (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
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.
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In order to reflect the reduced sales charges in the case of Class I or
Class A shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by a Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
On occasion, a Fund may compare its performance to, among other things, the
Standard & Poor's 500 Composite Stock Price Index, the Standard & Poor's
500/Barra Value Index, the Standard & Poor's 500/Barra Growth Index, the
Standard & Poor's Mid Cap 400 Index, the Russell 2000 Index, the Morgan Stanley
Capital International Europe, Asia and Far East Capitalization Weighted Index,
the Value Line Composite Index, the Dow Jones Industrial Average, the MSCI
Europe, the MSCI World Index, Salomon Smith Barney World Government Bond Index,
TSE 1st Section (TOPIX) or other published indices, or to data contained in
publications such as Lipper Analytical Services, Inc., Morningstar Publications,
Inc. ("Morningstar"), other competing universes, Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine and CDA
Investment Technology, Inc. When comparing its performance to a market index, a
Fund may refer to various statistical measures derived from the historical
performance of the Fund and the index such as standard deviation and beta. As
with other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period. From time
to time, a Fund may include its Morningstar risk-adjusted performance rating 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.
GENERAL INFORMATION
Description of Shares
The Corporation is a Maryland corporation incorporated on August 17, 1999.
It has an authorized capital of 2,000,000,000 shares of Common Stock, par value
$.0001 per share, of which the Corporation is authorized to issue 125,000,000
shares each of Class I, Class A, Class B and Class C shares for each of the four
Funds: Mercury Life Strategy Growth and Income Fund, Mercury Life Strategy
Growth Fund, Mercury Life Strategy Balanced Fund and Mercury Life Strategy
Aggressive Growth Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights with respect to
matters relating to such distribution expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class A Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the
54
<PAGE>
Directors of the Corporation, in which event the holders of the remaining shares
would be unable to elect any person as a Director.
There normally will be no meeting of shareholders for the purpose of
electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by the shareholders, at which time
the Directors then in office will call a shareholders' meeting for the election
of Directors. Shareholders may, in accordance with the terms of the By-Laws,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Directors. Also, the Corporation will be required to call a special
meeting of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in account maintenance fees or of a change in fundamental
policies, objectives or restrictions. Except as set forth above, the Directors
shall continue to hold office and appoint successor Directors. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except for any expenses
which may be attributable to only one class. Shares issued are fully-paid and
non-assessable by the Fund.
[-----] provided the initial capital for each Fund by purchasing 2500
shares of each Fund, for an aggregate of $100,000. Such shares were acquired
for investment and can only be disposed of by redemption. To the extent the
organizational expenses of the Corporation are paid by the Corporation they will
be expensed and immediately charged to net asset value. See "Determination of
Net Asset Value."
Prior to the offering of each Fund's shares, [-----] will be each Fund's
sole shareholder and deemed a controlling person of each Fund.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class I, Class
A, Class B and Class C shares of each of the Funds based on the projected value
of each 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:
55
<PAGE>
<TABLE>
<CAPTION>
Mercury Life Strategy Balanced Fund
Class I Class A Class B Class C
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Net Assets................... [-----------] [-----------] [-----------] [-----------]
Number of Shares Outstanding [-----------] [-----------] [-----------] [-----------]
Net Asset Value Per Share $ 10.00 $ 10.00 $ 10.00 $ 10.00
(net assets divided by number
of shares outstanding)......
Sales Charge (for Class I and
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/........ 0.55 0.55 ** **
Offering Price............... $ 10.55 $ 10.55 $ 10.00 $ 10.00
</TABLE>
- ------------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Account Choices -- Class B
and Class C Shares -- Deferred Sales Charge Options" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
<TABLE>
<CAPTION>
Mercury Life Strategy Growth and Income Fund
Class I Class A Class B Class C
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares Outstanding.. [-----------] [-----------] [-----------] [-----------]
Net Asset Value Per Share $ 10.00 $ 10.00 $ 10.00 $ 10.00
(net assets divided by number
of shares outstanding).......
Sales Charge (for Class I and
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/......... 0.55 0.55 ** **
Offering Price................ $ 10.55 $ 10.55 $ 10.00 $ 10.00
</TABLE>
- ----------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
56
<PAGE>
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Account Choices -- Class B
and Class C Shares -- Deferred Sales Charge Options" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
<TABLE>
<CAPTION>
Mercury Life Strategy Growth Fund
Class I Class A Class B Class C
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net Assets................... [-----------] [-----------] [-----------] [-----------]
Number of Shares Outstanding [-----------] [-----------] [-----------] [-----------]
Net Asset Value Per Share $ 10.00 $ 10.00 $ 10.00 $ 10.00
(net assets divided by number
of shares outstanding)......
Sales Charge (for Class I and
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/........ 0.55 0.55 ** **
Offering Price $ 10.55 $ 10.55 $ 10.00 $ 10.00
</TABLE>
- ------------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Account Choices -- Class B
and Class C Shares -- Deferred Sales Charge Options" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
<TABLE>
<CAPTION>
Mercury Life Strategy Aggressive Growth Fund
Class I Class A Class B Class C
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares Outstanding.. [-----------] [-----------] [-----------] [-----------]
Net Asset Value Per Share $ 10.00 $ 10.00 $ 10.00 $ 10.00
(net assets divided by number
of shares outstanding).......
Sales Charge (for Class I and
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/......... 0.55 0.55 ** **
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Mercury Life Strategy Growth Fund
Class I Class A Class B Class C
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Offering Price $ 10.55 $ 10.55 $ 10.00 $ 10.00
</TABLE>
- ------------------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Account Choices -- Class B
and Class C Shares -- Deferred Sales Charge Options" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
Independent Auditors
[ ] has been selected as the independent auditors of the
Corporation. The independent auditors are responsible for auditing the annual
financial statements of the Funds.
Custodian
[ ] acts as the custodian of each Fund's assets. Under its
contract with the Corporation, the custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the United States and with certain foreign
banks and securities depositories. The custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly owned subsidiary of ML & Co., acts as each
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement (the "Transfer Agency Agreement").
The Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Corporation.
Reports to Shareholders
The Corporation sends to its shareholders at least semi-annually 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.
58
<PAGE>
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 under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
59
<PAGE>
APPENDIX A
Ratings of Fixed Income Securities
Description of Moody's Investors Services, Inc.'s Corporate Debt Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
A-1
<PAGE>
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 valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
. Leading market positions in well-established industries
. High rates of return on funds employed
. Conservative capitalization structures with moderate reliance on debt
and ample asset protection
. Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation
. Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternative liquidity is maintained.
A-2
<PAGE>
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.
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
A-3
<PAGE>
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
A-4
<PAGE>
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.
Debt rated BB, B, CCC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could
lead to inadequate capacity to meet timely interest and principal payment.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest or repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC- debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an interest
or principal payment is missed. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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
A-5
<PAGE>
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 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-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
A-6
<PAGE>
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.
A-7
<PAGE>
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.
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,B 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"
CCC indicates the lowest degree of speculation and "CCC" the highest degree of
speculation. While such issues will likely have some quality and protection
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue in default on debt
instruments.
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.
A-8
<PAGE>
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated
A-9
<PAGE>
"AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to
be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
Fitch Alert Ratings are placed on Fitch Alert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive" indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. Fitch Alert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
Description of Fitch Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of
A-10
<PAGE>
the issuer and any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, Bonds are in default on interest and/or principal payments. Such bonds are
extremely
DD,D speculative and should be valued on D the basis of their ultimate recovery
value in liquidation or reorganization of the obligor. "DDD" represents the
highest potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch Investment Grade Short-term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
A-11
<PAGE>
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
A-12
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
Exhibit
Number
- --------
1 - Articles of Incorporation of Registrant.
2 - By-Laws of Registrant.
3 - Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
4 - Management Agreement between Registrant and Mercury Asset Management
US, a division of Fund Asset Management, L.P.*
5(a) - Class I Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(b) - Class A Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(c) - Class B Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(d) - Class C Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
6 - None
7 - Custody Agreement between Registrant and _____________*.
8(a) - Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.*
8(b) - 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.*
8(c) - License Agreement relating to Use of Name among Mercury Asset
Management International Ltd., Mercury Asset Management Group Ltd.
and Fund Asset Management, L.P.*
8(d) - License Agreement relating to Use of Name among Mercury Asset
Management International Ltd., Mercury Asset Management Group Ltd.
and Registrant.*
9 - Opinion and consent of Swidler Berlin Shereff Friedman, LLP, counsel
for Registrant.*
10 - Consent of ______________, independent auditors for the Registrant.*
11 - None.
12 - Certificate of [______]*
13(a) - Class A Distribution Plan and Class A Plan Sub-Agreement.*
13(b) - Class B Distribution Plan and Class B Plan Sub-Agreement.*
13(c) - Class C Distribution Plan and Class C Plan Sub-Agreement.*
14 - Not Applicable.
15(a) - Rule 18f-3 Plan.*
15(b) - Powers of Attorney.*
- -----------------------------
* To be filed by amendment.
C-1
<PAGE>
Item 24. Persons Controlled By or Under Common Control with Registrant.
Prior to the effective date of this Registration Statement, the Registrant
will sell shares of each Fund of the Registrant to [________].
Item 25. Indemnification.
Reference is made to Article V of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B and Class
C Distribution Agreements.
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, 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.
C-2
<PAGE>
In Section 9 of the Class A, Class B and Class C Distribution Agreements
relating to the securities being offered hereby, the Registrant agrees to
indemnify the Distributor and each person, if any, who controls the Distributor
within the meaning of the Securities Act of 1933, as amended (the "Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser.
The address of Mercury Asset Management US (the "Investment Adviser"), a
division of Fund Asset Management, L.P. ("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, [Index] Master Series Trust, Mercury Asset Management Funds, Inc.,
Mercury Index Funds, Inc., Mercury Quantitative Series Fund, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III,
Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured Fund
II, Inc., MuniHoldings California Insured Fund III, Inc., MuniHoldings
California Insured Fund IV, Inc., MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund
II, MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings
Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
C-3
<PAGE>
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
Set forth below is a list of each executive officer and partner of FAM
indicating each business, profession, vocation or employment of a substantial
nature in which each such person or entity has been engaged since [December 31,
1996] for his or her own account or in the capacity of director, officer,
employer, partner or trustee.
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- -------------------------------------------------------------------------------
Merrill Lynch
& Co., Inc...........Limited Partner Financial Services Holding Company;
Limited Partner of Merrill Lynch
Asset Management, L.P. ("MLAM")
Princeton Services....General Partner General Partner of MLAM
Jeffrey M. Peek.......President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
Vice President and Director of the
Global Securities and Economics
division of Merrill Lynch from 1995
to 1997
Terry K. Glenn........Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of Princeton
Funds Distributor, Inc.; Director
of FDS; President of Princeton
Administrators, L.P.
Donald C. Burke.......Senior Vice President Senior Vice President and of
and Treasurer Treasurer MLAM since 1999; Senior
Vice President and Treasurer of
Princeton Services; Vice President
and Treasurer of Princeton Funds
Distributor, Inc.; First Vice
President of MLAM from 1997 to
1999; Vice President of MLAM from
1990 to 1997; Director of Taxation
of MLAM since 1990.
Michael G. Clark......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Mark A. Desario.......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
C-4
<PAGE>
Linda L. Federici.........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Vincent R. Giordano.......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Michael J. Hennewinkel....Senior Vice Senior Vice President,
President, Secretary and General Counsel
Secretary and of MLAM; Senior Vice
General President of Princeton
Counsel Services
Philip L. Kirstein........Senior Vice President Senior Vice President of MLAM;
Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services
Ronald M. Kloss...........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Debra W. Landsman-Yaros...Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Vice
President of Princeton Funds
Distributor, Inc.
Stephen M. M. Miller......Senior Vice President Executive Vice President of
Princeton Administrators;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr.....Senior Vice President Senior Vice President of MLAM;
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
Mr. Glenn is President and Mr. Burke is Treasurer of all or substantially
all of the investment companies described in the following paragraph. Mr. Glenn
is director of such companies. Messrs. Giordano, Kirstein, and Monagle are
directors or 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 Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
C-5
<PAGE>
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Item 27. Principal Underwriters.
(a) Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc.
("MFD") acts as the principal underwriter for the Registrant and for each of the
following open-end investment companies:
Mercury Global Balanced Fund of Mercury Asset Management Funds, Inc.;
Mercury U.S. Large Cap Fund of Mercury Asset Management Funds, Inc.;
Mercury U.S. Small Cap Growth 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.; 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 Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
(1) (2) (3)
Positions and Offices Positions and Offices
Name with the Distributor with Registrant
- ------------------------- ---------------------- ----------------------------
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
C-6
<PAGE>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with the Distributor with Registrant
- ------------------------- ---------------------- ----------------------------
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
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 Life Strategy Series Fund, Inc., 800 Scudders
Mill Road, Plainsboro, New Jersey 08536;
(2) the transfer agent, Financial Data Services, Inc., P.O. Box 44062,
Jacksonville, Florida 32232-4062;
(3) the custodian,____________; and
(4) the investment adviser, 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 Funds" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Fund--Management and Advisory Arrangements" in the Statement
of Additional Information constituting Part B of the Registration Statement, the
Registrant is not party to any Management-related service contract.
Item 30. Undertakings.
None.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 12/th/ day of October, 1999.
Mercury Life Strategy Series Fund, Inc.
(Registrant)
By: /s/ Ira P. Shapiro
--------------------------------
Ira P. Shapiro, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------ ------------------------------ ---------------
/s/ Ira P. Shapiro President and Director October 12, 1999
- ------------------------ (Principal Executive Officer)
Ira P. Shapiro
/s/ Allan J. Oster Treasurer and Secretary October 12, 1999
- ------------------------ (Principal Financial and
Allan J. Oster Accounting Officer)
/s/ Philip L. Kirstein Director October 12, 1999
- ------------------------
Philip L. Kirstein
/s/ Terry K. Glenn Director
- ------------------------ October 12, 1999
Terry K. Glenn
C-8
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ---------- ---------------------------------------
1 Articles of Incorporation of Registrant
2 By-Laws of Registrant
<PAGE>
EXHIBIT 1
ARTICLES OF INCORPORATION
MERCURY LIFE STRATEGY SERIES FUND, INC.
THE UNDERSIGNED, Maria Gattuso, whose post office address is Swidler Berlin
Shereff Friedman, LLP, 919 Third Avenue, New York, New York 10022, being at
least eighteen years of age, does hereby act as an incorporator, under and by
virtue of the General Corporation Laws of the State of Maryland (the "General
Laws") authorizing the formation of corporations and with the intention of
forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is Mercury Life Strategy Series Fund, Inc. (the
"Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed, the powers,
rights and privileges that the Corporation shall be authorized to exercise and
enjoy, and the business or objects to be transacted, carried on and promoted by
it are as follows:
(1) To conduct and carry on business of an investment company of the
management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws and by these
Articles of Incorporation, as its Board of Directors may determine; provided,
however, that the value of the consideration per share to be received by the
Corporation upon the sale or other disposition of any shares of its capital
stock shall not be less than the net asset value per share of such capital stock
outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the designation of, convert,
rename, redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its issued or unissued capital stock of any class
or series, as its Board of Directors may determine, in any manner and to the
extent now or hereafter permitted by the General Laws and by these Articles of
Incorporation.
<PAGE>
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
(6) The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws now or hereafter in force, and the enumeration of the foregoing
purposes, powers, rights and privileges, shall not be deemed to exclude any
powers, rights or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in the
State of Maryland is c/o CSC - Lawyers Incorporating Service Company, 11 E.
Chase Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is CSC - Lawyers Incorporating Service Company, a
corporation of this State, and the post office address of the resident agent is
11 E. Chase Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Billion (2,000,000,000) shares, of the par
value of One Hundredth of One Cent ($.0001) per share, and of the aggregate par
value of Two Hundred Thousand Dollars ($200,000). The capital stock initially
consists of four series, known as Mercury Life Strategy Balanced Fund, Mercury
Life Strategy Equity Fund, Mercury Life Strategy Growth Fund, and Mercury Life
Strategy Aggressive Growth Fund (collectively, the "Series", and each, a
"Series"). Each Series shall consist, until further changed, of Five Hundred
Million (500,000,000) shares. The shares of each Series shall consist, until
further changed, of four classes of shares designated Class I shares, Class A
shares, Class B shares and Class C shares (the "Classes"). Each Class of each
Series shall consist, until further changed, of One Hundred Twenty Five Million
(125,000,000) shares.
(2) Unless otherwise expressly provided in the charter of the Corporation,
the Class I, Class A, Class B and Class C shares of each Series shall represent
an equal proportionate interest in the assets belonging to that Series (subject
to the liabilities of that Series) and each share of a particular Series shall
have identical voting, dividend, liquidation and other rights; provided,
--------
however, that notwithstanding anything in the charter of the Corporation to the
contrary:
(i) The Class I, Class A, Class B and Class C shares may be issued and
sold subject to such different sales loads or charges, whether
initial, deferred or contingent, or any combination thereof, as the
Board of Directors may from time to time establish in
2
<PAGE>
accordance with the Investment Company Act of 1940, as amended and in
effect from time to time, or any rules, regulations or orders issued
thereunder (collectively, the "Investment Company Act"), and other
applicable law.
(ii) Liabilities of a Series which are determined by or under the
supervision of the Board of Directors to be attributable to a
particular Class of that Series may be charged to that Class and
appropriately reflected in the net asset value of, or dividends
payable on, the shares of that Class of the Series.
(iii) The Class I, Class A, Class B and Class C shares of a
particular Series may have such different exchange and conversion
rights as the Board of Directors shall provide in compliance with the
Investment Company Act.
(3) The Board of Directors may classify and reclassify any unissued shares
of capital stock, of any class or series, into one or more additional or other
classes or series as may be established from time to time by setting or changing
in any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and pursuant to
such classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Dividends on a class or series may be declared or paid
only out of the net assets of that class or series. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular class or series of capital stock may be charged
to and borne solely by such class or series and the bearing of expenses solely
by a class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the net
asset value attributable to, and the dividend, redemption and liquidation rights
of, the shares of each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of the Corporation,
including those matters set forth in Article II, Sections (2) and (4) hereof and
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act or by the General Laws, such requirement
as to a separate vote by that class
3
<PAGE>
or series shall apply in lieu of a general vote of all classes and series as
described above, (b) in the event that the separate vote requirements referred
to in (a) above apply with respect to one or more classes or series, then,
subject to paragraph (c) below, the shares of all other classes and series not
entitled to a separate class vote shall vote as a single class, and (c) as to
any matter which does not affect the interest of a particular class or series,
such class or series shall not be entitled to any vote and only the holders of
shares of the affected classes and series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act), to take such action upon the concurrence of a majority
of the votes entitled to be cast by holders of capital stock of the Corporation
(or a majority of the votes entitled to be cast by holders of a class or series
entitled to vote thereon as a separate class or series).
(7) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, subject to compliance with the requirements of the Investment Company
Act, the Board of Directors shall have the authority to provide that holders of
shares of any class or series shall have the right to convert or exchange said
shares into shares of one or more other classes or series in accordance with
such requirements and procedures as may be established by the Board of
Directors.
(8) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation applicable to that
class or series.
(9) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends; provided, however, that the Corporation shall not be
required to issue share certificates for such fractional shares.
(10) The presence in person or by proxy of the holders of shares entitled
to cast one-third of the votes entitled to be cast shall constitute a quorum at
any meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled to cast one-
third of the votes entitled to be cast by each class entitled to vote as a
separate class shall constitute a quorum.
4
<PAGE>
(11) All persons who shall acquire stock in the Corporation, of any class
or series, shall acquire the same subject to the provisions of the charter and
By-Laws of the Corporation. Any reference to "shares," "stock" or "shares of
stock" in these Articles of Incorporation shall be deemed to refer, unless the
context otherwise requires, to the shares of each separate class and/or series.
As used in the charter of the Corporation, the terms "charter" and "Articles of
Incorporation" shall mean and include the Articles of Incorporation of the
Corporation as amended, supplemented and restated from time to time by Articles
of Amendment, Articles Supplementary, Articles of Restatement or otherwise.
(12) The Board of Directors may classify and reclassify any issued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely affect
the rights of holders of such issued shares. The Board's authority pursuant to
this paragraph shall include, but not be limited to, the power to vary among all
the holders of a particular class or series (a) the length of time shares must
be held prior to reclassification to shares of another class or series (the
"Holding Period(s)"), (b) the manner in which the time for such Holding
Period(s) is determined and (c) the class or series into which the particular
class or series is being reclassified; provided, however, that, subject to the
first sentence of this section, with respect to holders of the Corporation's
shares issued on or after the date of the Corporation's first effective
prospectus which sets forth Holding Period(s) (the "First Holding Period
Prospectus"), the Holding Period(s), the manner in which the time for such
Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at the
time such shares, which are the subject of the reclassification, were issued.
(13)(a) Each series of capital stock of the Corporation shall relate to a
separate portfolio of investments. All shares of stock in each series shall be
identical except that there may be variations between the different series as to
the purchase price, determination of net asset value, designations, preferences,
conversion or other rights, voting powers, restrictions, special and relative
rights and limitations as to dividends and on liquidation, qualifications or
terms or conditions of redemption of such shares of stock.
(b) Each series of stock of the Corporation shall have the following
powers, preferences and voting or other special rights, and the qualifications,
restrictions and limitations thereof shall be as follows:
(i) All consideration received by the Corporation for the issue or
sale of stock of each series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds received thereon, including any proceeds derived from the sale,
5
<PAGE>
exchange or liquidation thereof, and any assets, funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the series of stock with respect to which such assets,
payments or funds were received by the Corporation for all purposes, subject
only to the rights of creditors, and shall be so handled in the books of account
of the Corporation. Such assets, funds and payments, including any proceeds
derived from the sale, exchange or liquidation thereof, and any assets, funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, are herein referred to as "assets belonging to" such series. In
the event that there are any income, earnings, profits, and proceeds thereof,
assets, funds or payments that are not readily identifiable as belonging to any
particular series, the Board of Directors of the Corporation shall allocate them
among any one or more of the series established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deem fair and equitable. Each allocation by the Board of Directors
shall be conclusive and binding on the stockholders of the Corporation of all
series for all purposes.
(ii) The assets belonging to each series of stock shall be charged
with the liabilities in respect of such series, and also shall be charged with
its share of the general liabilities of the Corporation, in proportion to the
asset value of the respective series determined in accordance with the Articles
of Incorporation of the Corporation. The determination of the Board of
Directors shall be conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the same to a given series, and
as to whether the same or general assets of the Corporation are allocable to one
or more series.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three. The names of the directors who shall act until their
successors are duly elected and qualify are:
Terry K. Glenn
Philip K. Kirstein
Ira Shapiro
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such limitations as may be
set forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws.
6
<PAGE>
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation, of
any class or series, acquired by it after the issue thereof, or otherwise) other
than such right, if any, as the Board of Directors, in its discretion, may
determine.
(4) Each acting and former director and officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by the General
Laws, subject to the requirements of the Investment Company Act. No amendment
of these Articles of Incorporation or repeal of any provision hereof shall limit
or eliminate the benefits provided to directors and officers under this
provision in connection with any act or omission that occurred prior to such
amendment or repeal. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled.
(5) To the fullest extent permitted by the General Laws, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) The Board of Directors of the Corporation from time to time may change
the Corporation's name, or change the name or other designation of any class or
series of its stock, without the vote or consent of the stockholders of the
Corporation, in any manner and to the extent now or hereafter permitted by the
General Laws and by these Articles of Incorporation.
(8) Notwithstanding any other provision of these Articles of Incorporation
or the By-Laws of the Corporation, or the General Laws, the Board of Directors
of the Corporation may, upon the affirmative vote of the majority of the entire
Board of Directors and without the vote or consent of the stockholders, dissolve
the Corporation in the manner otherwise provided by the laws of the State of
Maryland.
ARTICLE VI
REDEMPTION
----------
7
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(1) Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of such holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the redemption
price of such shares as in effect from time to time as may be determined by the
Board of Directors of the Corporation in accordance with the provisions hereof,
subject to the right of the Board of Directors of the Corporation to suspend the
right of redemption of shares of capital stock of the Corporation or postpone
the date of payment of such redemption price in accordance with provisions of
applicable law.
(2) All shares of stock of the Corporation shall be redeemable at the
option of the Corporation. The Board of Directors may by resolution from time
to time authorize the Corporation to require the redemption of all or any part
of the outstanding shares of any class or series upon such terms and conditions
as the Board of Directors, in its discretion, shall deem advisable, and upon the
sending of written notice thereof to each holder whose shares are to be
redeemed.
(3) The redemption price of shares of capital stock of the Corporation
shall be the net asset value thereof as determined by the Board of Directors of
the Corporation from time to time in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment of
the redemption price shall be made in cash by the Corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the Corporation.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced
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<PAGE>
by the purchase of shares of capital stock or acceptance of share certificates,
that any and all such determinations shall be binding as aforesaid. No provision
of these Articles of Incorporation shall be effective to (a) require a waiver of
compliance with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act or of any valid rule, regulation or order of the
Securities and Exchange Commission thereunder or (b) protect or purport to
protect any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
ARTICLE VII
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of Mercury Life Strategy
Series Fund, Inc. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be her act and further acknowledges that, to the best
of her knowledge, the matters and facts set forth therein are true in all
material respects under penalties for perjury.
Dated this 13th day of August, 1999
/s/ Maria Gattuso
---------------------------
Maria Gattuso
I hereby consent to my designation in this document as resident agent for
Mercury Life Strategy Series Fund, Inc.
CSC-Lawyers Incorporation
Service Company
/s/ Bonnie H. Yerry
-------------------------
Resident Agent
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EXHIBIT 2
BY-LAWS
OF
MERCURY LIFE STRATEGY SERIES FUND, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of Mercury Life
----------------
Strategy Series Fund, Inc. (the "Corporation") shall be in the City of
Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. So long as the Corporation is registered as an
--------------
investment company under the Investment Company Act of 1940, as amended (such
term to include the rules and regulations promulgated under the Investment
Company Act of 1940, as amended (collectively, the "Investment Company Act"),
unless otherwise specified or the context otherwise requires), annual meetings
of the stockholders shall not be held, except where required to be held by the
Investment Company Act or by the Maryland General Corporation Law or when called
by the Board of Directors or by an officer or officers of the Corporation
authorized to take such action by the Board of Directors. If in any calendar
year the Corporation is required or elects to hold an annual meeting, the
meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as
the Board of Directors or the officer or officers calling the meeting may
prescribe. At each such annual meeting, the stockholders shall elect a Board of
Directors and transact such other business as may properly come before the
meeting. The provisions of these By-Laws which contemplate the holding of an
annual meeting of stockholders shall be suspended during any calendar year in
which no annual meeting of stockholders is held.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President of the Corporation, or on the
written request of the holders of at least 10% of the outstanding
<PAGE>
shares of capital stock of the Corporation entitled to vote at such meeting if
they comply with the applicable requirements of the Maryland General Corporation
Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be held
-----------------
at such place within the United States as the Board of Directors may from time
to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each stockholders' meeting and, if the meeting
is a special meeting, the purpose or purposes of the special meeting, shall be
given personally or by mail, not less than ten nor more than ninety days before
the date of such meeting, to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 5. Quorum. At all meetings of the stockholders, the holders of
------
shares of stock of the Corporation entitled to cast one-third of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more series or classes of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate series or class shall constitute a quorum. In
the absence of a quorum no business may be transacted, except that the holders
of a majority of the shares of stock present in person or by proxy and entitled
to vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
The absence from any meeting, in person or by proxy, of holders of the number of
shares of stock of the Corporation in excess of a majority thereof which may be
required by the Maryland General Corporation Law, the Investment Company Act, or
other applicable statute, the Articles of Incorporation, or these By-Laws, for
action upon any given matter shall not prevent action at such meeting upon any
other matter or matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the number of shares
of stock of the Corporation required for action in respect of such other matter
or matters.
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Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President of the Corporation, or in the absence
or inability to act of the Chairman of the Board and the President of the
Corporation, a Vice President of the Corporation, shall act as chairman of the
meeting. The Secretary of the Corporation, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall act as secretary
of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have been
so fixed, then at the later of (i) the close of business on the day on which
notice of the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
any corporate action to be taken by vote of the stockholders (other than the
election of directors, which shall be by plurality vote) may be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than ninety nor
less than ten days before the date of the meeting of the stockholders. All
persons who were holders of record of shares at such time, and not others, shall
be entitled to vote at such meeting and any adjournment thereof.
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Section 10. Inspectors. The Board may, in advance of any meeting of
----------
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any Stockholder entitled to vote thereto shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, may be
required to take and sign an oath to execute faithfully the duties of inspector
at such meeting with strict impartiality and according to the best of his
ability. The inspectors may be empowered to determine the number of shares
outstanding and the voting powers of each, the number of shares represented at
the meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request
of the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Articles
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
-------------------
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors; provided, however, that the number of
directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders.
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Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held for that purpose. The term
of office of each director shall be from the time of his election and
qualification until the election of directors next succeeding his election and
until his successor shall have been elected and shall have qualified, or until
his death, or until he shall have resigned or until December 31 of the year in
which he shall have reached seventy-two years of age, or until he shall have
been removed as hereinafter provided in these By-Laws, or as otherwise provided
by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed, with or without cause, by the stockholders by a vote of a majority of
the votes entitled to be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any other
cause, may be filled by a vote of the majority of the Board of Directors then in
office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a special meeting
of the stockholders shall be held as promptly as possible and in any event
within sixty days, for the purpose of filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be called
----------------
by two or more directors of the Corporation or by the Chairman of the Board or
the President of the Corporation.
Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications
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equipment if all persons participating in the meeting can hear each other at the
same time. Subject to the provisions of the Investment Company Act,
participation in a meeting by these means constitutes presence in person at the
meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, addressed to him at his residence or usual place of business, at least
three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of the
-----------------
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act, or other applicable
statute, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board. In the absence of a quorum
at any meeting of the Board, a majority of the directors present thereat may
adjourn such meeting to another time and place until a quorum shall be present
thereat. Notice of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the adjournment and,
unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board may, by resolution adopted by a
------------
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President of the Corporation
or, in his absence or inability to act, another director chosen by a majority of
the directors present, shall act as chairman of the meeting and preside thereat.
The Secretary of the Corporation (or, in his absence or inability to act, any
person appointed by the Chairman) shall act as secretary of the meeting and keep
the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to
-------------------------------------------------
the provisions of the Investment Company Act, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board
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or committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or
committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation,
as filed from time to time with the Securities and Exchange Commission and as
required by the Investment Company Act. The Board however, may delegate the
duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof, of
the Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by resolution adopted by a
-------------------
majority of the entire board, designate an Executive Committee consisting of two
or more of the directors of the corporation, which committee shall have and may
exercise all the powers and authority of the Board with respect to all matters
other than:
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act, or the taking of any other action required to be taken by the Board of
Directors by the Investment Company Act;
(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
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(f) the amendment or repeal of any resolution of the Board unless by its
terms any such resolution may be amended or repealed by such Executive
Committee;
(g) the declaration of dividends and the issuance of capital stock of the
Corporation; and
(h) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may from
-----------------------------
time to time, by resolution adopted by a majority of the whole Board, designate
one or more other committees of the Board, each such committee to consist of
two or more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of
-------
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation, except as may be prescribed by the Board.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number, Qualification, Election and Tenure. The officers of
------------------------------------------
the Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents and may also appoint such
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other officers, agents and employees as it may deem necessary or proper. Any two
or more offices may be held by the same person, except the offices of President
and Vice President, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity. Such officers shall be elected by the
Board of Directors each year at a meeting of the Board of Directors, each to
hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices for
such terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or Secretary of the Corporation. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President of the Corporation shall be the chief
---------
executive officer of the Corporation. In the absence of the Chairman of the
Board (or if there be none), he shall preside at all meetings of the
stockholders and of the Board Directors. He shall have, subject to the control
of the
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Board of Directors, general charge of the business and affairs of the
Corporation. He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he may delegate
these powers.
Section 8. Vice President. Each Vice President of the Corporation shall
--------------
have such powers and perform such duties as the Board of Directors or the
President of the Corporation may from time to time prescribe.
Section 9. Treasurer. The Treasurer of the Corporation shall
---------
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed in
the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust company
or member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
(c) cause all moneys and other valuables of the Corporation to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation (unless the
seal of the Corporation on such certificates shall be
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a facsimile, as hereinafter provided) and affix and attest the seal to all other
documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under the Maryland General Corporation
Law, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Corporation to indemnify such person
must be based upon the reasonable determination by special legal counsel in a
written opinion or the vote of a majority of a quorum of the directors who are
neither "interested persons," as defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the proceeding ("non-party independent directors"),
after review of the facts, that such officer or director is not guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the Maryland General Corporation Law without a preliminary
determination as to his or her ultimate entitlement to indemnification (except
as set forth below); provided, however, that the person seeking indemnification
shall provide to the Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met and a written undertaking to repay any such 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
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acceptable to the Corporation for his undertaking; (b) the Corporation is
insured against losses arising by reason of the advance; (c) a majority of a
quorum of non-party independent directors, or independent legal counsel in a
written opinion, shall determine, based on a review of facts readily available
to the Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law, from liability arising from his activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. The Corporation shall not issue stock
------------------
certificates.
Section 2. Books of Account and Record of Stockholders. There shall be
-------------------------------------------
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland General Corporation Law, a record containing the number
of shares of stock issued during a specified period not to exceed twelve months
and the consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
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Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the Maryland General Corporation Law.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
-------------------------------------------------------
Board may fix, in advance, a date not more than ninety days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-Laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its principal
office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
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ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall be as determined by the Board of Directors from time to time.
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors may from time to
time determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safe keeping of such banks or other companies as the Board of
Directors may from time to time determine. Every arrangement entered into with
any bank or other company for the safe keeping of the securities and investments
of the Corporation shall contain provisions complying with the Investment
Company Act.
ARTICLE XI
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer of the
Corporation or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of
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the Corporation which are filed with the Securities and Exchange Commission
shall be selected annually by the Board of Directors and, if required by the
provisions of the Investment Company Act, ratified by the stockholders.
ARTICLE XIII
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be available at
the annual meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days after the end
of the fiscal year), be placed on file at the Corporation's principal office.
Each such report shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such
report shall also show the Corporation's income and expenses for the period from
the end of the Corporation's preceding fiscal year to the close of the annual or
quarterly period covered by the report and any other information required by the
Investment Company Act, and shall set forth such other matters as the Board or
such firm of independent public accountants shall determine.
ARTICLE XIV
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
Board of Directors. The stockholders shall have no power to make, amend, alter
or repeal By-Laws.
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