SEMI-ANNUAL REPORT
JUNE 30, 2000
Mercury
QA Strategy Series,
Inc.
MERCURY QA STRATEGY
GROWTH AND INCOME FUND
MERCURY QA STRATEGY
LONG-TERM GROWTH FUND
MERCURY QA STRATEGY
ALL-EQUITY FUND
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
M. Colyer Crum, Director
Laurie Simon Hodrick, Director
Jack B. Sunderland, Director
Stephen B. Swensrud, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Arthur Zeikel, Director
Robert C. Doll, Jr., Senior Vice President
Philip Green, Senior Vice President
Sidney Hoots, Senior Vice President
Dean D'Onofrio, Senior Vice President
Frank Salerno, Senior Vice President
Donald C. Burke, Vice President and
Treasurer
Allan J. Oster, Secretary
Custodian
The Chase Manhattan Bank
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(888) 763-2260
June 30, 2000 2 Mercury QA Strategy Series, Inc.
DEAR SHAREHOLDER
We are pleased to provide you with the first semi-annual report for
Mercury QA Strategy Series, Inc. Mercury QA Strategy Series consists
of three asset-allocation portfolios. These Funds are invested in a
mix of underlying style-pure and capitalization-pure equity mutual
funds and a fixed-income fund. Mercury QA Strategy Series includes
the following three portfolios: Mercury QA Strategy Growth and
Income Fund, Mercury QA Strategy Long-Term Growth Fund and Mercury
QA Strategy All-Equity Fund. (Complete performance information for
each of the Funds can be found on pages 5 - 8 of this report to
shareholders.)
Market Environment
The US economy appears to be slowing down. As a result, significant
increases in inflation and interest rates may not happen, which is
usually good news for financial assets. On the other hand, slower
economic growth probably means slower profit growth, a prospect that
may weigh on the markets over the summer.
Despite the decline of technology share prices during April and May,
large cap growth stocks have a positive year-to-date return through
June. Furthermore, continuing a trend that we have seen for much of
the 1990s, growth stocks outpaced value stocks for the first half of
the year. Large cap growth stocks returned +2.6% over the first half
of the year, as measured by the unmanaged S&P 500/Barra Growth
Index, while large cap value stocks fell -4.1%, as measured by the
S&P 500/Barra Value Index. Reversing a pattern we also saw for the
better part of the past decade, small cap stocks have outperformed
large cap stocks thus far in 2000.
Investment Outlook
We continue to tilt Mercury QA Strategy Series toward growth stocks,
small cap stocks and international stocks. We believe that many
growth stocks, including industries in the technology sector, look
attractive given their price declines in the second quarter and
their solid earnings outlook. Small cap stocks continue to look very
attractive to us relative to large cap stocks on almost every
valuation measure, including price-to-earnings (22.0 versus 29.8),
price-to-book (2.4 versus 5.0) and price-to-free cash flow (18.3
versus 32.3). Finally, we believe that international stocks,
particularly in Europe, are relatively inexpensive given their
potential for earnings growth through productivity gains and
consolidation.
June 30, 2000 3 Mercury QA Strategy Series, Inc.
In Conclusion
We thank you for your investment in Mercury QA Strategies Series,
Inc., and we look forward to serving your investment needs in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Philip M. Green)
Philip M. Green
Senior Vice President and
Portfolio Manager
August 8, 2000
June 30, 2000 4 Mercury QA Strategy Series, Inc.
FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
The Fund offers four classes of shares, each with its own sales
charge and expense structure, allowing you to invest in the way that
best suits your needs.
CLASS I SHARES incur a maximum initial sales charge of 5.25% and
bear no ongoing distribution and account maintenance fees. Class I
Shares are available only to eligible investors.
CLASS A SHARES incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
CLASS B SHARES are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first two years, decreasing to
3% for each of the next two years and decreasing 1% each year
thereafter to 0% after the sixth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class A Shares after approximately 8 years.
CLASS C SHARES are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares may be
subject to a 1% contingent deferred sales charge if redeemed within
one year after purchase.
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Aggregate Total Return" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders. The Fund's Investment Adviser voluntarily waived a
portion of its management fee. Without such waiver, the Fund's
performance would have been lower.
June 30, 2000 5 Mercury QA Strategy Series, Inc.
FUND PERFORMANCE DATA (CONTINUED)
RECENT PERFORMANCE RESULTS*
Since Inception
As of June 30, 2000 Total Return
Growth and Income Fund Class I -0.70%
Growth and Income Fund Class A -0.70
Growth and Income Fund Class B -0.80
Growth and Income Fund Class C -0.90
Long-Term Growth Fund Class I -1.00
Long-Term Growth Fund Class A -1.10
Long-Term Growth Fund Class B -1.10
Long-Term Growth Fund Class C -1.10
All-Equity Fund Class I -1.30
All-Equity Fund Class A -1.40
All-Equity Fund Class B -1.40
All-Equity Fund Class C -1.40
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in the Fund's net asset
values for the period shown, and assume reinvestment of all
dividends and capital gains at net asset value on the ex-dividend
date. The Fund commenced operations on 6/2/00.
June 30, 2000 6 Mercury QA Strategy Series, Inc.
FUND PERFORMANCE DATA (CONTINUED)
AGGREGATE TOTAL RETURN--GROWTH AND INCOME FUND
% Return % Return
Without Sales With Sales
Class I Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -0.70% -5.91%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without Sales With Sales
Class A Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -0.70% -5.91%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without With
Class B Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -0.80% -4.77%
*Maximum contingent deferred sales charge
is 4% and is reduced to 0% after 6 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -0.90% -1.89%
*Maximum contingent deferred sales charge
is 1% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
AGGREGATE TOTAL RETURN--LONG-TERM GROWTH FUND
% Return % Return
Without Sales With Sales
Class I Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -1.00% -6.20%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without Sales With Sales
Class A Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -1.10% -6.29%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without With
Class B Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -1.10% -5.06%
*Maximum contingent deferred sales charge
is 4% and is reduced to 0% after 6 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -1.10% -2.09%
*Maximum contingent deferred sales charge
is 1% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
June 30, 2000 7 Mercury QA Strategy Series, Inc.
FUND PERFORMANCE DATA (CONCLUDED)
AGGREGATE TOTAL RETURN--ALL-EQUITY FUND
% Return % Return
Without Sales With Sales
Class I Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -1.30% -6.48%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without Sales With Sales
Class A Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 -1.40% -6.58%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without With
Class B Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -1.40% -5.34%
*Maximum contingent deferred sales charge
is 4% and is reduced to 0% after 6 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 -1.40% -2.39%
*Maximum contingent deferred sales charge
is 1% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
June 30, 2000 8 Mercury QA Strategy Series, Inc.
SCHEDULE OF INVESTMENTS
<TABLE>
MERCURY QA STRATEGY SERIES, INC.--GROWTH AND INCOME FUND
<CAPTION>
In US Dollars
Shares
Industry Held Mutual Funds Value
<S> <C> <S> <C>
Mutual Funds-- 55,144 Mercury QA International Fund $ 545,375
39.9% 276,947 Mercury QA Large Cap Core Fund 2,727,931
43,236 Mercury QA Large Cap Growth Fund 446,626
33,847 Mercury QA Large Cap Value Fund 316,474
26,052 Mercury QA Mid Cap Fund 255,305
25,200 Mercury QA Small Cap Fund 252,502
Total Investments in Mutual Funds
(Cost--$4,593,417)--39.9% 4,544,213
Face
Amount Short-Term Securities
Commercial $ 505,000 General Motors Acceptance Corp., 7.13%
Paper*--4.4% due 7/03/2000 504,800
US Government 2,600,000 Federal Farm Credit Bank, 6.57%
Agency due 7/03/2000 2,599,051
Obligations*-- 400,000 Federal Home Loan Banks, 6.48%
49.2% due 7/03/2000 399,856
2,600,000 Federal Home Loan Mortgage Corporation,
6.57% due 7/03/2000 2,599,051
------------
5,597,958
Total Investments in Short-Term Securities
(Cost--$6,102,758)--53.6% 6,102,758
Total Investments
(Cost--$10,696,175)--93.5% 10,646,971
Variation Margin on Financial
Futures Contracts**--(0.2%) (23,225)
Other Assets Less Liabilities--6.7% 760,470
------------
Net Assets--100.0% $ 11,384,216
============
*Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
**Financial futures contracts purchased as of June 30, 2000 were as
follows:
Number of Expiration
Contracts Issue Date Value
6 S&P 500 Financial Futures Index September 2000 $ 2,202,150
------------
Total Financial Futures Contracts Purchased
(Contract Price--$2,225,411) $ 2,202,150
============
See Notes to Financial Statements.
</TABLE>
June 30, 2000 9 Mercury QA Strategy Series, Inc.
SCHEDULE OF INVESTMENTS (CONTINUED)
<TABLE>
MERCURY QA STRATEGY SERIES, INC.--LONG-TERM GROWTH FUND
<CAPTION>
In US Dollars
Shares
Industry Held Mutual Funds Value
<S> <C> <S> <C>
Mutual Funds-- 90,311 Mercury QA International Fund $ 893,180
61.7% 745,331 Mercury QA Large Cap Core Fund 7,341,506
109,000 Mercury QA Large Cap Growth Fund 1,125,970
104,000 Mercury QA Large Cap Value Fund 972,400
55,157 Mercury QA Mid Cap Fund 540,536
86,000 Mercury QA Small Cap Fund 861,720
Total Investments in Mutual Funds
(Cost--$11,851,423)--61.7% 11,735,312
Face
Amount Short-Term Securities
US Government $ 1,800,000 Federal Farm Credit Bank, 6.57%
Agency due 7/03/2000 1,799,343
Obligations*-- 4,620,000 Federal Home Loan Mortgage Corporation,
33.7% 6.57% due 7/03/2000 4,618,314
Total Investments in Short-Term Securities
(Cost--$6,417,657)--33.7% 6,417,657
Total Investments
(Cost--$18,269,080)--95.4% 18,152,969
Variation Margin on Financial
Futures Contracts**--(0.2%) (38,525)
Other Assets Less Liabilities--4.8% 912,070
------------
Net Assets--100.0% $ 19,026,514
============
*Certain US Government Agency Obligations are traded on a discount
basis; the interest rates shown reflect the discount rates paid at
the time of purchase by the Fund.
**Financial futures contracts purchased as of June 30, 2000 were as
follows:
Number of Expiration
Contracts Issue Date Value
9 S&P 500 Financial Futures Index September 2000 $ 3,303,225
------------
Total Financial Futures Contracts Purchased
(Contract Price--$3,341,823) $ 3,303,225
============
See Notes to Financial Statements.
</TABLE>
June 30, 2000 10 Mercury QA Strategy Series, Inc.
SCHEDULE OF INVESTMENTS (CONCLUDED)
<TABLE>
MERCURY QA STRATEGY SERIES, INC.--ALL-EQUITY FUND
<CAPTION>
In US Dollars
Shares
Industry Held Mutual Funds Value
<S> <C> <S> <C>
Mutual Funds-- 324,968 Mercury QA International Fund $ 3,213,930
81.7% 2,012,318 Mercury QA Large Cap Core Fund 19,821,331
376,108 Mercury QA Large Cap Growth Fund 3,885,196
299,551 Mercury QA Large Cap Value Fund 2,800,807
238,107 Mercury QA Mid Cap Fund 2,333,444
263,164 Mercury QA Small Cap Fund 2,636,903
Total Investments in Mutual Funds
(Cost--$35,076,784)--81.7% 34,691,611
Face
Amount Short-Term Securities
US Government $ 6,114,000 Federal Home Loan Mortgage Corporation,
Agency 6.57% due 7/03/2000 6,111,768
Obligations*--14.4%
Total Investments in Short-Term Securities
(Cost--$6,111,768)--14.4% 6,111,768
Total Investments
(Cost--$41,188,552)--96.1% 40,803,379
Variation Margin on Financial
Futures Contracts**--(0.2%) (92,225)
Other Assets Less Liabilities--4.1% 1,755,344
------------
Net Assets--100.0% $ 42,466,498
============
*Certain US Government Agency Obligations are traded on a discount
basis; the interest rate shown reflects the discount rate paid at
the time of purchase by the Fund.
**Financial futures contracts purchased as of June 30, 2000 were as
follows:
Number of Expiration
Contracts Issue Date Value
21 S&P 500 Financial Futures Index September 2000 $ 7,707,525
------------
Total Financial Futures Contracts Purchased
(Contract Price--$7,799,291) $ 7,707,525
============
See Notes to Financial Statements.
</TABLE>
June 30, 2000 11 Mercury QA Strategy Series, Inc.
<TABLE>
STATEMENTS OF ASSETS AND
LIABILITIES
<CAPTION>
As of June 30, 2000
MERCURY QA STRATEGY SERIES, INC.
GROWTH AND LONG-TERM
INCOME FUND GROWTH FUND
<S> <C> <C>
Assets:
Investments, at value* $ 10,646,971 $ 18,152,969
Cash on financial futures contracts 166,713 240,927
Receivables:
Capital shares sold 662,804 423,096
Securities sold -- 263,000
Investment adviser 11,708 17,837
Prepaid registration fees and other assets 66,019 78,062
------------ ------------
Total assets 11,554,215 19,175,891
------------ ------------
Liabilities:
Payables:
Variation margin 23,225 38,525
Capital shares redeemed 56,451 1,632
Distributor 6,291 11,244
Accrued expenses and other liabilities 84,032 97,976
------------ ------------
Total liabilities 169,999 149,377
------------ ------------
Net Assets:
Net assets $ 11,384,216 $ 19,026,514
============ ============
Net Assets Consist of:
Class I Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized $ 7 $ 14
Class A Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 8 11
Class B Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 37 81
Class C Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 62 87
Paid-in capital in excess of par 11,453,624 19,184,704
Undistributed investment income--net 15,776 18,903
Accumulated realized capital losses on investments--net (12,833) (22,577)
Unrealized depreciation on investments--net (72,465) (154,709)
------------ ------------
Net assets $ 11,384,216 $ 19,026,514
============ ============
Net Asset Value:
Class I: Net assets $ 673,200 $ 1,360,496
============ ============
Shares outstanding 67,766 137,477
============ ============
Net asset value $ 9.93 $ 9.90
============ ============
Class A: Net assets $ 836,161 $ 1,069,460
============ ============
Shares outstanding 84,179 108,091
============ ============
Net asset value $ 9.93 $ 9.89
============ ============
Class B: Net assets $ 3,701,215 $ 8,002,876
============ ============
Shares outstanding 372,967 809,388
============ ============
Net asset value $ 9.92 $ 9.89
============ ============
Class C: Net assets $ 6,173,640 $ 8,593,682
============ ============
Shares outstanding 623,185 869,151
============ ============
Net asset value $ 9.91 $ 9.89
============ ============
*Identified cost $ 10,696,175 $ 18,269,080
============ ============
See Notes to Financial Statements.
</TABLE>
June 30, 2000 12 Mercury QA Strategy Series, Inc.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(CONCLUDED)
<CAPTION>
As of June 30, 2000
MERCURY QA STRATEGY SERIES, INC.
ALL-EQUITY
FUND
<S> <C>
Assets:
Investments, at value* $ 40,803,379
Cash 500
Cash on financial futures contracts 595,592
Receivables:
Capital shares sold 1,271,743
Investment adviser 23,113
Prepaid registration fees and other assets 168,066
------------
Total assets 42,862,393
------------
Liabilities:
Payables:
Variation margin 92,225
Capital shares redeemed 86,146
Distributor 26,345
Accrued expenses and other liabilities 191,179
------------
Total liabilities 395,895
------------
Net Assets:
Net assets $ 42,466,498
============
Net Assets Consist of:
Class I Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized $ 22
Class A Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 28
Class B Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 186
Class C Shares of Common Stock, $.0001 par value,
166,666,667 shares authorized 194
Paid-in capital in excess of par 42,946,033
Undistributed investment income--net 15,459
Accumulated realized capital losses on investments--net (18,485)
Unrealized depreciation on investments--net (476,939)
------------
Net assets $ 42,466,498
============
Net Asset Value:
Class I: Net assets $ 2,198,850
============
Shares outstanding 222,854
============
Net asset value $ 9.87
============
Class A: Net assets $ 2,762,033
============
Shares outstanding 280,000
============
Net asset value $ 9.86
============
Class B: Net assets $ 18,372,088
============
Shares outstanding 1,863,462
============
Net asset value $ 9.86
============
Class C: Net assets $ 19,133,527
============
Shares outstanding 1,940,660
============
Net asset value $ 9.86
============
*Identified cost $ 41,188,552
============
See Notes to Financial Statements.
</TABLE>
JUNE 30, 2000 13 MERCURY QA STRATEGY SERIES, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
For the Period June 2, 2000++ to June 30, 2000
MERCURY QA STRATEGY SERIES, INC.
GROWTH AND LONG-TERM ALL-EQUITY
INCOME FUND GROWTH FUND FUND
<S> <C> <C> <C>
Investment Income:
Interest and discount earned $ 24,191 $ 31,302 $ 41,804
-----------------------------------------------------
Expenses:
Registration fees 8,624 8,322 8,625
Account maintenance and distribution
fees--Class B 2,798 5,615 13,304
Account maintenance and distribution
fees--Class C 3,371 5,420 12,562
Adminstrative fees 2,479 4,491 10,238
Offering costs 2,203 3,724 9,272
Investment advisory fees 1,062 1,925 4,388
Accounting services 770 3,318 1,044
Professional fees 1,444 1,393 1,444
Printing and shareholder reports 412 1,393 550
Transfer agent fees--Class B 112 299 819
Transfer agent fees--Class C 136 290 770
Account maintenance fees--Class A 121 209 479
Directors' fees and expenses 96 157 381
Transfer agent fees--Class A 19 44 118
Transfer agent fees--Class I 17 51 90
-----------------------------------------------------
Total expenses before reimbursement 23,664 36,651 64,084
Reimbursement of expenses (15,249) (24,252) (37,739)
-----------------------------------------------------
Total expenses after reimbursement 8,415 12,399 26,345
-----------------------------------------------------
Investment income--net 15,776 18,903 15,459
-----------------------------------------------------
Realized & Unrealized Loss on
Investments--Net:
Realized loss on investments--net (12,833) (22,577) (18,485)
Unrealized depreciation on investments--net (72,465) (154,709) (476,939)
-----------------------------------------------------
Net Decrease in Net Assets Resulting from
Operations $ (69,522) $ (158,383) $ (479,965)
=====================================================
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 14 Mercury QA Strategy Series, Inc.
<TABLE>
STATEMENTS OF CHANGES
IN NET ASSETS
<CAPTION>
For the Period June 2, 2000++ to June 30, 2000
MERCURY QA STRATEGY SERIES, INC.
GROWTH AND LONG-TERM ALL-EQUITY
Increase (Decrease in Net Assets:: INCOME FUND GROWTH FUND FUND
<S> <C> <C> <C>
Operations:
Investment income--net $ 15,776 $ 18,903 $ 15,459
Realized loss on investments--net (12,833) (22,577) (18,485)
Unrealized depreciation on investments--net (72,465) (154,709) (476,939)
-----------------------------------------------------
Net decrease in net assets resulting from
operations (69,522) (158,383) (479,965)
-----------------------------------------------------
Capital Share Transactions:
Net increase in net assets derived from capital
share transactions 11,353,738 19,084,897 42,846,463
-----------------------------------------------------
Net Assets:
Total increase in net assets 11,284,216 18,926,514 42,366,498
Beginning of period 100,000 100,000 100,000
-----------------------------------------------------
End of period* $11,384,216 $19,026,514 $42,466,498
=====================================================
*Undistributed investment income--net $ 15,776 $ 18,903 $ 15,459
=====================================================
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 15 Mercury QA Strategy Series, Inc.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
MERCURY QA STRATEGY SERIES, INC.--GROWTH AND INCOME FUND
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Period June 2, 2000++ to
June 30, 2000
Increase (Decrease) in Net Asset Value: Class I Class A Class B Class C
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------------------------------------------------
Investment income--net 02 .02 .02 .01
Realized and unrealized loss on
investments--net (.09) (.09) (.10) (.10)
-----------------------------------------------------
Total from investment operations (.07) (.07) (.08) (.09)
-----------------------------------------------------
Net asset value, end of period $ 9.93 $ 9.93 $ 9.92 $ 9.91
=====================================================
Total Investment Return:**
Based on net asset value per share (.70%)+++ (.70%)+++ (.80%)+++ (.90%)+++
=====================================================
Ratios to Average Net Assets:
Expenses, net of reimbursement .30%* .55%* 1.30%* 1.30%*
=====================================================
Expenses 2.45%* 2.70%* 3.44%* 3.47%*
=====================================================
Investment income --net 3.12%* 2.88%* 2.11%* 2.12%*
=====================================================
Supplemental Data:
Net assets, end of period (in thousands) $ 673 $ 836 $ 3,701 $ 6,174
=====================================================
Portfolio turnover 25.84% 25.84% 25.84% 25.84%
=====================================================
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 16 Mercury QA Strategy Series, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
MERCURY QA STRATEGY SERIES, INC.--LONG-TERM GROWTH FUND
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Period June 2, 2000++ to
June 30, 2000
Increase (Decrease) in Net Asset Value: Class I Class A Class B Class C
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------------------------------------------------
Investment income--net .02 .02 .01 .01
Realized and unrealized loss on
investments--net (.12) (.13) (.12) (.12)
-----------------------------------------------------
Total from investment operations (.10) (.11) (.11) (.11)
-----------------------------------------------------
Net asset value, end of period $ 9.90 $ 9.89 $ 9.89 $ 9.89
=====================================================
Total Investment Return:**
Based on net asset value per share (1.00%)+++ (1.10%)+++ (1.10%)+++ (1.10%)+++
=====================================================
Ratios to Average Net Assets:
Expenses, net of reimbursement .10%* .36%* 1.09%* 1.09%*
=====================================================
Expenses 1.98%* 2.22%* 2.97%* 2.99%*
=====================================================
Investment income --net 2.41%* 2.20%* 1.35%* 1.32%*
=====================================================
Supplemental Data:
Net assets, end of period (in thousands) $ 1,361 $ 1,069 $ 8,003 $ 8,594
=====================================================
Portfolio turnover 4.48% 4.48% 4.48% 4.48%
=====================================================
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 17 Mercury QA Strategy Series, Inc.
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
MERCURY QA STRATEGY SERIES, INC.--ALL-EQUITY FUND
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Period June 2, 2000++ to
June 30, 2000
Increase (Decrease) in Net Asset Value: Class I Class A Class B Class C
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------------------------------------------------
Investment income--net .01 .01 --++++ --++++
Realized and unrealized loss on
investments--net (.14) (.15) (.14) (.14)
-----------------------------------------------------
Total from investment operations (.13) (.14) (.14) (.14)
-----------------------------------------------------
Net asset value, end of period $ 9.87 $ 9.86 $ 9.86 $ 9.86
=====================================================
Total Investment Return:**
Based on net asset value per share (1.30%)+++ (1.40%)+++ (1.40%)+++ (1.40%)+++
=====================================================
Ratios to Average Net Assets:
Expenses, net of reimbursement .00%* .26%* 1.01%* .99%*
=====================================================
Expenses 1.29%* 1.54%* 2.29%* 2.29%*
=====================================================
Investment income--net 1.35%* 1.22%* .44%* .42%*
=====================================================
Supplemental Data:
Net assets, end of period (in thousands) $ 2,199 $ 2,762 $ 18,372 $ 19,133
=====================================================
Portfolio turnover 2.82% 2.82% 2.82% 2.82%
=====================================================
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 18 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
MERCURY QA STRATEGY SERIES, INC.
1 Significant Accounting Policies:
Mercury QA Strategy Series, Inc. (the "Corporation") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company consisting of three separate
funds: Mercury QA Strategy Growth and Income Fund ("Growth and
Income Fund"), Mercury QA Strategy Long-Term Growth Fund ("Long-Term
Growth Fund") and Mercury QA Strategy All-Equity Fund ("All-Equity
Fund") (the "Fund" or "Funds"). Each Fund seeks to achieve its
respective investment objective by investing in a mix of Underlying
Funds (the "Underlying Funds") managed or distributed by Mercury
Advisors ("Mercury"), or one of its affiliates. In addition, each
Fund may invest some of its assets directly in derivative
instruments. Each Fund's financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America, which may require the use of management
accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary
to a fair statement of the results for the interim period presented.
All such adjustments are of a normal, recurring nature. Prior to
commencement of operations on June 2, 2000, the Funds had no
operations other than those relating to organizational matters and
the issuance of 10,000 capital shares of each Fund on February 25,
2000 to Mercury, a division of Fund Asset Management, L.P. ("FAM"),
for $100,000 per Fund. Each Fund offers four classes of shares.
Class I and Class A Shares are sold with a front-end sales charge.
Class B and Class C Shares may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class A, Class B and Class C Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures (except that Class B Shares have certain
voting rights with respect to Class A distribution expenditures).
The following is a summary of significant accounting policies
followed by the Funds.
(a) Valuation of investments--Portfolio securities of the Funds and
the Underlying Funds that are traded on stock exchanges are valued
at the last sale price on the exchange on which such securities are
traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the
last available bid price prior to the time of valuation. In cases
where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market.
Securities that are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at
the last sale price in the case of exchange-traded options. In the
case of options traded in the over-the-counter market, valuation is
the last asked price (options written) or the last bid price
(options purchased). Short-term securities are valued at amortized
cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily
available are valued at fair market value, as determined in good
faith by or under the direction of the Corporation's Board of
Directors.
June 30, 2000 19 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(b) Derivative financial instruments--Each Fund may engage in
various portfolio investment strategies to increase or decrease the
level of risk to which the Fund is exposed more quickly and
efficiently than transactions in other types of instruments. Losses
may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--Each Fund is authorized to write and purchase call and
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or a gain or loss to the extent that the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--Each Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts.
* Foreign currency options and futures--Each Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--Each Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
June 30, 2000 20 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(c) Income taxes--It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income, including dividend income
and capital gain distributions from the Underlying Funds, if any,
are recorded on the ex-dividend dates. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(e) Expenses--Most expenses of the Corporation can be directly
attributed to a Fund. Expenses included in the accompanying
financial statements reflect the expenses of each Fund and do not
include any expenses associated with the Underlying Funds. Each Fund
indirectly bears its proportional share of the fees and expenses of
the underlying funds in which it invests. Accordingly, each Fund's
investment return will be net of both the fees and expenses of the
Underlying Funds and the expenses attributable to the Fund.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
each Fund are recorded on the ex-dividend dates.
2 Investment Advisory Agreement and Transactions with Affiliates:
The Corporation has entered into an Investment Advisory Agreement
with Mercury. The general partner of Mercury is Princeton Services,
Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The
Corporation has also entered into a Distribution Agreement and
Distribution Plans with FAM Distributors, Inc. ("FAMD" or the
"Distributor"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
Mercury is responsible for the management of each Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of each Fund. For
such services, each Fund pays a monthly fee at the annual rate of
.15% of that Fund's average daily net assets.
June 30, 2000 21 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Corporation has also entered into an Administrative Agreement
with Mercury. The Corporation pays a monthly fee at an annual rate
of .35% of each Fund's average daily net assets for the performance
of administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Funds.
For the period June 2, 2000 to June 30, 2000, Mercury earned fees of
$1,062, $1,925 and $4,388 from Growth and Income Fund, Long-Term
Growth Fund and All-Equity Fund, respectively, all of which were
voluntarily waived. In addition, Mercury reimbursed additional
expenses of $14,187, $22,327 and $33,351 from Growth and Income
Fund, Long-Term Growth Fund and All-Equity Fund, respectively.
Pursuant to the Distribution Plans adopted by the Corporation in
accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Funds pay the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares
as follows:
Account
Maintenance Fee Distribution Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML &
Co., also provides account maintenance and distribution services to
the Corporation. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class A, Class B and Class C shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period June 2, 2000 to June 30, 2000, FAMD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of Class I and Class A Shares as follows:
Growth and Long-Term All-Equity
Income Fund Growth Fund Fund
Class I:
FAMD -- -- $ 36
MLPF&S -- -- $ 650
Class A:
FAMD $ 840 $ 224 $ 1,409
MLPF&S $34,524 $49,956 $109,652
June 30, 2000 22 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
MLPF&S received contingent deferred sales charges relating to
transactions in Class B and Class C Shares as follows:
Class B Class C
Growth and Income Fund $ 212 --
Long-Term Growth Fund $ 164 $428
All-Equity Fund $1,140 $104
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Corporation's transfer agent.
Accounting services are provided to the Corporation by FAM at cost.
Certain officers and/or directors of the Corporation are officers
and/or directors of Mercury, FAM, PSI, FAMD, FDS, and/or ML & Co.
3 Investments:
Purchases and sales of investments, excluding short-term securities,
for the period June 2, 2000 to June 30, 2000 were as follows:
Purchases Sales
Growth and Income Fund $ 5,190,000 $ 587,000
Long-Term Growth Fund $12,118,000 $ 263,000
All-Equity Fund $35,569,956 $ 489,555
Net realized losses for the period June 2, 2000 to June 30, 2000 and
net unrealized losses as of June 30, 2000 were as follows:
Realized Unrealized
GROWTH AND INCOME FUND Losses Losses
Long-term investments $ (9,583) $ (49,204)
Financial futures contracts (3,250) (23,261)
-------------------------------
Total $ (12,833) $ (72,465)
===============================
Realized Unrealized
LONG-TERM GROWTH FUND Losses Losses
Long-term investments $ (3,577) $ (116,111)
Financial futures contracts (19,000) (38,598)
-------------------------------
Total $ (22,577) $ (154,709)
===============================
Realized Unrealized
ALL-EQUITY FUND Losses Losses
Long-term investments $ (3,617) $ (385,173)
Financial futures contracts (14,868) (91,766)
-------------------------------
Total $ (18,485) $ (476,939)
===============================
June 30, 2000 23 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
As of June 30, 2000, net unrealized depreciation and the aggregate
cost of investments for Federal income tax purposes were as follows:
Gross Gross Net Aggregate
Unrealized Unrealized Unrealized Cost of
Appreciation Depreciation Depreciation Investments
Growth and Income Fund $ 19,818 $ 69,022 $ 49,204 $ 10,696,175
Long-Term Growth Fund $ 58,596 $ 174,707 $ 116,111 $ 18,269,080
All-Equity Fund $ 162,464 $ 547,637 $ 385,173 $ 41,188,552
4 Capital Share Transactions:
Net increase in net assets derived from capital share transactions for the
period June 2, 2000 to June 30, 2000 were as follows:
Growth and Income Fund $ 11,353,738
Long-Term Growth Fund $ 19,084,897
All-Equity Fund $ 42,846,463
Transactions in capital shares for each class were as follows:
GROWTH AND INCOME FUND
Class I Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 65,266 $ 652,910
--------------------------------
Net increase 65,266 $ 652,910
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
GROWTH AND INCOME FUND
Class A Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 83,098 $ 828,796
Shares redeemed (1,419) (14,044)
--------------------------------
Net increase 81,679 $ 814,752
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
June 30, 2000 24 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
GROWTH AND INCOME FUND
Class B Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 386,793 $ 3,864,048
Shares redeemed (16,326) (163,252)
--------------------------------
Net increase 370,467 $ 3,700,796
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
GROWTH AND INCOME FUND
Class C Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 635,841 $ 6,336,143
Shares redeemed (15,156) (150,863)
--------------------------------
Net increase 620,685 $ 6,185,280
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
LONG-TERM GROWTH FUND
Class I Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares issued to shareholders 135,282 $ 1,350,493
Shares redeemed (305) (3,068)
--------------------------------
Net increase 134,977 $ 1,347,425
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
LONG-TERM GROWTH FUND
Class A Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 110,084 $ 1,100,612
Shares redeemed (4,493) (44,526)
--------------------------------
Net increase 105,591 $ 1,056,086
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
June 30, 2000 25 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
LONG-TERM GROWTH FUND
Class B Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 808,751 $ 8,066,384
Shares redeemed (1,863) (18,440)
--------------------------------
Net increase 806,888 $ 8,047,944
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
LONG-TERM GROWTH FUND
Class C Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 878,708 $ 8,752,400
Shares redeemed (12,057) (118,958)
--------------------------------
Net increase 866,651 $ 8,633,442
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
ALL-EQUITY FUND
Class I Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 226,803 $ 2,257,753
Shares redeemed (6,449) (63,845)
--------------------------------
Net increase 220,354 $ 2,193,908
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
ALL-EQUITY FUND
Class A Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 282,244 $ 2,815,194
Shares redeemed (4,744) (47,069)
--------------------------------
Net increase 277,500 $ 2,768,125
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
June 30, 2000 26 Mercury QA Strategy Series, Inc.
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
ALL-EQUITY FUND
Class B Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 1,891,528 $ 18,871,990
Shares redeemed (30,566) (302,633)
--------------------------------
Net increase 1,860,962 $ 18,569,357
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
ALL-EQUITY FUND
Class C Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 1,969,102 $ 19,621,630
Shares redeemed (30,942) (306,557)
--------------------------------
Net increase 1,938,160 $ 19,315,073
================================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
JUNE 30, 2000 27 MERCURY QA STRATEGY SERIES, INC.
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Mercury QA Strategy Series, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
