As filed with the Securities and Exchange Commission on March 1,
2000
Securities Act File No. 333-88849
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
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¨ |
Pre-Effective
Amendment No. 1
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x |
Post-Effective
Amendment No.
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¨ |
and/or
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REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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AMENDMENT NO.
1
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x
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(Check appropriate box or boxes)
MERCURY QA STRATEGY SERIES, INC.
(Exact name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey
08536
(Address of Principal Executive Offices)
Registrants 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:
JOEL H. GOLDBERG, Esq.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
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and
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MICHAEL J. HENNEWINKEL, Esq.
P.O. Box 9011
Princeton, New Jersey 08543-9011
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It is proposed that this filing will become effective:
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¨ immediately
upon filing pursuant to paragraph (b)
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¨ on (date)
pursuant to paragraph (b)
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¨ 60 days after
filing pursuant to paragraph (a)(1)
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¨ on (date)
pursuant to paragraph (a)(1)
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¨ 75 days after
filing pursuant to paragraph (a)(2)
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¨ on (date)
pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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¨ This
post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
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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.
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 March 1, 2000
Mercury QA Strategy Growth And Income Fund
Mercury QA Strategy Long-Term Growth Fund
and Mercury QA Strategy All-Equity Fund
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OF MERCURY QA STRATEGY
SERIES, INC.
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(LOGO)
A
SUBSCRIPTION PERIOD FOR SHARES OF EACH FUND WILL END ON MAY 2, 2000, 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.
[LOGO OF MERCURY ASSET MANAGEMENT]
Table
of Contents
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
In an effort to help you better understand the many
concepts involved in making an investment decision, we have defined the
highlighted terms in this Prospectus in the sidebar.
Equity Security security that
represents a unit of ownership of a corporation.
Fixed Income Security security
that pays a fixed rate of interest or a fixed dividend.
Investment Grade any of the four
highest debt obligations ratings by recognized rating agencies,
including Moodys Investors Service, Inc., Standard & Poor
s or Fitch IBCA, Inc.
Bonds debt obligations
issued by corporations, governments and other issuers.
ABOUT THE MERCURY QA STRATEGY FUNDS
What is each Funds objective?
Mercury QA Strategy Growth and Income Fund
The Funds investment objective is to provide high total
return with reduced risk over the long term.
Mercury QA Strategy Long-Term Growth Fund
The Funds investment objective is to provide long-term
capital growth.
Mercury QA Strategy All-Equity Fund
The Funds investment objective is to provide long-term
capital growth.
We cannot guarantee that a Fund will achieve its
objective.
What are each Funds 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 mutual funds managed or distributed
by the investment adviser or one of its affiliates. Each Fund starts
with a strategic target allocation between investments in equity
securities and fixed-income securities. The
equity portion is then allocated among underlying funds that each
reflect a specific equity market segment. The fixed-income portion is
allocated to a single underlying fund that reflects a broad range of
dollar-denominated investment grade bonds with maturities
greater than one year.
The strategic target allocations for each Fund and the ranges
within which each Fund may vary its strategic target allocation are set
forth below. The Funds assets will rarely be exactly in line with
the strategic target allocations. Rather, each Funds investment
in each asset class fluctuates within a range depending on the
investment advisers perception of the opportunities available
among the asset classes and the relative risks associated with these
opportunities, consistent with each Funds objective.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Strategic Target Allocations
Fund |
|
Target |
|
Range |
Mercury QA Strategy Growth
and Income Fund |
|
Equity |
|
55% |
|
40%-70% |
Fixed-Income and Cash
Equivalents* |
|
45% |
|
30%-60% |
Mercury QA Strategy Long-Term
Growth Fund |
|
Equity |
|
75% |
|
60%-90% |
Fixed-Income and Cash
Equivalents* |
|
25% |
|
10%-40% |
Mercury QA Strategy
All-Equity Fund |
|
Equity |
|
100% |
|
95%-100% |
Fixed-Income and Cash
Equivalents* |
|
0% |
|
0%-5% |
*
|
The Fund intends to
maintain cash positions, either directly or through its investment in
the underlying funds, to the extent such underlying funds maintain
cash positions.
|
Each Fund therefore has a range within which it may vary its
strategic target allocation. The investment adviser will shift the Funds
relative weightings in equity and fixed income securities as
well as each Funds equity investments among underlying funds, in
light of a Funds investment objective and in response to market
conditions. This 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 Funds assets
directly in individual securities and other financial instruments such
as short term money market instruments.
The equity portion of each Fund initially will be invested in
six portfolios of Mercury QA Equity Series, Inc. (the Mercury QA
Equity Funds) The fixed-income portion of each Fund initially
will be invested in the Master Aggregate Bond Index Series of
Quantitative Master Series Trust.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Quantitative Analysis focuses on
quantifiable measures as opposed to qualitative considerations such as
the character of management.
Top-down Analysis analysis
in which the investment adviser first looks at trends in the general
economy, and next selects industries and then companies that should
benefit from those trends.
Bottom-up Stock Selection Approach
searching for outstanding performance of individual
stocks before considering the impact of economic trends.
Value Strategy a
strategy in which the focus is to invest in value
stocks.
Value Stocks stocks of
companies that are selling at low to modest valuations relative to
general market measures, such as earnings, book value and other
fundamental accounting measures, and that are expected to have
favorable prospects for capital appreciation and/or dividend-paying
ability.
Growth Strategy a
strategy in which the focus is to invest in growth
stocks.
Growth Stocks stocks of
companies that are expected to have better prospects for earnings
growth than the growth rate of the general domestic
economy.
The table below shows the range (as a percentage of each Funds
assets) that is expected initially to be invested in each underlying
fund.
|
|
Range of Assets
of
|
Underlying
Fund |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Equity Asset
Class |
|
|
|
|
|
|
|
Mercury QA Large Cap Core
Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA Large Cap Value
Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA Large Cap Growth
Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA Mid Cap Fund of
Mercury QA Equity Series, Inc. |
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4% |
|
7% |
|
9% |
|
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc. |
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3% |
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4% |
|
5% |
|
Mercury QA International Fund
of
Mercury QA Equity Series, Inc. |
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3% |
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3% |
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5% |
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Fixed-Income Asset
Class |
|
|
|
|
|
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Master Aggregate Bond Index
Series of
Quantitative Master Series Trust |
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45% |
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20% |
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0% |
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The investment adviser of the Mercury QA Equity
Funds seeks to maximize each Mercury QA Equity Funds expected
return by utilizing a disciplined approach to sector weighting, stock
selection and portfolio construction which combines quantitative
analysis, in-depth research and risk management disciplines to
produce style purity with respect to a particular market segment. The
investment adviser of the Mercury QA Equity Funds uses three
principal strategies to select investments for each Mercury QA Equity
Fund. First the investment adviser of the Mercury QA Equity Funds
uses a top-down analysis to identify high performing
sectors. Second, the investment adviser of the Mercury QA Equity
Funds uses a bottom-up stock selection approach to
identify those securities within a sector that seem to be the most
attractive. Depending on the Mercury QA Equity Fund, this analysis
involves selection of stocks through a value strategy, a
growth strategy, or a blend of the two. Third, the
investment adviser of the Mercury QA Equity Funds uses quantitative
risk management techniques to produce an overall portfolio with risk
and style characteristics similar to each Mercury QA Equity Fund
s respective market segment. |
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Large-capitalization Companies
companies that have market capitalizations in
the range of companies included in the Standard & Poor
s 500 Composite Price Index (currently at least $5.3
billion).
Standard & Poors 500 Composite Stock Price
Index a market-weighted index composed of
common stocks issued by 500 U.S. large-capitalization
companies in a wide range of businesses. The stocks included in the
index collectively represent a substantial portion of all common
stocks publicly traded in the U.S.
Common Stock units of ownership of a
corporation.
Mid-capitalization Companies
companies that have market capitalizations in the range of companies
included in the Standard & Poors Mid Cap 400
Index (currently between $137 million and $3.8
billion).
Standard & Poors Mid Cap 400 Index
a market-weighted index composed of common stocks
issued by 400 U.S. mid-capitalization companies in a wide range of
businesses.
Standard & Poors SmallCap 600 Index
a market-weighted index composed of domestic stocks
issued by 600 U.S. smaller- capitaliza
tion companies in a wide range of businesses.
Small-capitalization Companies
companies that have market capitalizations in
the range of companies included in the Standard & Poor
s SmallCap 600 Index (currently below $382
million).
The market segment and style investment analysis for each of the Mercury
QA Equity Funds is as follows:
Fund |
|
Market Segment |
|
Mercury QA Large Cap Core
Fund of
Mercury QA Equity Series, Inc. |
|
stocks of large-capitalization
companies
selected through a blend of value and
growth strategies |
|
Mercury QA Large Cap Value
Fund of
Mercury QA Equity Series, Inc. |
|
stocks of large-capitalization companies
selected through a value strategy |
|
Mercury QA Large Cap Growth
Fund of
Mercury QA Equity Series, Inc. |
|
stocks of large-capitalization companies
selected through a growth strategy |
|
Mercury QA Mid Cap Fund of
Mercury QA Equity Series, Inc. |
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stocks of mid-capitalization
companies
selected through a blend of value and
growth strategies |
|
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc. |
|
stocks of small-capitalization
companies
selected through a blend of value and
growth strategies |
|
Mercury QA International
Fund of
Mercury QA Equity Series, Inc. |
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stocks of companies whose primary trading
markets are located outside of the United
States with an emphasis on larger
capitalization companies in these markets
selected through a blend of value and
growth strategies |
While certain sectors will be overweighted or
underweighted, each Mercury QA Equity Fund seeks to invest in a broad
range of stocks from its market segment, and to include stocks from
most major sectors of the U.S. economy, or, in the case of the Mercury
QA International Fund, markets located outside the United
States.
The Master Aggregate Bond Index Series will normally
invest in a sample of the bonds included in the Lehman Brothers
Aggregate Bond Index, or a sample of bonds not included in the index
but closely correlated with bonds that are in the index, and in
derivative instruments correlated with the Lehman Brothers Aggregate
Bond Index based on its investment advisers 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 fewer
transaction costs than would be incurred through full replication of
the index.
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 Funds investment objective. A Fund
s investment in an underlying fund may exceed 25% of the Fund
s total assets.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Lehman Brothers Aggregate Bond Index
a market-weighted index consisting of
approximately 6,500 U.S. dollar-denominated investment grade bonds
with maturities greater than one year, as chosen by Lehman Brothers
Holding Inc.
Volatilitythe amount and frequency of price
movement of a security, commodity, or market.
The particular underlying funds in which each Fund may invest, the
percentage of each Funds assets to be invested in each
underlying fund, the target strategic allocation and allocation ranges
between the equity market segment and the fixed-income segment, 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 Funds
investments and, therefore, the value of a Funds shares may
fluctuate. 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 Funds investments goes down,
you may lose money.
Changes in the value of a Funds investment
(including changes in an underlying equity fund) may occur because a
particular stock market is fluctuating. At other times, there are
specific factors that may affect an underlying funds performance
or affect the value of particular investments held by an underlying
fund. The Funds are also subject to the risk that the investment
advisers allocations among underlying funds (or the stocks that
the underlying funds select) or the individual securities that the
investment adviser selects will underperform relative to other
securities in its market segment or other funds with similar
investment objectives.
A Fund may invest in the Mercury QA Mid Cap Fund or the
Mercury QA Small Cap Fund, that in turn will invest in 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 larger,
established companies.
Each Fund may also invest in Mercury QA International
Fund that in turn will 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 foreign currency appreciates (or
depreciates) in value against the U.S. dollar, securities denominated
in that currency appreciate (or depreciate) in U.S. dollar
terms.
A Funds 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 fluctuate 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.
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 and investment management fees), but also expenses of the Fund.
Additionally, one underlying fund may buy the same securities that
another underlying fund sells. If this happens, 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 funds, as well as taxable gains from
transactions in shares of the underlying funds by a Fund.
Each fund is a non-diversified fund, which means that,
through its investment in the underlying funds, it invests more of its
assets in fewer companies than if it were a diversified fund. This
increases a Funds risk because each investment has a greater
effect on the Funds performance. Each of the currently
anticipated underlying funds, however, is a diversified
fund.
Who should invest?
The Mercury QA Strategy Growth and Income Fund
may be an appropriate investment for you if you:
|
|
Are
investing with long term goals, such as retirement or funding a child
s education
|
|
|
Want a
professionally managed portfolio
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
|
|
Are willing
to accept the risk that the value of your investment may fluctuate
(over the short term and the long term) in order to seek potentially
higher long term returns
|
|
|
Are looking
for a moderate amount of current income
|
The Mercury QA Strategy Long-Term Growth Fund
may be an appropriate investment for you if you:
|
|
Are
investing with long term goals, 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 and the long term) in order to seek potentially
long term capital growth
|
|
|
Are looking
for some current income
|
The Mercury QA Strategy All-Equity Fund may be
an appropriate investment for you if you:
|
|
Are
investing with long term goals, 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 and the long term) in order to seek potentially
long term capital growth
|
|
|
Are not
looking for a significant amount of current income
|
RISK/RETURN BAR CHART AND TABLE
Since the Funds are scheduled to begin operating on May
5, 2000, there is no current performance information for any
Fund.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or
indirectly. Listed below are some of the main types of expenses, which
all mutual funds may charge:
Expenses paid directly by the
shareholder:
Shareholder Fees these include sales
charges 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 Funds marketing and distribution efforts, such as
compensating financial consultants, advertising and
promotion.
Service (Account Maintenance) Fees
fees used to compensate securities dealers for
account maintenance activities.
Each 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.
Class I Shares
Shareholder Fees (fees paid directly from
your
investment)(b): |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price)(c) |
|
5.25% |
|
5.25% |
|
5.25% |
|
Maximum Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower)(d) |
|
None |
|
None |
|
None |
|
Maximum Sales Charge (Load)
imposed on dividend
reinvestments |
|
None |
|
None |
|
None |
|
Redemption Fee |
|
None |
|
None |
|
None |
|
Exchange Fee |
|
None |
|
None |
|
None |
|
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets): |
|
Management
Fee(e) |
|
0.15% |
|
0.15% |
|
0.15% |
|
Distribution and/or
Service (12b-1) Fees(f) |
|
None |
|
None |
|
None |
|
Other Expenses (including
transfer agency fees)(g) |
|
.43% |
|
.43% |
|
.33% |
Underlying Fund
Expenses(h) |
|
.74% |
|
1.03% |
|
1.25% |
Administrative
Fees |
|
.35% |
|
.35% |
|
.35% |
|
|
|
|
|
|
|
Total Other
Expenses |
|
1.52% |
|
1.81% |
|
1.93% |
|
Total Annual Fund Operating
Expenses |
|
1.67% |
|
1.96% |
|
2.08% |
|
Fee Waiver(i) |
|
(.35)% |
|
(.35)% |
|
(.35)% |
|
|
|
|
|
|
|
Total Net Operating
Expenses(j) |
|
1.32% |
|
1.61% |
|
1.73% |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Class A Shares
Shareholder Fees (fees paid directly from
your investment)(b): |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price)(c) |
|
5.25% |
|
5.25% |
|
5.25% |
|
Maximum Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower)(d) |
|
None |
|
None |
|
None |
|
Maximum Sales Charge (Load)
imposed on dividend
reinvestments |
|
None |
|
None |
|
None |
|
Redemption Fee |
|
None |
|
None |
|
None |
|
Exchange Fee |
|
None |
|
None |
|
None |
|
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets): |
|
Management
Fee(e) |
|
0.15% |
|
0.15% |
|
0.15% |
|
Distribution and/or
Service (12b-1) Fees(f) |
|
0.25% |
|
0.25% |
|
0.25% |
|
Other Expenses (including
transfer agency fees)(g) |
|
.43% |
|
.43% |
|
.33% |
Underlying Fund
Expenses(h) |
|
.74% |
|
1.03% |
|
1.25% |
Administrative
Fees |
|
.35% |
|
.35% |
|
.35% |
|
|
|
|
|
|
|
Total Other
Expenses |
|
1.52% |
|
1.81% |
|
1.93% |
|
Total Annual Fund Operating
Expenses |
|
1.92% |
|
2.21% |
|
2.33% |
|
Fee Waiver(i) |
|
(.35)% |
|
(.35)% |
|
(.35)% |
|
|
|
|
|
|
|
Total Net Operating
Expenses(j) |
|
1.57% |
|
1.86% |
|
1.98% |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Class B Shares(a)
Shareholder Fees (fees paid directly from
your investment)(b): |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) |
|
None |
|
None |
|
None |
|
Maximum Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower)(c) |
|
4.00% |
|
4.00% |
|
4.00% |
|
Maximum Sales Charge (Load)
imposed on dividend
reinvestments |
|
None |
|
None |
|
None |
|
Redemption Fee |
|
None |
|
None |
|
None |
|
Exchange Fee |
|
None |
|
None |
|
None |
|
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)(d): |
|
Management
Fee(e) |
|
0.15% |
|
0.15% |
|
0.15% |
|
Distribution and/or
Service (12b-1) Fees(f) |
|
1.00% |
|
1.00% |
|
1.00% |
|
Other Expenses (including
transfer agency fees)(g) |
|
.43% |
|
.43% |
|
.33% |
Underlying Fund
Expenses(h) |
|
.74% |
|
1.03% |
|
1.25% |
Administrative
Fees |
|
.35% |
|
.35% |
|
.35% |
|
|
|
|
|
|
|
Total Other
Expenses |
|
1.52% |
|
1.81% |
|
1.93% |
|
Total Annual Fund Operating
Expenses |
|
2.67% |
|
2.96% |
|
3.08% |
|
Fee Waiver(i) |
|
(.35)% |
|
(.35)% |
|
(.35)% |
|
|
|
|
|
|
|
Total Net Operating
Expenses(j) |
|
2.32% |
|
2.61% |
|
2.73% |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] FUND FACTS
Class C Shares
Shareholder Fees (fees paid directly from
your investment)(b): |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) |
|
None |
|
None |
|
None |
|
Maximum Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever is
lower)(c) |
|
1.00% |
|
1.00% |
|
1.00% |
|
Maximum Sales Charge (Load)
imposed on dividend
reinvestments |
|
None |
|
None |
|
None |
|
Redemption Fee |
|
None |
|
None |
|
None |
|
Exchange Fee |
|
None |
|
None |
|
None |
|
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets): |
|
Management
Fee(e) |
|
0.15% |
|
0.15% |
|
0.15% |
|
Distribution and/or
Service (12b-1) Fees(f) |
|
1.00% |
|
1.00% |
|
1.00% |
|
Other Expenses (including
transfer agency fees)(g) |
|
.43% |
|
.43% |
|
.33% |
Underlying Fund
Expenses(h) |
|
0.74% |
|
1.03% |
|
1.25% |
Administrative
Fees |
|
.35% |
|
.35% |
|
.35% |
|
|
|
|
|
|
|
Total Other
Expenses |
|
1.52% |
|
1.81% |
|
1.93% |
|
Total Annual Fund Operating
Expenses |
|
2.67% |
|
2.96% |
|
3.08% |
|
Fee waiver(i) |
|
(.35)% |
|
(.35)% |
|
(.35)% |
|
|
|
|
|
|
|
Total Net Operating
Expenses(j) |
|
2.32% |
|
2.61% |
|
2.73% |
|
(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)
|
In addition, certain securities dealers may charge
a fee to process a purchase or sale of shares.
|
(c)
|
Some investors may qualify for reductions in the
sales charge (load).
|
(d)
|
You may pay a deferred sales charge if you purchase
$1 million or more and you redeem within one year.
|
(e)
|
The investment adviser or its affiliate provides
accounting services to each 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.
Class B and Class 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%.
|
(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
assets of each Fund that are initially expected to be invested in
each underlying fund 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 Funds assets among the underlying funds and
with other events that directly affect the expenses of the
underlying funds.
|
(i)
|
With respect to each Fund, the investment adviser
has entered into a contractual arrangement with the Funds to waive
the Administrative fee of .35%. This arrangement has a one-year term
and is renewable.
|
(j)
|
The net total operating expenses reflect the
investment advisers estimate of expenses that will actually be
incurred during each Funds current fiscal year, restated to
reflect the contractual fee waiver currently in
effect.
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Fund Facts
Examples:
These examples are intended to help you compare the
cost of investing in the Funds 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 Funds 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 |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One Year |
|
$
652 |
|
$
680 |
|
$
692 |
|
Three Years
|
|
$
993 |
|
$1,077 |
|
$1,112 |
|
|
|
CLASS A SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One Year |
|
$
676 |
|
$
704 |
|
$
715 |
|
Three Years
|
|
$1,066 |
|
$1,150 |
|
$1,184 |
|
|
|
CLASS B SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
635 |
|
$
664 |
|
$
676 |
|
Three
Years |
|
$1,098 |
|
$1,185 |
|
$1,220 |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] FUND FACTS
|
|
|
|
|
|
|
CLASS C SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
335 |
|
$
364 |
|
$
376 |
|
Three
Years |
|
$
798 |
|
$
885 |
|
$
920 |
|
|
Expenses if you did not
redeem your shares: |
|
|
CLASS I SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
652 |
|
$
680 |
|
$
692 |
|
Three
Years |
|
$
993 |
|
$1,077 |
|
$1,112 |
|
|
CLASS A SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
676 |
|
$
704 |
|
$
715 |
|
Three
Years |
|
$1,066 |
|
$1,150 |
|
$1,184 |
|
|
CLASS B SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
235 |
|
$
264 |
|
$
276 |
|
Three
Years |
|
$
798 |
|
$
885 |
|
$
920 |
|
|
CLASS C SHARES |
|
|
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
One
Year |
|
$
235 |
|
$
264 |
|
$
276 |
|
Three
Years |
|
$
798 |
|
$
885 |
|
$
920 |
|
|
These expenses do not reflect the
continuation of the contractual arrangement between the
investment adviser and each Fund to waive the Administrative
Fee of 0.35%. As stated above, this arrangement has a one-year
term and is renewable.
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
About the Portfolio Manager
Philip Green is a Senior Vice President and the
Portfolio Manager of the Funds. Mr. Green has been a Senior Vice
President of Fund Asset Management, L.P. and certain of its
affiliates since 1999. Mr. Green is primarily responsible for
the day-to-day management of the Funds.
About the Investment Adviser
Mercury Asset Management US, a division of Fund Asset
Management, L.P., is the investment adviser.
Derivative Instrumentan
instrument, such as an option, future or swap, whose value is
based on the performance of an underlying asset.
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.
General Investment Management Approach
Mercury Asset Management US, a division of Fund
Asset Management, L.P., serves as investment adviser to the
three asset allocation Mercury QA 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, short-term money market
instruments and other financial instruments, such as
derivative instruments, including
futures. The investment adviser may use
derivatives to seek to reduce the effect of currency
fluctuations on securities held by the 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.
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 Advisers Asset
Allocation Investment Philosophy and Process
Each Fund has a strategic target allocation
between equity and fixed-income securities and a range within
which it can vary these allocations. Each Fund also has a
baseline range for allocation of its assets among the underlying
funds. The investment adviser will adjust the equity and
fixed-income allocations and the underlying funds allocations
within these ranges based on its evaluation of the relative
attractiveness of various asset classes in light of a Fund
s investment objective and prevailing economic 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. When deviating from the strategic target allocation
and the percentage of assets of a Fund that is allocated to each
underlying fund, the investment adviser seeks to balance the
amount any asset class can be overweighted against the amount of
added risk due to the deviation. Finally, the investment adviser
may seek to further adjust a Funds allocation by investing
in individual securities, short-term money market instruments
(cash-equivalents) and 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. The Mercury QA Strategy All-Equity Fund has a limited
strategic
target allocation of 95%-100% equity securities. Thus, under
normal conditions, the Mercury QA Strategy All-Equity Fund will
not vary its strategic allocation significantly, although the
investment adviser may vary the relative weighting of the
underlying funds in its portfolio.
The strategic target allocations for each Fund
and the ranges within which each Fund may vary its strategic
target allocation are set forth below.
Strategic Target Allocations
Fund |
|
Target |
|
Range |
|
Mercury
QA Strategy Growth and Income Fund |
|
Equity |
|
55% |
|
40%-70% |
|
Fixed-Income
and Cash Equivalents* |
|
45% |
|
30%-60% |
|
Mercury
QA Strategy Long-Term Growth Fund |
|
Equity |
|
75% |
|
60%-90% |
|
Fixed-Income
and Cash Equivalents* |
|
25% |
|
10%-40% |
|
Mercury
QA Strategy All-Equity Fund |
|
Equity |
|
100% |
|
95%-100% |
|
Fixed-Income
and Cash Equivalents* |
|
0% |
|
0%-5% |
|
*
|
The Fund intends to maintain cash positions, either
directly or through its investment in the underlying funds, to
the extent such underlying funds maintain cash
positions.
|
The table below shows the range (as a percentage
of each Funds assets) that is expected initially to be
invested in each underlying fund.
|
|
Range of
Assets of |
Underlying
Fund |
|
Mercury QA
Strategy
Growth and
Income Fund |
|
Mercury QA
Strategy
Long-Term
Growth Fund |
|
Mercury QA
Strategy
All-Equity
Fund |
|
Equity
Asset Class |
|
Mercury QA
Large Cap Core Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA
Large Cap Value Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA
Large Cap Growth Fund of
Mercury QA Equity Series, Inc. |
|
15% |
|
22% |
|
27% |
|
Mercury QA
Mid Cap Fund of Mercury QA Equity Series, Inc.
|
|
4% |
|
7% |
|
9% |
|
Mercury QA
Small Cap Fund of Mercury QA Equity Series, Inc.
|
|
3% |
|
4% |
|
5% |
|
Mercury QA
International Fund of
Mercury QA Equity Series, Inc. |
|
3% |
|
3% |
|
5% |
|
Fixed-Income Asset Class |
|
|
|
|
|
|
|
Master
Aggregate Bond Index Series of
Quantitative Master Series Trust |
|
45% |
|
20% |
|
0% |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
A Funds investment in an underlying fund may, and in some
cases is expected to, exceed 25% of the Funds total
assets.
The particular underlying funds in which each
Fund may invest, the percentage of each Funds assets to be
invested in each underlying fund, the target strategic
allocation and allocation ranges between the equity market
segment and the fixed-income segment and the investment policies
of each underlying fund may be changed from time to time without
shareholder approval.
Description of the Underlying Funds
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.
Underlying
Fund |
|
Investment
Objective |
|
Equity Asset Class |
|
|
|
Mercury QA Large Cap Core Fund of
Mercury QA Equity Series, Inc. |
|
to provide long-term
growth of capital |
|
Mercury QA Large Cap Value Fund of
Mercury QA Equity Series, Inc. |
|
primarily to provide
long-term growth of capital
and secondarily to provide dividend income |
|
Mercury QA Large Cap Growth Fund of
Mercury QA Equity Series, Inc. |
|
to provide long-term
growth of capital |
|
Mercury QA Mid Cap Fund of
Mercury QA Equity Series, Inc. |
|
to provide long-term
growth of capital |
|
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc. |
|
to provide long-term
growth of capital |
|
Mercury QA International Fund of
Mercury QA Equity Series, Inc. |
|
to provide long-term
growth of capital |
|
|
Fixed-Income Asset Class |
|
|
|
Master Aggregate Bond Index Series of
Quantitative Master Series Trust |
|
to match the
performance of the Lehman
Brothers Aggregate Bond Index as closely as
possible before the deduction of expenses |
|
Underlying Funds that Invest in Equity
Securities
The investment strategy for each of the Mercury
QA Equity Funds listed above (except the Mercury QA
International Fund) is to normally invest at least 65% of its
total assets in equity securities of U.S. issuers. Each of the
Mercury QA Large
Cap Core Fund, Mercury QA Large Cap Value Fund and Mercury QA
Large Cap Growth fund normally invests at least 65% of its total
assets in equity securities of large-capitalization companies.
Each of the Mercury QA Mid Cap Fund and Mercury QA Small Cap
Fund normally invests at least 65% of its total assets in equity
securities of mid-capitalization companies and
small-capitalization companies, respectively. The Mercury QA
International Fund normally invests 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 of the Mercury QA Equity
Funds seeks to maximize each Mercury QA Equity Funds
expected return by investing in securities to create a portfolio
that has risk and style characteristics similar to those of a
particular market segment. The investment adviser of the Mercury
QA Equity Funds uses three principal strategies to select
investments for each Fund. First, the investment adviser uses
objective criteria to construct an optimal portfolio
of investments that has similar risk and style characteristics
as a particular market segment, but which will overweight
sectors the investment adviser of the Mercury QA Equity Funds
believes to be attractive and underweight sectors the investment
adviser of the Mercury QA Equity Funds believes to be less
attractive. Next, the investment adviser of the Mercury QA
Equity Funds analyzes the stocks among such sectors using
technical and in-depth quantitative research to identify those
stocks that may perform well relative to the overall market
segment. This analysis is designed to identify a portfolio of
investments that the adviser believes will outperform the market
segment. Depending on the Mercury QA Equity Fund, this analysis
involves selection of stocks through a value
strategy, a growth strategy or a blend of the two.
Third, the investment adviser of the Mercury QA Equity Funds
uses quantitative risk management techniques to ensure that each
Funds portfolio remains consistent with, and within
appropriate risk levels relative to, its respective market
segment.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
The market segment and style of investment analysis for each of
the Mercury QA funds is as follows:
Fund |
|
Market
Segment |
|
Mercury QA Large Cap Core Fund of
Mercury QA Equity Series, Inc. |
|
stocks of
large-capitalization companies selected
through a blend of value and growth
strategies |
|
Mercury QA Large Cap Value Fund of
Mercury QA Equity Series, Inc. |
|
stocks of
large-capitalization companies selected
through a value strategy |
|
Mercury QA Large Cap Growth Fund of
Mercury QA Equity Series, Inc. |
|
stocks of
large-capitalization companies selected
through a growth strategy |
|
Mercury QA Mid Cap Fund of
Mercury QA Equity Series, Inc. |
|
stocks of
mid-capitalization companies selected
through a blend of value and growth
strategies |
|
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc. |
|
stocks of
small-capitalization companies selected
through a blend of value and growth
strategies |
|
Mercury QA International Fund of
Mercury QA Equity Series, Inc. |
|
stocks of companies
whose primary trading
markets are located outside of the United States
with an emphasis on larger capitalization
companies in these markets selected through a
blend of value and growth
strategies |
|
The investment adviser of the Mercury QA Equity
Funds uses portfolio construction techniques to construct the
optimal portfolio. These portfolio construction
techniques rely on objective formulas, and are designed to
maintain a disciplined and style controlled strategy for each
Fund. The investment adviser of the Mercury QA Equity Funds then
uses technical and in-depth quantitative analysis to select
individual investments from the universe of the optimal
portfolio. This technical and in-depth quantitative
analysis is the most significant part of the investment process,
and is designed to identify those investments that the adviser
believes will outperform the relevant market
segment.
The technical and in-depth quantitative analysis
focuses on a variety of 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 Mercury QA Equity Fund, the investment
adviser of the Mercury QA Equity Funds emphasizes identifying
and purchasing those stocks that it believes are priced most
attractively and which appear to present good opportunities for
gain, based on the investment advisers technical and
in-depth quantitative
analysis. The Mercury QA Large Cap Value Fund focuses on stocks of
companies that appear to be undervalued by the market or which
appear to be temporarily out of favor, but which the investment
adviser of the Mercury QA Equity Funds believes offer promising
long term prospects. The Mercury QA Large Cap Growth Fund
focuses on stocks of companies that are expected to have better
prospects for earnings than the growth rate of the general
domestic economy. The investment adviser of the Mercury QA
Equity Funds uses a blend of value and growth strategies in
selecting investments for the other four Mercury QA Equity
Funds.
To achieve further efficiencies, and/or add
value, each Mercury QA Equity Fund may also invest in futures
contracts. The investment adviser of the Mercury QA Equity Funds
selects futures that it believes may serve as substitutes for
individual securities in an attempt to broadly represent a
particular market or market segment. Each Mercury QA Equity Fund
regularly invests a small portion of its assets in futures
contracts correlated with an index representing
the Mercury QA Equity Funds particular market segment.
Futures allow the Mercury QA Equity Funds to increase exposure
to the market segment quickly and at less cost than buying or
selling individual stocks. Each Mercury QA Equity Fund invests
in futures 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 Mercury QA
Equity Fund also invests in futures whenever the investment
adviser of the Mercury QA Equity Funds believes a futures
contract presents price or return characteristics superior to
those of stocks represented in the market segment. Furthermore,
the Mercury QA International Fund uses futures as an efficient
and less costly way of increasing or decreasing its exposure to
stocks of companies in particular countries represented in its
market segment. The Mercury QA Equity Funds consider futures
that provide exposure to equity indices of individual stocks to
be equity securities for purposes of the percentages described
above.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
Each of the market segments targeted by a Mercury
QA Equity Fund is reflected in a broad-based market index.
Therefore, while none of the Mercury QA Equity Funds is an index
fund that seeks to replicate an index, the portfolio
construction techniques discussed above are designed with the
goal of ensuring that each Mercury QA Equity Fund will have risk
and style characteristics similar to the index listed
below:
Fund |
|
Index |
|
Mercury QA Large Cap Core Fund of
Mercury QA Equity Series, Inc. |
|
Standard & Poor
s 500 Composite Stock Price
Index (S&P 500) |
|
Mercury QA Large Cap Value Fund of
Mercury QA Equity Series, Inc. |
|
Standard & Poor
s 500/Barra Value Index |
|
|
Mercury QA Large Cap Growth Fund of
Mercury QA Equity Series, Inc. |
|
Standard & Poor
s 500/Barra Growth Index |
|
|
Mercury QA Mid Cap Fund of
Mercury QA Equity Series, Inc. |
|
Standard & Poor
s Mid Cap 400 Index |
|
|
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc. |
|
Standard & Poor
s SmallCap 600 Index |
|
|
Mercury QA International Fund of
Mercury QA Equity Series, Inc. |
|
Morgan Stanley Capital
International Europe,
Asia and Far East Capitalization Weighted Index
(EAFE Index) |
|
Each Mercury QA Equity Fund may invest in short
term, fixed-income securities that are considered to be cash
equivalents. These instruments may include obligations of the
U.S. Government, its agencies or instrumentalities, highly rated
bonds or comparable unrated bonds, commercial paper, bank
obligations and repurchase agreements. The Mercury QA Equity
Funds will not invest in short term money market instruments in
order to lessen the Mercury QA funds exposure to common
stocks as a defensive strategy, but will instead attempt to
remain fully invested at all times.
Underlying Fund that Invests in Fixed
Income Securities
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 closely correlated with bonds that are
in the index, and in derivative instruments correlated to the
Lehman Brothers Aggregate Bond Index based on the underlying fund
s investment advisers 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
fewer transaction costs than would be incurred through full
replication of the index.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the details
The Master Aggregate Bond Index Series may occasionally invest in
bonds not included in the Lehman Brothers Aggregate Bond Index,
but which are selected to reflect characteristics such as
maturity, duration, and credit quality that are similar to bonds
in the index. This may result in somewhat different levels of
interest rate, credit or other risks from the levels of risks on
the securities included in the Lehman Brothers Aggregate Bond
Index. The Master Aggregate Bond Index Series may trade
securities to the extent necessary to maintain the duration of
certain segments of the portfolio close to the duration of
corresponding segments of the index. This will tend to increase
the Master Aggregate Bond Index Series turnover
rate.
Because the Lehman Brothers Aggregate Bond Index
is composed of investment grade bonds, the Master Aggregate Bond
Index Series will invest in corporate bonds rated investment
grade (rated at least Baa by Moodys Investors Services,
Inc. or BBB by Standard & Poors Ratings Group), or if
unrated, of comparable quality. The Master Aggregate Bond Index
Series may continue to hold a security that is downgraded below
investment grade.
The Master Aggregate Bond Index Series will
usually invest a substantial portion of its assets in
mortgage-backed securities. Mortgage-backed securities may be
either pass through securities or collateralized mortgage
obligations. Pass through securities are securities that
represent a right to receive principal and interest payments
collected on a pool of mortgages, which are passed through to
security holders (less servicing costs). Collateralized mortgage
obligations are mortgage-backed securities that divide the
principal and interest payments collected on a pool of mortgages
into several revenue streams with different priority rights to
various portions of the underlying mortgage
payments.
The Master Aggregate Bond Index Series may also
purchase securities on a when-issued basis, and it may purchase
or sell securities for delayed delivery. This is when the Master
Aggregate Bond Index Series buys or sells securities with
payment and delivery taking place in the future so that it can
lock in a favorable yield and price at the time of entering into
the transaction. The Master Aggregate Bond Index Series may also
enter into dollar rolls, in which it sells securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar securities on a future date
from the same party. During the period between the Master
Aggregate Bond Index Series sale of one security and
purchase of a similar security, the Master Aggregate Bond Index
Series does not receive principal and interest on the securities
sold. The Master Aggregate Bond Index Series may also enter into
standby commitment agreements in which the Master Aggregate Bond
Index Series is committed, for a stated period of time, to buy a
stated amount of fixed income security which may
be issued and sold to the Master Aggregate Bond Index Series at
the option of the issuer. The price of the security is fixed at
the time of the commitment, and the Master Aggregate Bond Index
Series is paid a commitment fee whether the security is issued
or not.
The Master Aggregate Bond Index Series may invest
in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures
contracts correlated with the performance of the Lehman Brothers
Aggregate Bond Index. Derivatives may allow the Master Aggregate
Bond Index Series to increase or decrease its exposure to the
Lehman Brothers Aggregate Bond Index quickly and at less cost
than buying or selling bonds. The Master Aggregate Bond Index
Series may invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the
event of subscriptions, to maintain liquidity in the event of
redemptions and to keep trading costs low. In connection with
the use of derivative instruments, the Master Aggregate Bond
Index Series may enter into short sales in order
to adjust the weightings of particular securities represented in
a derivative to more accurately reflect the securities
weightings in the target index.
All Funds
Each Funds investment objective is
fundamental and may not be changed without shareholder approval.
Each Funds 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.
Each Fund will normally invest almost all of its
assets as described above. Each Fund may, however, invest
directly in individual securities and other financial
instruments, including short-term instruments, such as money
market securities and repurchase agreements for asset allocation
or other purposes. It is expected that each Fund may from time
to time invest directly in currency contracts for
hedging purposes. The Funds may also invest in short-term
instruments or fixed-income securities or buy or sell futures
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 between the equity asset
class and fixed-income asset class within the percentage ranges
described above.
This section contains a summary discussion of the
principal 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 objectives, or that a Fund
s performance will be positive over any period of
time.
Risks that Apply to the
Funds
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 Funds risk is increased because each
investment has a greater effect on the Funds performance.
This hurts a Funds 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.
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 which the Funds expect to invest as
of the date of this Prospectus. Therefore in the section below,
the term Fund refers to both the Mercury QA Strategy
Series Funds and the underlying funds.
Stock Market Risk
Stock market risk is the risk that the stock
markets in one or more countries in which a Fund or an
underlying fund invests will go down in value, including the
possibility that one or more markets will go down sharply and
unpredictably.
Selection Risk
Selection risk for the Mercury QA Equity Funds is
the risk that investments that underlying fund management
selects may underperform relative to other securities in a
particular market segment overall or other funds with similar
investment objectives and investment strategies.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
Net Asset Value the
market value in U.S. dollars of a Funds total assets after
deducting liabilities, divided by the number of shares
outstanding.
Selection risk for the Funds is the risk that the investments
(including in the underlying funds) that the investment adviser
selects may underperform relative to other securities in the
stock or bond market or other funds with similar investment
objectives and investment strategies.
Derivatives
Derivatives, such as futures, may allow a Fund to
increase or decrease its level of risk exposure more quickly and
efficiently than other types of instruments.
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.
|
|
|
Liquidity risk
the risk that certain securities may be difficult or
impossible to sell at the time that a Fund would like or at
the price that a Fund believes the security is then
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. Derivatives
may not always be available or cost efficient. If a Fund invests
in derivatives, the investments may not be effective as a hedge
against price movements.
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 Funds portfolio.
Borrowing will cost a Fund interest expense and other fees. The
costs of borrowing may reduce a Funds return.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
Certain securities that a Fund buys may create leverage,
including, for example, derivative securities. Like borrowing,
these investments may increase a Funds 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 may also lose
money if it does not recover the securities and the value of the
collateral falls. These events could trigger adverse tax
consequences to a Fund.
Illiquid Securities
Each Fund may invest up to 15% of its net assets
in illiquid securities that it cannot easily resell within seven
days at current value or that have contractual or legal
restrictions on resale. If a Fund buys illiquid securities it
may be unable to quickly resell them or may be able to sell them
only at a price below current value.
Restricted Securities
Restricted securities have contractual or legal
restrictions on their resale. They include private placement
securities that a Fund buys directly from the issuer. Private
placement and other restricted securities may not be listed on
an exchange and may have no active trading market.
Restricted securities may be illiquid. A Fund may
be unable to sell them on short notice or may be able to sell
them only at a price below current value. A Fund may get only
limited information about the issuer, and 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.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
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 move closer to some historical level and
that price differences from this level will disappear. However,
in the event the price differences do not disappear or widen, a
Fund could lose money on a transaction.
Risks that Apply to Certain Underlying
Funds
Mercury QA Small Cap Fund and Mercury QA Mid Cap
Fund
Small Cap Risk
Small cap companies, and, to a lesser extent, mid
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 or mid cap company may lose substantial
value.
Small cap securities, and, to a lesser extent,
mid cap securities, generally trade in lower volumes and are
subject to greater and more unpredictable price changes than
larger cap securities or the stock market as a whole. Moreover,
small cap securities often are not income producing investments,
and thus may not cushion the underlying funds total return
from price changes.
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 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.
Mercury QA International Fund and Master Aggregate
Bond Index Series
Foreign Market Risk
Because the underlying funds may invest in
foreign securities, it offers the potential for more
diversification than an investment only in the United States.
Stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However,
such investments involve special risks not present in U.S.
investments that can increase the chances that the underlying
fund will lose money. In particular, investment in foreign
securities involves the following risks, which are generally
greater for investments in emerging markets:
|
|
The economies of certain foreign markets often
do not compare favorably with that of the United States in
areas such as growth of gross domestic product, reinvestment
of capital, resources, and balance of payments. Some of these
economies may rely heavily on particular industries or foreign
capital. They may be more vulnerable to adverse 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 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.
|
|
|
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.
They could also impair an underlying funds ability to
purchase or sell foreign securities or transfer the assets or
income back into the United States, or otherwise adversely
affect the underlying funds operations.
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|
|
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 some foreign countries may be less extensive than
those available to investors in the United States.
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|
|
Because there are generally fewer investors on
foreign exchanges and a fewer number of shares traded each
day, it may be more difficult for the underlying funds to buy
and sell securities on those exchanges. In addition, prices of
foreign
securities may go down more than prices of securities traded in
the United States.
|
|
|
Foreign markets may have different clearance
and settlement procedures. In certain markets, settlements may
be unable to keep pace with the volume of securities
transactions. If this occurs, settlement may be delayed and an
underlying funds assets may be uninvested and not
earning returns. The underlying fund may miss investment
opportunities or be unable to sell an investment because of
these delays.
|
Currency Risk and Exchange Risk
Securities in which the underlying funds invest
may be denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect
the value of an underlying funds portfolio. Generally,
when the U.S. dollar rises in value against a foreign currency,
a security denominated in that currency loses value because the
currency is worth fewer U.S. dollars. Conversely, when the U.S.
dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as
currency risk, means that a stronger U.S. dollar
will reduce returns for U.S. investors while a weak U.S. dollar
will increase those returns.
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. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For
example, some foreign countries may have no laws or rules
against insider trading. Insider trading occurs when a person
buys or sells a companys securities based on 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 U.S. accounting standards, it may be harder for
an underlying funds portfolio manager to completely and
accurately determine a companys 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 an underlying fund
can earn on its investments.
Certain Risks of Holding Fund Assets Outside the
United States
Each underlying fund generally holds the foreign
securities and cash in which it invests in foreign banks and
securities depositories. Certain of such foreign banks
and securities depositories may be recently organized or new to
the foreign custody business. In addition, there may be limited
or no regulatory oversight over their operations. Also, the laws
of some countries may put limits on an underlying funds
ability to recover its assets if a foreign bank, depository or
issuer of a security, or any of its agents, goes bankrupt. In
addition, it is often more expensive for the underlying Fund to
buy, sell, and hold securities in certain foreign markets than
in the U.S. The increased expense for investing in certain
foreign markets reduces the amount an underlying fund can earn
on its investments and typically results in a higher operating
expense ratio for it than for funds invested only in the
U.S.
Dividends or interest on, or proceeds from the
sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may
apply.
European Economic and Monetary Union (EMU
)
A number of European countries have entered into
EMU in an effort to reduce barriers between themselves and
eliminate fluctuations in their currencies. EMU established a
single European currency (the euro), that was introduced on
January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Certain
securities (beginning with government and corporate bonds) were
redenominated in the euro. These securities trade and make
dividend and other payments only in euros. Like other investment
companies and business organizations, including the companies in
which the underlying funds invest, the underlying funds could be
adversely affected:
|
|
If the transition to euro, or EMU as a whole,
does not continue to proceed as planned.
|
|
|
If a participating country withdraws from
EMU.
|
Master Aggregate Bond Index Series
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 Master
Aggregate Bond Index Series can hold bonds of any maturity. As a
result, if the Master Aggregate Bond Index Series invests a
large amount in long-term bonds, that funds 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.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] About the Details
Credit Risk
Credit risk is the risk that the issuer will be
unable to pay interest or principal when due. The degree of
credit risk depends on both the financial condition of the
issuer and the terms of the obligation.
Event Risk
Event risk is the risk that corporate issuers may
undergo restructurings, such as mergers, leveraged buyouts,
takeovers, or similar events, which may be financed by increased
debt. As a result of the added debt, the credit quality and
market value of a companys bonds may decline
significantly.
Foreign Government Debt
The Master Aggregate Bond Index Series may invest
in debt securities issued or guaranteed by foreign governments
(including foreign states, provinces and municipalities) or
their agencies. Investments in these securities subject the
Master Aggregate Bond Index Series 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.
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 fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or
that the other party will not meet its obligation. If this
occurs, the underlying fund loses both the investment
opportunity for the assets it has set aside to pay for the
security and any gain in the securitys 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.
A stripped mortgage-backed security is a mortgage-backed
security that is separated into its principal and interest
components. The resulting two securities may be sold separately
and may perform differently.
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.
Dollar Rolls
Dollar rolls involve the risk that the market
value of the securities that the underlying fund is committed to
buy may decline below the price of the securities it has sold.
These transactions may involve leverage. The underlying fund
will engage in dollar rolls to enhance return and not for the
purpose of borrowing.
Standby Commitment Agreements
Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less
than its purchase price.
STATEMENT OF ADDITIONAL
INFORMATION
If you would like further information about the
Funds or the underlying funds, including how they invest, please
see the Statement of Additional Information.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
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.
For example, if you select Class I or Class 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 reduction or waiver.
If you select Class B or Class 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 Funds 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
Class C shares.
Each Funds shares are distributed by
Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc.
A subscription period for the Funds shares
will end on May 2, 2000, unless extended. Subscriptions will be
payable, shares will be issued and each Fund will commence
operations on the third business day after the end of the
subscription period. A Fund or the distributor can terminate the
subscription offering at any time, in which case the Fund will
not commence operations or will commence operations with a
limited number of shares.
After a Fund commences operations, its shares can
be purchased on each business day.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
To better understand the pricing of each Fund
s shares, we have summarized the information
below:
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|
Class
I |
|
Class
A |
|
Class
B |
|
Class
C |
|
Availability? |
|
Limited to certain
investors including: |
|
Generally available
through selected
securities dealers. |
|
Generally available
through selected
securities dealers. |
|
Generally available
through selected
securities dealers. |
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|
Current Class I
shareholders |
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|
Certain Retirement
Plans |
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Participants of
certain sponsored
programs |
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Certain affiliates of
selected securities
dealers |
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Initial Sales
Charge? |
|
Yes. Payable at time
of purchase. Lower
sales charges available
for certain larger
investments. |
|
Yes. Payable at time
of purchase. Lower
sales charges available
for certain larger
investments. |
|
No. Entire purchase
price is invested in
shares of the Fund. |
|
No. Entire purchase
price is invested in
shares of the Fund. |
|
|
Deferred Sales
Charge? |
|
No. (May be charged
for purchases over
$1 million that are
redeemed within one
year). |
|
No. (May be charged
for purchases over
$1 million that are
redeemed within one
year). |
|
Yes. Payable if you
redeem within six
years of purchase. |
|
Yes. Payable if you
redeem within one
year of purchase. |
|
|
Account
Maintenance
and Distribution
Fees? |
|
No. |
|
0.25% Account
Maintenance Fee. No
Distribution Fee. |
|
0.25% Account
Maintenance Fee.
0.75% Distribution
Fee. |
|
0.25% Account
Maintenance Fee.
0.75% Distribution
Fee. |
|
|
Conversion to
Class A shares? |
|
No. |
|
Not
applicable. |
|
Yes, automatically
after approximately
8 years. |
|
No. |
|
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
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.
Class I and Class A Shares Initial Sales Charge
Options
The public offering price of Class I and Class A
shares of a Fund during the subscription period is $10.00 per
share. If you select Class I or Class 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.
Your
Investment |
|
As a % of
Offering Price |
|
As a % of
Your Investment* |
|
Dealer
Compensation
as a % of
Offering Price |
|
Less than $25,000 |
|
5.25% |
|
5.54% |
|
5.00% |
|
$25,000 but less than $50,000 |
|
4.75% |
|
4.99% |
|
4.50% |
|
$50,000 but less than $100,000 |
|
4.00% |
|
4.17% |
|
3.75% |
|
$100,000 but less than $250,000 |
|
3.00% |
|
3.09% |
|
2.75% |
|
$250,000 but less than
$1,000,000 |
|
2.00% |
|
2.04% |
|
1.80% |
|
$1,000,000 and over** |
|
0.00% |
|
0.00% |
|
0.00% |
|
*
|
Rounded to the nearest one-hundredth
percent.
|
**
|
If you invest $1,000,000 or more in
Class I or Class A shares of a Fund, you may not pay an
initial sales charge. In that case, the investment adviser
compensates the selling dealer from its own funds. If you
redeem your shares within one year after purchase, you may be
charged a deferred sales charge. This charge is 1% of the
lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class I and
Class A shares by certain employer sponsored retirement or
savings plans.
|
No initial sales charge applies to Class I or
Class A shares of a Fund that you buy through reinvestment of
dividends.
A reduced or waived sales charge on a purchase of
Class I or Class 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
|
|
|
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
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
|
|
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 the Funds transfer agent at
1-888-763-2260.
Class B and Class 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 distribution plans that each Fund has
adopted under Rule 12b-1 under the Investment Company Act of
1940. Because these fees are paid out of each Funds 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. 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 securities dealer who assists you
in your decision to purchase the shares of such
Fund.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
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 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
|
|
|
Redemption by certain eligible 401(a) and
401(k) plans, certain related accounts, 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
|
|
|
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
|
|
|
Withdrawal through the Systematic Withdrawal
Plan of up to 10% per year of your account value at the time
the plan is established
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
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 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 of a Fund in an exchange from another fund with a
shorter conversion schedule, the Funds eight year
conversion schedule will apply. If you exchange your Class B
shares in the Fund for Class B shares of another Mercury fund
with a longer conversion schedule, the other funds
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 relative to Class C shares
may be reduced or waived in connection with certain involuntary
termination(s) 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
many considerations, your financial consultant may help you with
this decision.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
If you want
to |
|
Your
choices |
|
Information important
for you to know |
|
Buy shares |
|
First, select the
share class
appropriate for you |
|
Please refer to the
pricing of shares table on page 34. Be sure to read
this Prospectus carefully. |
|
|
|
Next, determine the
amount of
your investment |
|
The minimum initial
investment for a Fund is $1,000 for all accounts
except: |
|
|
|
|
$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
consultant
or securities dealer submit your
purchase order |
|
The price of your
shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed
prior to the
close of business on the New York Stock Exchange (generally 4:00
p.m.
Eastern time) will be priced at the net asset value determined
that day. |
|
|
|
|
|
Purchase orders
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 agent |
|
To purchase shares
directly, call the transfer agent to request a
purchase application. Mail the completed purchase application to
the
transfer agent at the address on the inside back cover of this
Prospectus. |
|
Add to your
investment |
|
Purchase additional
shares |
|
The minimum investment
for additional purchases is generally $100 for
all accounts except: |
|
|
|
|
$50 for certain fee-based programs |
|
|
|
|
$1 for retirement plans |
|
|
|
|
|
(The minimums for
additional purchases may be waived under certain
circumstances.) |
|
|
|
Acquire additional
shares
through the automatic dividend
reinvestment plan |
|
All dividends are
automatically reinvested without a sales charge. |
|
|
|
Participate in the
automatic
investment plan |
|
You may automatically
invest a specific amount on a periodic basis
through your securities dealer: |
|
|
|
|
The current minimum for such automatic
investments is $100. The
minimum may be waived or revised under certain
circumstances. |
|
Transfer shares to
another securities
dealer |
|
Transfer to a
participating
securities dealer |
|
To transfer your
shares of a Fund to another securities dealer,
authorized dealer agreements must be in place between the
distributor
and the transferring securities dealer and the distributor and
the
receiving securities dealer. Certain shareholder services may
not be
available for the transferred shares. All future trading of
these shares
must be coordinated by the receiving securities
dealer. |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] ACCOUNT CHOICES
If you want
to |
|
Your
choices |
|
Information important
for you to know |
|
|
|
Transfer to a
non-participating
securities dealer |
|
You cannot transfer
your shares of a Fund to a securities dealer that
does not have an authorized dealer agreement with the
distributor. You
must either: |
|
|
|
|
Transfer your shares to an account with the
transfer agent; or |
|
|
|
|
Sell your shares, paying any applicable
deferred sales charge. |
|
Sell your
shares |
|
Have your financial
consultant
or securities dealer submit your
sales order |
|
The price of your
shares is based on the next calculation of net asset
value after your order is placed. For your redemption request to
be
priced at the net asset value on the day of your request, you
must
submit your request to your dealer prior to that days
close of business
on the New York Stock Exchange (generally at 4:00 p.m. Eastern
time).
Any redemption request placed after that time will be priced at
the net
asset value at the close of business on the next business
day. |
|
|
|
|
|
Certain securities
dealers may charge a fee to process a sale of shares.
For example, the fee charged by Merrill Lynch, Pierce, Fenner
& Smith
Incorporated is currently $5.35. 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 agent |
|
You may sell shares
held at the transfer agent by writing to the transfer
agent at the address on the inside back cover of this
Prospectus. All
shareholders on the account must sign the letter. A signature
guarantee
will generally be required but may be waived in certain limited
circumstances. You can obtain a signature guarantee from a bank,
securities dealer, securities broker, credit union, savings
association,
national securities exchange and registered securities
association. A
notary public seal will not be acceptable. If you hold stock
certificates,
return the certificates with the letter. The transfer agent will
normally
mail redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before a
Fund has collected payment for the purchase of shares, the Fund
or the
transfer agent may delay mailing your proceeds. This delay
usually will
not exceed ten days. |
|
Sell shares
systematically |
|
Participate in a Fund
s
Systematic Withdrawal Plan |
|
You can generally
arrange through your selected dealer for systematic
redemptions of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions.
You must have dividends automatically reinvested. For Class B and
Class 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 redemptions. Ask
your
financial consultant for details. |
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
If you want
to |
|
Your
choices |
|
Information important
for you to know |
|
Exchange your
shares |
|
Select the fund into
which you
want to exchange. Be sure to
read that funds prospectus. |
|
You can exchange your
shares of a Fund for shares of other Mercury
mutual funds or for shares of the Summit Cash Reserves Fund. You
must have held the shares used in the exchange for at least 15
calendar
days before you can exchange to another fund. |
|
|
|
|
|
Each class of 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. |
|
|
Because of the high cost of maintaining smaller
shareholder accounts, the Funds may redeem the shares in your
account (without charging any deferred sales charge) if the
net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value
of your account is less than $500 before the Funds make an
involuntary redemption. You will then have 60 days to make an
additional investment to bring the value of your account to at
least $500 before the Funds take any action. This involuntary
redemption does not apply to retirement plans or Uniform Gifts
or Transfers to Minors Act accounts.
|
|
Each Fund also reserves the right to terminate
any account engaging in market-timing mutual funds. For
purposes of this policy, market-timing involves
three or more purchases and/or sales of shares of mutual funds
within a 90 day period to capture short term profits resulting
from market volatility.
|
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
HOW SHARES ARE PRICED
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, based on prices at the time of closing. The
Exchange generally closes at 4:00 p.m. Eastern time. The net
asset value used in determining your price is the next one
calculated after your purchase or redemption order is placed.
Net asset value is generally calculated by valuing each security
or other asset at its closing price for the day. Many of the
Mercury QA International Funds investments are traded on
foreign securities exchanges that close many hours before the
New York Stock Exchange. Events that could affect securities
prices that occur between these times normally are not reflected
in the underlying funds net asset value. Foreign
securities sometimes trade on days that the New York Stock
Exchange is closed. As a result, the Mercury QA International
Funds net asset value may change on days when you will not
be able to purchase or redeem the underlying funds shares.
Securities and assets for which market quotations are not
readily available are generally valued at fair value as
determined in good faith by or under the direction of the Board
of Directors of the Funds.
Generally, Class I shares will have the highest
net asset value, because that class has the lowest expenses, and
Class A shares will have a higher net asset value than Class B
or Class C shares because Class B and Class C shares have
distribution fees and higher transfer agency fees. Also,
dividends paid on Class I and Class A shares will generally be
higher than dividends paid on Class B and Class C shares because
Class I and Class A shares have lower expenses.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
Dividends ordinary income
and capital gains paid to shareholders. Dividends may be
reinvested in additional Fund shares as they are
paid.
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.
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.
Each Fund will distribute at least annually any
net investment income and any net realized long or short term
capital gains. The Funds may also pay a special distribution at
the end of the calendar year to comply with Federal tax
requirements. Dividends may be reinvested
automatically in shares of 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. Although
this cannot be predicted with any certainty, the Funds
anticipate that the majority of their dividends, if any, will
consist of capital gains.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] Account Choices
Buying a dividend
Unless your investment is in a tax-deferred account,
you may want to avoid buying shares shortly before a Fund pays a
dividend. The reason? If you buy shares when a fund has realized
but not yet distributed income or capital gains, you will pay
the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing
you may want to consult your tax advisor.
You will pay tax on dividends from a Fund whether you receive them
in cash or additional shares. If you redeem Fund shares or
exchange them for shares of another fund, any gain on the
transaction may be subject to tax. The Funds intend to pay
dividends that will either be taxed as ordinary income or
capital gains. Capital gain dividends of individuals are
generally taxed at different rates than ordinary income
dividends.
Dividends and interest received by a Fund may
give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. A Fund expects
to make an election (when over 50% of its assets consists of
foreign stocks or securities at its fiscal year end) that will
generally require shareholders to include in income their share
of foreign withholding taxes paid by the Fund. Shareholders may
be entitled to treat these taxes as taxes paid by them, and
therefore, deduct such taxes in computing their taxable income
or, in some cases, to use them as foreign tax credits against
the U.S. income taxes otherwise owed.
If you are neither a lawful permanent resident
nor a citizen of the U.S. or if you are a foreign entity, the
Funds 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, a Fund must withhold 31% of your
distributions and redemption proceeds if you have not provided a
taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences
under current Federal tax law of an investment in a Fund. It is
not a substitute for personal tax advice. Consult your personal
tax advisor about the potential tax consequences of an
investment in a Fund under all applicable tax laws.
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] The Portfolio Management
Mercury Asset Management US, a division of Fund
Asset Management, L.P., is the Funds investment adviser.
The investment adviser manages the Funds investments and
business operations under the overall supervision of the Board
of Directors of the Funds. The investment advisers
responsibilities include determining changes to (a) the
underlying funds in which the Funds may invest; (b) the
percentage of assets of each Fund invested in an underlying
fund; and (c) 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 is responsible for making all investment decisions for
the Funds. The investment adviser or its affiliates also serves
as investment adviser to each underlying fund. The investment
advisers principal business address is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Philip Green is a Senior Vice President and
Portfolio Manager of each Fund and is primarily responsible for
the day-to-day management of each Funds portfolio. Mr.
Green has been a Senior Vice President of Fund Asset Management,
L.P. and certain of its affiliates since 1999, a Managing
Director and Portfolio Manager of Global Institutional Services
at Bankers Trust from 1997 to 1999, a Vice President of
Quantitative Equities at Bankers Trust in 1996, a Vice President
of Asset Allocations Strategies at Bankers Trust from 1994 to
1996, a Vice President of Foreign Exchange and Currency Overlay
Strategies at Bankers Trust from 1988 to 1999 and an Assistant
Treasurer of Asset Management Group at Bankers Trust from 1985
to 1988.
Mercury Asset Management US is a division of Fund
Asset Management, L.P. Fund Asset Management, L.P. was organized
as an investment adviser in 1977 and offers investment advisory
services to more than 50 registered investment companies. Fund
Asset Management, L.P. and its affiliated advisers had
approximately $550.07 billion in investment company and other
portfolio assets under management as of January 31, 2000. This
amount includes assets managed for affiliates.
The investment adviser is paid at the rate of
0.15% of each Funds average daily net assets for asset
allocation services.
In addition, each Fund, as a shareholder of 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 mutual funds that do not invest primarily in other
underlying funds. In addition, the following
chart shows the contractual management fees payable to the
investment adviser and its affiliates by the underlying funds.
Some of these rates may be lower due to voluntary fee waivers by
the investment adviser of the underlying fund. In addition, the
chart shows the current annual fund operating expenses of Class
I shares of each underlying fund in which the Funds expect to
initially invest, after applicable fee waivers.
Underlying
Fund |
|
Contractual
Management
Fee |
|
Annual
Fund
Operating
Expenses |
|
Mercury QA
Large Cap Core Fund of
Mercury QA Equity Series, Inc. |
|
0.40% |
|
1.16% |
|
Mercury QA
Large Cap Value Fund of
Mercury QA Equity Series, Inc. |
|
0.40% |
|
1.16% |
|
Mercury QA
Large Cap Growth Fund of
Mercury QA Equity Series, Inc. |
|
0.40% |
|
1.16% |
|
Mercury QA
Mid Cap Fund of
Mercury QA Equity Series, Inc. |
|
0.55% |
|
1.60% |
|
Mercury QA
Small Cap Fund of
Mercury QA Equity Series, Inc. |
|
0.55% |
|
1.65% |
|
Mercury QA
International Fund of
Mercury QA Equity Series, Inc. |
|
0.65% |
|
1.75% |
|
Master
Aggregate Bond Index Series(a)(b) |
|
0.06% |
|
0.07% |
|
(a)
|
The investment adviser of
Quantitative Master Series Trust has entered into contractual
arrangements to provide that the management fee for the series
when combined with administrative fees of certain funds that
invest in the series, will not exceed specific amounts. As a
result of these contractual arrangements, the investment
adviser of the Master Aggregate Bond Index Series currently
receives a fee of 0.01%.
|
(b)
|
The fee rate paid to the investment
adviser and its affiliates by the Master Aggregate Bond Index
Series during the fiscal year ended December 31, 1999
(including voluntary waivers) was 0.01%.
|
A Note about Year 2000
As the year 2000 began, there were few problems
caused by the inability of certain computer systems to tell the
difference between the year 2000 and the year 1900 (commonly
known as the Year 2000 Problem). It is still
possible that some computer systems could malfunction in the
future because of the Year 2000 Problem or as a result of
actions taken to address the Year 2000 Problem. Fund management
does not anticipate that its services or those of the Funds
other service providers will be adversely affected, but
Fund management will continue to monitor the situation. If
malfunctions related to the Year 2000 Problem do arise, the
Funds and their investments could be negatively
affected.
MERCURY QA STRATEGY SERIES, INC.
[This page intentionally left blank]
[This page intentionally left blank]
Funds
Mercury QA Strategy Growth and Income
Fund
Mercury QA Strategy Long-Term Growth
Fund
Mercury QA Strategy All-Equity Fund
of Mercury QA Strategy Series, 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.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
(888-763-2260)
Independent Auditors
Deloitte & Touche, LLP
Princeton Forrestal Village
116-300 Village Boulevard
Princeton, New Jersey 08540-6400
Distributor
Mercury Funds Distributor,
a division of Princeton Funds Distributor,
Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian for the Funds and the Mercury QA Equity
Funds
The Chase Manhattan Bank
4 Chase MetroTech, 18th Floor
Brooklyn, New York 11245
Custodian for Master Aggregate Bond Index
Series
Merrill Lynch Trust Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
MERCURY QA STRATEGY SERIES, INC.
[GRAPHIC] To Learn More
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 45289,
Jacksonville, Florida 32232-5289 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 SECs Public Reference Room in Washington, D.C. Call
1-202-942,8090 for information on the operation of the Public
Reference Room. This information is also available on the SEC
s Internet Site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by electronic request
at the following e-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington,
D.C. 20549-0102.
You should rely only on the information contained
in this Prospectus. No one is authorized to provide you with
information that is different from the information contained in
this Prospectus.
Investment Company Act File
#811-09617.
Code #19090-0300.
©Fund Asset Management, L.P.
Mercury QA Strategy Series, Inc.
(LOGO)
PROSPECTUS ·
March 1, 2000
[LOGO OF MERCURY ASSET MANAGEMENT]
STATEMENT OF ADDITIONAL
INFORMATION
Mercury QA Strategy Growth and Income
Fund
Mercury QA Strategy Long-Term Growth
Fund
Mercury QA Strategy All-Equity
Fund
of Mercury QA Strategy Series,
Inc.
P.O. Box 9011, Princeton, New Jersey
08543-9011 Phone No. (888)
763-2260
Mercury QA Strategy Growth and Income Fund, Mercury
QA Strategy Long-Term Growth Fund and Mercury QA Strategy
All-Equity Fund (each a Fund, and collectively the
Funds) are each separate non-diversified series of
Mercury QA Strategy Series, Inc. (the Corporation),
an open-end investment company (commonly known as a mutual
fund). The investment objective of the Mercury QA Strategy
Growth and Income Fund is to provide high total return with
reduced risk over the long term. The investment objective of the
Mercury Strategy Long-Term Growth Fund and Mercury Strategy All
Equity Fund is to provide long term capital growth. 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 Asset Management
US, a division of Fund Asset Management, L.P. (Mercury
or the Investment Adviser) or one of its
affiliates. 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
realized.
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 March 1, 2000 (the Prospectus
), which has been filed with the Securities and Exchange
Commission (the Commission) and can be obtained,
without charge, by calling the Funds at 888-763-2260 or your
financial consultant, or by writing to the address listed above.
The Prospectus is incorporated by reference to this Statement of
Additional Information, and this Statement of Additional
Information has been incorporated by reference to the
Prospectus.
Mercury Asset Management US, a division of
Fund
Asset Management, L.P. Investment Adviser
Mercury Funds Distributor, a division of
Princeton Funds
Distributor, Inc. Distributor
The date of this Statement of Additional
Information is March 1, 2000.
TABLE OF CONTENTS
|
|
Page
|
Investment Objectives and Policies |
|
2 |
Other
Investment Policies, Practices and Risk Factors |
|
2 |
Risk
Factors in Derivatives |
|
15 |
Investment Restrictions |
|
18 |
Management of the Fund |
|
21 |
Directors and Officers |
|
21 |
Compensation of Directors |
|
23 |
Administration Arrangements |
|
23 |
Management and Advisory Arrangements |
|
24 |
Code of
Ethics |
|
27 |
Purchase of Shares |
|
27 |
Initial
Sales Charge AlternativesClass I and Class A
Shares |
|
28 |
Reduced
Initial Sales Charges |
|
29 |
Distribution Plans |
|
31 |
Limitations on the Payment of Deferred Sales
Charges |
|
32 |
Redemption of Shares |
|
32 |
Redemption |
|
33 |
Repurchase |
|
34 |
Reinstatement PrivilegeClass I and Class A
Shares |
|
34 |
Deferred
Sales ChargesClass B and Class C Shares |
|
34 |
Portfolio Transactions and Brokerage |
|
36 |
Pricing of Shares |
|
37 |
Determination of Net Asset Value |
|
37 |
Shareholder Services |
|
39 |
Investment Account |
|
39 |
Automatic Investment Plan |
|
40 |
Automatic Dividend Reinvestment Plan |
|
40 |
Systematic Withdrawal Plan |
|
40 |
Retirement and Education Savings Plans |
|
41 |
Exchange
Privilege |
|
41 |
Fee-Based Programs |
|
43 |
Dividends and Taxes |
|
43 |
Dividends |
|
43 |
Taxes |
|
43 |
Tax
Treatment of Options and Futures Transactions |
|
45 |
Other
Tax Matters |
|
46 |
Performance Data |
|
46 |
General Information |
|
48 |
Description of Shares |
|
48 |
Computation of Offering Price Per Share |
|
49 |
Independent Auditors |
|
50 |
Custodian |
|
50 |
Transfer
Agent |
|
50 |
Legal
Counsel |
|
50 |
Reports
to Shareholders |
|
50 |
Additional Information |
|
50 |
Independent Auditors Reports |
|
51 |
Statements of Assets and Liabilities |
|
52 |
Appendix A |
|
A-1 |
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:
Fund
|
|
Investment
Objective
|
Mercury QA
Strategy Growth and Income Fund |
|
to provide
high total return with reduced risk
over the long term |
|
|
Mercury QA
Strategy Long-Term Growth Fund |
|
to provide
long term capital growth |
|
|
Mercury QA
Strategy All-Equity Fund |
|
to provide
long term capital growth |
The investment objective of each Fund is a
fundamental policy and may not be changed without shareholder
approval. However, 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 percentage of each Funds assets to be invested
in each Underlying Fund and the strategic target allocation and
allocation ranges between the equity market segment and the
fixed-income segment. Reference is made to About the
DetailsHow the Funds Invest in the Prospectus for a
discussion of the investment objective and policies of each Fund
and the Underlying Funds. There can be no assurance that the
investment objectives of the Funds will be realized.
The following description provides additional
information regarding the Underlying Funds and the types of
investments that the Underlying Funds and the Funds may
make.
Other Investment Policies, Practices and
Risks
The Funds invest in a mix of Underlying Funds, as
well as directly in securities and other financial instruments.
Therefore, the Funds are subject to the risks associated with
their direct investments, as well as the risks associated with
an investment in the Underlying Funds. Accordingly, this section
Other Investment Policies, Practices and Risks
discusses both types of risks, and 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 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 Standard and Poors Rating Group
(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 issuers parent must have outstanding debt
rated Aa or higher by Moodys or AA or higher by S&P or
outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1 by Moodys 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. With the
exception of the Mercury QA Strategy All-Equity Fund, each Fund
may enter into dollar rolls, in which a Fund will sell
securities for delivery in the current month and simultaneously
contract to repurchase substantially similar (the same type and
coupon) securities on a specified future date from the same
party. During the roll period, a Fund forgoes principal and
interest paid on the securities sold. A 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 a Funds 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, a Funds 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 Funds obligation to
purchase the similar securities in the forward transaction.
Dollar rolls are speculative techniques which can be deemed to
involve leverage. A 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. A 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), including securities or instruments not
represented in an index correlating with the Funds
particular market segment. Such transactions will be used to
seek to achieve efficiencies in a Fund and/or add value to the
Fund. Generally, to complete a short sale transaction, a Fund
will borrow the security to make delivery to the buyer. A 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 a Fund. If the price of a
security sold short goes up between the time of the short sale
and the time a Fund must deliver the security to the lender, the
Fund will incur a loss; conversely, if the price declines, the
Fund will realize a gain. Any gain will be decreased, and any
loss increased, by transaction costs. Although a Funds
gain is limited to the price at which it sold the security
short, its potential loss is theoretically unlimited. If a Fund
makes short sales of securities that increase in value, it may
underperform similar mutual funds that do not make short sales
of securities they do not own. Until the security is replaced, a
Fund is required to pay to the lender any interest which accrues
during the period of the loan. To borrow the security, a 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 a
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 firms 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 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.
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
foreign 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 foreign investments may be subject to foreign
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) set out a framework for a
European Economic and Monetary Union (EMU) among the
countries that comprise the European Union (EU). EMU
established a single common European currency (the euro
) that was introduced on January 1, 1999 and is expected
to replace the existing national currencies of all EMU
participants by July 1, 2002. EMU took effect for the initial
EMU participants on January 1, 1999. Certain securities issued
in participating EU countries (beginning with government and
corporate bonds) will be redenominated in the euro, and are
listed, and 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 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 the euro are
transferred back into that countrys 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 Funds shareholders under
foreign or, in certain limited circumstances, U.S. tax
laws.
Many foreign governments supervise and regulate
stock exchanges, brokers and the sale of securities less than
the United States does. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For
example, some foreign countries may have no laws or rules
against insider trading. Insider trading occurs when a person
buys or sells a companys securities based on 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 U.S. accounting standards, it may be harder for
Fund management 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 Fund can earn on its
investments.
Foreign financial markets, while generally growing
in trading volume, typically have substantially less volume than
U.S. markets, and securities of many foreign. companies are less
liquid and their prices more volatile than securities of
comparable domestic companies. The foreign 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
foreign 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 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 Funds
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
an Underlying Funds 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 Funds 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. Countries with emerging markets can be found in regions
such as Asia, Latin America, Eastern Europe and
Africa.
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 and the
existence or possible imposition of exchange controls, custodial
restrictions or other foreign or U.S. governmental laws or
restrictions applicable to such investments, (iv) national
policies that may limit the Funds 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 Funds 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 a 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
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
their 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. A 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 Funds
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 Funds operations require cash,
such as when the Fund redeems shares or pays dividends, and
could result in the Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid
investments.
Each Fund may invest in securities that are
restricted securities. Restricted securities have contractual or
legal restrictions on their resale and include private
placement securities that a Fund may buy directly from the
issuer. Restricted securities may be sold in private placement
transactions between 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 Funds investments in private
placements may consist of direct investments and may include
investments in smaller, less-seasoned issuers, which may involve
greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a
limited management group. In making investments in such
securities, a Fund may obtain access to material nonpublic
information which may restrict the Funds ability to
conduct portfolio transactions in such securities.
144A Securities. For
purposes of this section, the term Board of Directors
shall be deemed to mean both the Board of Directors of
the Funds and the Board of Trustees or Board of Directors of the
Underlying Funds, as applicable.
Each Fund may purchase restricted securities that can be offered
and sold to qualified institutional buyers under
Rule 144A under the Securities Act of 1933, as amended (the
Securities Act). The Board of Directors has
determined to treat as liquid Rule 144A securities that are
either freely tradeable in their primary markets offshore or the
Board of Directors has adopted guidelines and delegated to the
Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be
ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will
continue to develop, the Board of Directors will carefully
monitor the 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. A 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, a 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 a Funds net
asset value. The cost basis of the security will be adjusted by
the amount of the commitment fee. In the event the security is
not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Repurchase Agreements.
Each Fund may invest in securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with
a member bank of the Federal Reserve System, primary dealers in
U.S. Government Securities, or an affiliate thereof, or with
other entities which the Investment Adviser otherwise deems to
be 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 although, to the extent the repurchase
agreement is not denominated in U.S. dollars, the Funds
return may be affected by currency fluctuations. A Fund may not
invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days (together with other illiquid
securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. A Fund will require
the seller to provide additional collateral if the market value
of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of
default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not
owned by 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 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 at
a time that is disadvantageous to he Fund. 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.
New Issues. Each Fund
may seek to purchase hot issuesthat is, 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. A Fund also would
bear the risk of the security trading at a discount to the issue
price. A Fund may not be able to obtain an allocation of a Hot
IPO, or in the amount that it would like.
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 finders, 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 Funds shares and in the yield on the Fund
s portfolio. Although the principal of such borrowings
will be fixed, a Funds assets may change in value during
the time the borrowings are outstanding.
Borrowings will create interest expenses for a Fund
which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation
derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay on the borrowings, the Fund
s return will be greater than if leverage had not been
used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient
to cover the cost of borrowing, the return to a Fund will be
less than if leverage had not been used, and therefore the
amount available for distribution to shareholders as dividends
and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may
determine to maintain a Funds leveraged position if it
expects that the benefits to the Funds shareholders of
maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by a Fund may result in
the Fund being subject to covenants in credit agreements
relating to asset coverage, portfolio composition requirements
and other matters. It is not anticipated that observance of such
covenants would impede the Investment Adviser from managing a
Funds portfolio in accordance with the Funds
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
Funds 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 Companies.
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. It is not intended as a complete
investment program but is designed for those long term investors
who are prepared to experience above-average fluctuations in net
asset value.
While 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 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 (
OTC) 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 or during periods when such
disposition may not be desireable, or to make many small sales
over a lengthy period of time.
Equity securities of specific small cap issuers may
present different opportunities for long term capital
appreciation during varying portions of economic or securities
markets cycles, as well as during varying stages of their
business development. The market valuation of small cap issuers
tends to fluctuate during economic or market cycles, presenting
attractive investment opportunities at various points during
these cycles.
Smaller companies, due to the size and kinds of
markets that they serve, may be less susceptible than large
companies to intervention from the Federal government by means
of price controls, regulations or litigation.
Mortgage Backed Securities.
With the exception of the Mercury QA Strategy All-Equity
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.
Strategies Involving Options, Futures, Swaps,
Indexed Instruments and Foreign Exchange
Transactions
Each Fund may 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 and 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 that index. Each Fund will normally
invest a substantial portion of its assets in options and
futures contracts correlated with an index representing a Fund
s particular market segment. Each Fund may also utilize
options on futures, swaps and other indexed instruments and
convertible bonds. Derivatives may be employed as a proxy for a
direct investment in securities underlying the relevant index.
Options, futures and other derivative instruments may also be
employed to gain market exposure quickly in the event of
subscriptions, provide liquidity, to invest uncommitted cash
balances, for non-hedging purposes and in connection with
short-term trading opportunities. Each Fund may also use
derivatives in connection with the investment strategy that
seeks to profit from differences in price when the same (or
similar) security, currency or commodity is traded in two or
more markets.
In addition, a Fund may engage in futures contracts
on foreign currencies in connection with certain foreign
security transactions and as an efficient and less costly way of
emphasizing or de-emphasizing investment in particular countries
represented in its particular market segment.
The Investment Adviser will choose among the
foregoing instruments based on its judgment of how best to meet
each Funds goals. In connection therewith, the Investment
Adviser will assess such factors as current and anticipated
securities prices, relative liquidity and price levels in the
options, futures and swap markets compared to the securities
markets, and a Funds cash flow and cash management
needs.
Indexed Securities
The Funds may invest in securities the potential
return of which is based on the change in particular
measurements of value or rate (an index). As an
illustration, a Fund may invest in a debt security 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 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 to 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 options expiration date. If the market
value of the portfolio holdings associated with the put option
increases rather than decreases, however, the Fund will lose the
option premium and will consequently realize a lower return on
the portfolio holdings than would have been realized without the
purchase of the put.
Each Fund is also authorized to purchase call
options on securities it intends to purchase or securities
indices the performance of which is substantially correlated to
securities held in its portfolio. 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 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 the performance of which is substantially
correlated to securities held in its portfolio. 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 exceed substantially 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 optionsfor 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 OTC markets. In
general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post
margin against their obligations, and the performance of the
parties obligations in connection with such options is
guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the
buyer and seller, but generally do not require the parties to
post margin and are subject to greater risk of counterparty
default. See Additional Risk Factors of OTC Transactions
below.
Futures
Each Fund may engage in transactions in futures and
options thereon. Futures are standardized, exchange-traded
contracts that obligate a purchaser to take delivery, and a
seller to make delivery, of a specific amount of 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, a 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 the Funds
transactions or in a third party account with the Funds
custodian. Each day thereafter until the futures position is
closed, a 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 FCMs
custody, and, consequently, in the event of default due to the
FCMs bankruptcy, the margin may be subject to pro rata
treatment as the FCMs 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 a margin or may receive payment
in cash.
The sale of a futures contract limits a Funds
risk of loss through a decline in the market value of portfolio
holdings correlated with the futures contract prior to the
future contracts 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 a Fund determines not to complete an
anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures
position.
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 under
regulations of the Commodity Futures Trading Commission. A Fund
will only engage in futures and options transactions from time
to time. A Fund is under no obligation to use such transactions
and may choose not to do so.
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.
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. A Fund is not
required to engage in futures contracts, and may not do so.
Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified
amount of a specified currency or multinational currency unit at
a price and future date set at the time of the contract. Spot
foreign exchange transactions are similar but require current,
rather than future, settlement. A Fund will enter into foreign
exchange transactions only for purposes of hedging either a
specific transaction or a portfolio position. A Fund may enter
into a foreign exchange transaction for purposes of hedging
(including anticipatory hedges) a specific transaction by, for
example, purchasing a currency needed to settle a security
transaction at a future date or selling a currency in which the
Fund has received or anticipates receiving a dividend or
distribution.
Other Investment Policies the Funds May
Use.
The Funds may also 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
Funds may seek to earn a profit from differences between (i) the
value of a derivative and the value of a particular index, (ii)
the implied value of an option to convert a convertible bond and
the actual value of such option, (iii) the value of a company
s shares 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.
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.
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 Funds exposure, on a marked-to-market basis, to the
transaction (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that a Fund has assets
available to satisfy its obligations with respect to the
transaction, but will not limit the Funds exposure to
loss.
Additional Risk Factors of OTC
Transactions
Certain derivatives traded in OTC markets, including
indexed securities, swaps and OTC options may be substantially
less liquid than other instruments in which a Fund may invest.
The absence of liquidity may make it difficult or impossible for
a Fund to sell such instruments promptly at an acceptable price.
The absence of liquidity may also make it more difficult for a
Fund to ascertain a market value for such instruments. A Fund
will therefore acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains
a formula price at which the instrument may be terminated or
sold, or (ii) for which the investment adviser to the Fund
anticipates the Fund can receive on each business day at least
two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealers quotation
may be used.
Because derivatives traded in OTC markets are not
guaranteed by an exchange or clearing corporation and generally
do not require payment of margin, to the extent that a Fund has
unrealized gains in such instruments or has deposited collateral
with its counterparty, the Fund is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations.
A 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.
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 companys 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 companys stock may not
result in any profit for the Fund and may lose significant
value.
Additional Limitations on the Use of
Derivatives
The Funds may not use any derivative to gain
exposure to an asset or class of assets that it would be
prohibited by its investment restrictions from purchasing
directly.
Additional Information Concerning Market
Segments
Each of the market segments targeted by an
Underlying Fund is reflected in a broad-based market index.
Except for the Master Aggregate Bond Index Series, in which the
fixed-income portion of each Fund will be initially invested,
none of the Underlying Funds is an index fund; that is, none of
these Underlying Funds seeks to replicate the performance of a
particular index. However, each of these Underlying Funds
generally will invest in its targeted equity market segment with
risk and style characteristics similar to those of the
respective index that is described below:
Standard and Poors 500 Composite Stock
Price Index (Mercury QA Large Cap Core Fund)
The Standard and Poors 500 Composite Stock
Price Index (S&P 500) is composed of 500 common
stocks issued by U.S. large-capitalization companies in a wide
range of businesses. The stocks included in the index
collectively represent a substantial portion of all common
stocks publicly traded in the United States. The S&P 500 is
generally considered broadly representative of the performance
of publicly traded U.S. large capitalization stocks. The S&P
500 is a market-weighted index, which means that the largest
stocks represented in the index have the most effect on the index
s performance. Currently, the largest stocks in the S
&P 500 have an effect on the performance of the index that
is many times greater than the effect of the other stocks in the
index. The stocks in the S&P 500 are chosen by the S&P,
a division of the McGraw-Hill Companies, Inc. S&P chooses
stocks for inclusion in the S&P 500 based on market
capitalization, trading activity and the overall mix of
industries represented in the index, among other
factors.
Standard and Poors 500/Barra Value Index
(Mercury QA Large Cap Value Fund)
The Standard and Poors 500/Barra Value Index (
S&P 500/Barra Value Index) includes
approximately one-half of the companies in the S&P 500,
which are considered value stocks, based on their
price-to-book ratios. This is determined by dividing the book
value per share of common stock of each company in the S&P
500 by the price per share of the company. Each company in the S
&P 500 is then assigned to either the S&P 500/Barra
Value Index or the Standard and Poors 500/Barra Growth
Index (S&P 500/Barra Growth Index). The S&P
500/Barra Value Index contains companies with lower
price-to-book ratios while the S&P 500/Barra Growth Index
contains companies with higher price-to-book ratios. The S&P
500/Barra Value and Growth Indexes are designed so that the
combined capitalization of the S&P 500 is approximately
equally divided between the S&P 500/Barra Value and Growth
Indexes. Over time, the relative capitalization weightings in
the S&P 500/Barra Value and Growth Indexes will vary due to
capitalization changes of the companies in the respective index.
Accordingly, every six months, the S&P 500/Barra Value and
Growth Indexes are rebalanced so that the combined index
capitalization of the S&P 500 is once again approximately
equally split between the S&P 500/Barra Value and Growth
Indexes. Each time the S&P 500/Barra Value and Growth
Indexes are rebalanced, a cutoff value is determined based on
the price-to-book ratio of the company in the S&P 500/Barra
Value Index with the highest price-to-book ratio. This cutoff
value is used to determine whether to place a company into the S
&P 500/Barra Value Index or the S&P 500/Barra Growth
Index. If a companys price-to-book ratio is above the
cutoff value, it is placed in the S&P 500/Barra Growth
Index; otherwise, it is added to the
S&P 500/Barra Value Index. When companies are deleted from the
S&P 500, they are also deleted from the S&P 500/Barra
Value or Growth Indexes, as applicable. Accordingly, the S&P
500/Barra Value and Growth Indexes are adjusted monthly to
reflect additions and deletions of companies in the S&P 500.
The weighting of the S&P 500/Barra Value Index is based upon
the market capitalization of each company in the
index.
Standard and Poors 500/Barra Growth
Index (Mercury QA Large Cap Growth Fund)
The Standard and Poors 500/Barra Growth Index (
S&P 500/Barra Growth Index) includes
approximately one-half of the companies in the S&P 500,
which are considered growth stocks, based on their
price-to-book ratios. This is determined by dividing the book
value per share of common stock of each company in the S&P
500 by the price per share of the company. Each company in the S
&P 500 is then assigned to either the S&P 500/Barra
Value Index or the S&P 500/Barra Growth Index. The S&P
500/Barra Value Index contains companies with lower
price-to-book ratios while the S&P 500/Barra Growth Index
contains companies with higher price-to-book ratios. The S&P
500/Barra Value and Growth Indexes are designed so that the
combined capitalization of the S&P 500 is approximately
equally divided between the S&P 500/Barra Value and Growth
Indexes. Over time, the relative capitalization weightings in
the S&P 500/Barra Value and Growth Indexes will vary due to
capitalization changes of the companies in the respective index.
Accordingly, every six months, the S&P 500/Barra Value and
Growth Indexes are rebalanced so that the combined index
capitalization of the S&P 500 is once again approximately
equally split between the S&P 500/Barra Value and Growth
Indexes. Each time the S&P 500/Barra Value and Growth
Indexes are rebalanced, a cutoff value is determined based on
the price-to-book ratio of the company in the S&P 500/Barra
Value Index with the highest price-to-book ratio. This cutoff
value is used to determine whether to place a company into the S
&P 500/Barra Value Index or the S&P 500/Barra Growth
Index. If a companys price-to-book ratio is above the
cutoff value, it is placed in the S&P 500/Barra Growth
Index; otherwise, it is added to the S&P 500/Barra Value
Index. When companies are deleted from the S&P 500, they are
also deleted from the S&P 500/Barra Value or Growth Indexes,
as applicable. Accordingly, the S&P 500/Barra Value and
Growth Indexes are adjusted monthly to reflect additions and
deletions of companies in the S&P 500. The weighting of the S
&P 500/Barra Growth Index is based upon the market
capitalization of each company in the index.
Standard & Poors Mid Cap 400 Index
(Mercury QA Mid Cap Fund)
The Standard & Poors Mid Cap 400 Index (
S&P 400) is composed of 400 common stocks issued
by U.S. mid-capitalization companies in a wide range of
businesses. The S&P 400 is generally considered broadly
representative of the performance of publicly traded U.S.
mid-capitalization stocks. The S&P 400 is a market-weighted
index, which means that the largest stocks represented in the
index have the most effect on the indexs performance. The
stocks in the S&P 400 are chosen by S&P. S&P chooses
stocks for inclusion in the S&P 400 based on market
capitalization, trading activity and the overall mix of
industries represented in the index, among other
factors.
Standard & Poors SmallCap 600 Index
(Mercury QA Small Cap Fund)
The Standard & Poors SmallCap 600 Index (
S&P 600) is composed of 600 domestic stocks
issued by U.S. small-capitalization companies in a wide range of
businesses. The S&P 600 is generally considered broadly
representative of the performance of publicly traded U.S.
smaller-capitalization stocks. The S&P 600 is a
market-weighted index, which means that the largest stocks
represented in the index have the most effect on the index
s performance. The stocks in the S&P 600 are chosen by
S&P. S&P chooses stocks for inclusion in the S&P 600
based on market capitalization market size, liquidity,
(bid-asked spread, ownership, share turnover and number of no
trade days) and industry group representation.
Morgan Stanley Capital International Europe,
Asia and Far East Capitalization Weighted Index
(Mercury QA International Fund)
The Morgan Stanley Capital International Europe,
Asia and Far East Capitalization Weighted Index (EAFE Index
) is composed of equity securities of approximately 1,000
companies from various industrial sectors
whose primary trading markets are located outside the United
States. Companies included in the EAFE Index are selected from
among the larger capitalization companies in these markets. The
countries currently included in the EAFE Index are Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, The Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and the United
Kingdom. The weighting of the EAFE Index among these countries
is based upon each countrys relative market
capitalizations, and not its gross domestic product, which means
that the index contains more companies from countries with the
largest capital markets (like Japan and the United Kingdom) and
these countries have the most effect on the indexs
performance. The stocks in the EAFE Index are chosen by Morgan
Stanley & Co., Incorporated (MSCI). MSCI chooses
stocks for inclusion in the EAFE Index based on market
capitalization, trading activity and the overall mix of
industries represented in the index, among other factors. The
EAFE Index is generally considered broadly representative of the
performance of stocks traded in the international markets. MSCI
s selection of a stock for the EAFE Index does not mean
that MSCI believes the stock to be an attractive
investment.
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); provided, however, 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:
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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.
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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.
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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 Corporations Registration
Statement, as it may be amended from time to time.
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5.
Issue senior securities to the extent such issuance
would violate applicable law.
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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 Funds
investment policies as set forth in its Registration
Statement, as it may be amended from time to time, in
connection with hedging transactions, short sales, forward
commitment transactions and similar investment strategies.
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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.
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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 Corporations
Registration Statement, as it may be amended from time to
time, and without registering as a commodity pool operator
under the Commodity Exchange Act.
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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 managed in compliance with the Code
requirements as though such requirements were applicable to the
Fund. These requirements include limiting a Funds
investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the 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.
In addition, the Corporation has adopted
non-fundamental restrictions that may be changed by its Board of
Directors without shareholder approval. Like the fundamental
restrictions, none of the non-fundamental restrictions,
including but not limited to restriction (a) below, shall
prevent a Fund from investing its assets in shares of another
registered investment company. Under the non-fundamental
restrictions, a Fund may not:
(a) Purchase securities of other
investment companies, except to the extent such purchases are
permitted by applicable law.
(b) Make short sales of securities or
maintain a short position, except to the extent permitted by
applicable law and otherwise permitted by the Corporations
Registration Statement.
(c) Invest in securities that cannot be
readily resold because of legal or contractual restrictions or
that cannot otherwise be marketed, redeemed or put to the issuer
or a third party, if at the time of acquisition more that 15% of
its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within
seven days or securities that the Board of Directors of the
Corporation has otherwise determined to be liquid pursuant to
applicable law. Securities purchased in accordance with Rule
144A under the Securities Act (which are restricted securities
that can be resold to qualified institutional buyers, but not to
the general public) and determined to be liquid by the Board of
Directors of the Corporation are not subject to the limitations
set forth in this investment restriction.
(d) Make any additional investments if
the amount of its borrowings exceeds 5% of its total assets.
Borrowings do not include the use of investment techniques that
may be deemed to create leverage, including, but not limited to,
such techniques as dollar rolls, when-issued securities, options
and futures.
If a percentage restriction on the investment or use
of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentages resulting
from changing values will not be considered a
violation.
The 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.
The staff of the Commission has taken the position
that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the
corporation has adopted an investment policy pursuant to which
no Fund will purchase or sell OTC options if, as a result of
such transaction, the sum of the market value of OTC options
currently outstanding which are held by such Fund, the market
value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin
deposits on the Funds existing OTC options on futures
contracts exceeds 15% of the net assets of the Fund taken
at market value, together with all other assets of such Fund which
are illiquid are not otherwise readily marketable. However, if
an OTC option is sold by a Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New
York and if a Fund has the unconditional contractual right to
repurchase such OTC option form the dealer 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 securities
minus the options strike price). The repurchase price with
the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the
option plus the amount by which the option is in-the-money.
This policy as to OTC options is not a fundamental policy
of any Fund and may be amended by the Board of Directors of the
Corporation without the approval of the shareholders. However,
the Board of Directors of the Corporation will not change or
modify this policy prior to the change or modification by the
Commission staff of its position.
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, 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.
Otherwise, an Underlying Fund or a Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its
affiliates acting as principal without an exemptive
order.
Portfolio Turnover
Each Fund may engage in a substantial number of
portfolio transactions. The rate of portfolio turnover will be a
limiting factor when the Investment Adviser considers whether to
purchase or sell securities for a Fund or shares of the
underlying Funds only to the extent that the Investment Adviser
will consider the impact of transaction costs on a Funds
tracking error when compared to the Underlying Funds
market segment or index, as applicable. Changes in the
securities comprising a Funds market segment will tend to
increase that Funds portfolio turnover rate, as the
Investment Adviser restructures the Funds holding to
reflect the changes in the market segment. The portfolio
turnover rate is, in summary, the percentage computed by
dividing the lesser of a Funds purchases or sales of
securities by the average net asset value of the Fund. High
portfolio turnover involves correspondingly greater brokerage
commissions for a Fund investing in equity securities and other
transaction costs which are borne directly by a Fund. A high
portfolio turnover rate may also result in the realization of
taxable capital gains, including short-term capital gains
taxable at ordinary income rates.
MANAGEMENT OF THE 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 (non-interested Directors). 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 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.
Name and
Age
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Position(s)
With the
Corporation
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Principal
Occupation(s) During Past 5 Years
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Terry K.
Glenn, 59 |
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President and
Director(1)(2) |
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Executive Vice
President of Fund Asset
Management, L.P. (FAM) and certain of its
affiliates (which terms as used herein include their
corporate predecessors) since 1983; Executive
Vice President and Director of Princeton Services,
Inc. (Princeton Services) since 1993; President
of Princeton Funds Distributor, Inc. (PFD)
since 1986 and Director thereof since 1991;
President of Princeton Administrators since 1988 |
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Jack B.
Sunderland, 71
P.O. Box 7
West Cornwall, CT 06796 |
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Director(2)(3) |
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President and
Director of American Independent
Oil Company, Inc. (energy company) since 1987;
Member of Council on Foreign Relations since
1971 |
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Stephen B.
Swensrud, 66
24 Federal Street,
Suite 400
Boston, MA 02110 |
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Director(2)(3) |
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Chairman of
Fernwood Advisors (investment
adviser) since 1996; Principal of Fernwood
Associates (financial consultant) since 1975 |
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J. Thomas
Touchton, 61
Suite 3405
One Tampa City Center
201 North Franklin Street
Tampa, FL 33602 |
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Director(2)(3) |
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Managing
Partner of the Witt Touchton Company
and its predecessor, The Witt Co. (private
investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University;
Director of TECO Energy Inc. (electric utility
holding company) |
|
|
Robert C.
Doll, 45 |
|
Senior Vice
President (1)(2) |
|
Senior Vice
President of FAM and certain of its
affiliates since 1999; Senior Vice President of
Princeton Services since 1999; Chief Investment
Officer of Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from 1991 to
1999 |
|
|
Philip Green,
36 |
|
Senior Vice
President (1)(2) |
|
Senior Vice
President of FAM and certain of its
affiliates since 1999; Managing Director and
Portfolio Manager of Global Institutional Services
at Bankers Trust from 1997 to 1999; Vice
President of Quantitative Equities at Bankers Trust
in 1996; Vice President of Asset Allocations
Strategies at Bankers Trust from 1994 to 1996;
Vice President of Foreign Exchange and Currency
Overlay Strategies at Bankers Trust from 1988 to
1999; Assistant Treasurer of Asset Management
Group at Bankers Trust from 1985 to 1988 |
Name and
Age
|
|
Position(s)
With the
Corporation
|
|
Principal
Occupation(s) During Past 5 Years
|
Dean D
Onofrio, 41 |
|
Senior Vice
President(1)(2) |
|
Managing
Director and Head of Quantitative
Advisors since 1999; Managing Director in
Corporate Institutional Client Group from 1997
through 1999; Managing Director of Bankers
Trust Company from 1981 to 1996; Analyst of
Quantitative Investments Group of Bankers Trust
Company from 1981 to 1982; Portfolio Manager
of Quantitative Investments Group of Bankers
Trust Company from 1983 to 1984; Head of
Quantitative Investments Group of Bankers Trust
Company from 1985 to 1989; Head of U.S. Equity
Derivatives Marketing Group of Bankers Trust
Company from 1990 to 1993; Head of Hedge
Funds and Arbitrage Trading Group of Bankers
Trust Company from 1994 to 1996 |
|
|
Frank Salerno,
40 |
|
Senior Vice
President (1)(2) |
|
First Vice
President of FAM and certain of its
affiliates since 1999; Managing Director and Chief
Investment Officer of Structured Investments at
Bankers Trust from 1995 to 1999; Managing
Director and Head of Structured Investments at
Bankers Trust from 1993 to 1995; Domestic Head
of Structured Investments at Bankers Trust from
1991 to 1993; Assistant Vice President of
Structured Investments at Bankers Trust from
1985 to 1991 |
|
|
Donald C.
Burke, 39 |
|
Vice President
and
Treasurer(1)(2) |
|
Senior Vice
President and Treasurer of FAM and
certain of its affiliates since 1999; Senior Vice
President and Treasurer of Princeton Services
since 1999; Vice President of PFD since 1999;
First Vice President of certain affiliates of FAM
from 1997 to 1999; Director of Taxation of FAM
since 1990; Vice President of FAM from 1990 to
1997 |
|
|
Sidney Hoots,
39 |
|
Senior Vice
President (1)(2) |
|
Senior Vice
President of FAM and certain of its
affiliates since 1999; Managing Director of Global
Institutional Services at Bankers Trust from 1992
to 1999; Manager of Quantitative U.S. Equities
Group at Bankers Trust from 1991 to 1992;
Manager of Bond Index Funds at Bankers Trust
from 1986 to 1991; Quantitative Analyst of Index
Funds at Bankers Trust from 1984 to 1986 |
|
|
Allan J.
Oster, 36 |
|
Secretary(1)(2) |
|
Consultant
(Legal Advisory) of FAM and certain
of its affiliates since 1999; Associate, Drinker
Biddle & Reath LLP, 1996-1999; Senior Counsel,
U.S. Securities and Exchange Commission from
1991 to 1996 |
(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 FAM or
certain of its affiliates acts as investment
adviser.
|
(3)
|
Member of the Corporations Audit and
Nominating Committee, which is responsible for the selection
of the independent auditors and the selection and nomination
of non-interested Directors.
|
As of the date of this Statement of Additional Information, the
officers and directors of the Corporation as a group (11
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 non-interested
Director for service to all Funds a fee of $5,000 per year plus
$500 per Board meeting attended. The Corporation also expects to
compensate members of the Audit and Nominating Committee (the
Committee), which consists of all of the
non-interested Directors, with a fee of $1,000 per year for
services to all Funds. The Corporation expects to reimburse each
non-interested Director for his out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table sets forth the aggregate
compensation the Corporation expects to pay to the
non-interested Directors for their first full fiscal year and
the aggregate compensation paid by all investment companies
advised by FAM or its affiliates (Mercury and
Affiliates-Advised Funds) to the non-interested Directors
for the calendar year ended December 31, 1999.
Name of
Director
|
|
Aggregate
Compensation
from Corporation
|
|
Pension or
Retirement
Benefits Accrued
as Part of
Corporation
Expenses
|
|
Total
Compensation
From Corporation
and Mercury and
Affiliates Advised
Funds Paid to
Directors(1)
|
Jack
B. Sunderland |
|
$8,000 |
|
None |
|
$143,975 |
Stephen B. Swensrud |
|
$8,000 |
|
None |
|
$232,250 |
J.
Thomas Touchton |
|
$8,000 |
|
None |
|
$142,725 |
(1)
|
The Directors serve on other Mercury and
Affiliates-Advised Funds as follows: Mr. Sunderland (20
registered investment companies consisting of 37 portfolios);
Mr. Swensrud (26 registered investment companies consisting of
64 portfolios); and Mr. Touchton (20 registered investment
companies consisting of 37 portfolios).
|
The Directors may purchase Class I shares of a Fund
at net asset value. See Purchase of SharesReduced
Initial Sales ChargesPurchase Privileges of Certain
Persons.
Administration Arrangements
The Corporation has entered into an administration
agreement with the Investment Adviser (the Administration
Agreement). As discussed in the Prospectus, the Investment
Adviser receives for its services to the Funds under the
Administration Agreement monthly compensation at the annual rate
of 0.35% of the average daily net assets of each Fund. The
Investment Adviser and the Corporation have entered into a
contractual arrangement pursuant to which this fee is currently
being waived.
The Administration Agreement obligates the
Investment Adviser to provide certain management and
administrative services to the Corporation and the Funds
and to pay, or cause its affiliate to pay, for maintaining its
staff and personnel necessary to perform its obligations under
the Administration Agreement and to provide office space,
facilities and necessary personnel for the Corporation. Under
the Administration Agreement, the Investment Adviser is also
obligated to pay, or cause its affiliate to pay, the
compensation of those officers and directors of the Corporation
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 Funds (except to the extent paid by the Distributor),
including, among other things, taxes, expenses for legal and
auditing services, costs of printing proxies, shareholder
reports, prospectuses and statements of additional information,
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 actual
out-of-pocket expenses of unaffiliated directors of the
Corporation 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 the Funds incurred in
connection with the continuous offering of their 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.
Duration and Termination.
Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years
from its effective date. Thereafter, it will remain in effect
from year to year with respect to each Fund if approved annually
(a) by the Board of Directors of the Corporation and (b) by a
majority of the Board of Directors of the Corporation who are
not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. The
Administration Agreement is not assignable and will
automatically terminate in the event of its assignment. In
addition, such contract may be terminated with respect to one or
more Funds by the Board of Directors of the Corporation or with
respect to a Fund by the vote of a majority of the outstanding
voting securities of such Fund, or by the Investment Adviser,
without penalty, on 60 days written notice to the other
party.
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 Directors, the Investment Adviser provides
day-to-day advice as to each Funds investment
transactions, including determinations concerning changes to (a)
the underlying funds in which the Funds may invest; and (b) the
percentage of each Funds assets to be invested in each
underlying Fund and the strategic target allocation ranges
between the equity market segment and the fixed-income segment.
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.
Securities held by the Funds may also be held by, or
be appropriate investments for, other funds or investment
advisory clients for which the Investment Adviser or its
affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or
more clients of the Investment Adviser or an affiliate when one
or more clients of the Investment Adviser or an affiliate are
selling the same security. If purchases or sales of securities
arise for consideration at or about the same time that would
involve the 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.
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 0.15% of the average daily
net assets of each Fund.
Payment of Fund Expenses.
The Management Agreement obligates the Investment Adviser
to provide investment advisory services to the Corporation and
to pay all compensation of and furnish office space for officers
and employees of the Corporation connected with investment and
economic research, trading and investment management of the
Funds, as well as the fees of those directors of the Corporation
who are affiliated persons of the Investment Adviser or any of
its affiliates. Each Fund pays, or causes to be paid, all other
expenses incurred in the operation of the Fund (except to the
extent paid by the Distributor), including, among other things,
taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates (if any), shareholder
reports and 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 expenses of
non-interested 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 Corporation or the Funds. The
Distributor will pay certain promotional expenses of the
Corporation incurred in connection with the continuous offering
of shares of each of the Funds. 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.
Organization of the Investment Adviser.
Mercury Asset Management US, a division of
FAM, has an address at P.O. Box 9011, Princeton, New Jersey
08543-9011. FAM is a limited partnership, the partners of which
are ML & Co., a financial services holding company and the
parent of Merrill Lynch, and Princeton Services. ML & Co.
and Princeton Services are controlling persons of
FAM as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a
controlling influence over its management or
policies.
Below is certain information regarding the Portfolio
Manager of the Funds and certain other employees of the
Investment Adviser.
Omar Aguilar, Ph.D.
Mr. Aguilar is Director of Research for Quantitative
Advisors. He is responsible for developing, enhancing and
maintaining econometric forecasting models and researching and
implementing quantitative strategies. Previously, Mr. Aguilar
worked with CDC Investment Management and Bankers Trust. Mr.
Aguilar received his Ph.D. in 1998 and his MS in 1996 from the
Institute of Statistics and Decision Sciences at Duke
University. He also received a BS in Actuarial Sciences in 1992
and a graduate degree in Applied Statistics in 1993 from the
Mexican Autonomous Institute of Technology (ITAM). Mr. Aguilar
has written for several journals, including Journal of Business
Statistics, Proceedings from the American Statistical
Association and Applied Bayesian Statistics Books.
Dean DOnofrio, CFA.
Mr. DOnofrio is Managing Director and the Head
of Quantitative Advisors. Prior to his role with Merrill Lynch
Quantitative Advisors team, he held the position of Managing
Director, Head of U.S. Equity Linked Origination and Head of
U.S. Global Equity Linked Products Marketing. Prior to his
tenure at Merrill Lynch, Mr. DOnofrio was a Managing
Director at Bankers Trust. During his fifteen years at Bankers
Trust, Mr. DOnofrio held several positions including Head
of Quantitative Investments and Head of Banker Trusts
Equity Derivatives business in the United States. Mr. D
Onofrio is a Chartered Financial Analyst and received a BA
in Mathematics and Economics from Colgate
University.
Philip Green. Mr.
Green is the Portfolio Manager of the Funds and the Managing
Director and Head of Asset Allocation for Quantitative Advisors.
He manages portfolios that employ a quantitative investment
process. He has 14 years of investment experience. Prior to
joining Merrill Lynch, Mr. Green was a Managing Director and
Portfolio Manager with Bankers Trust where he managed the
Bankers Trust Institutional Asset Management Fund (BTAMX) and
the Bankers Trust Lifecycle Long Fund (BTILX). He has published
several articles in money management journals, including
Financial Analysts Journal, Journal of Foreign Exchange &
Money Markets, Journal of Investing, Handbook of Quantitative
International Investing. Mr. Green received his BS in Economics
from the Wharton School and his MBA from New York University. He
is a member of the American Finance Association.
Sidney Hoots. Mr.
Hoots is Managing Director and Head of Research for Quantitative
Advisors. He develops quantitative stock selection techniques
for the group. He has 17 years of investment experience.
Previously, Mr. Hoots worked at Bankers Trust where he was
responsible for the development of their proprietary
quantitative systems. He received his BS from Duke University
and his MBA from the University of Chicago. He is also a Member
of the American Finance Association.
Vinay Mendiratta. Mr.
Mendiratta is a Director for Quantitative Advisors. He is
responsible for the development investment products for
institutional and retail clients. Previously, Mr. Mendiratta was
a product specialist at Bankers Trust where he structured a
variety of quantitatively managed investment products for
investors. In addition, he was an analyst with Chase Manhattan
Bank. Mr. Mendiratta received his BA in Economics from Duke
University and his MBA in Finance from Columbia
University.
Frank Salerno. Mr. Salerno is
Managing Director and Chief Investment Officer for Quantitative
Advisors. He has 17 years investment experience. Previously, Mr.
Salerno worked at Bankers Trust as the Chief Investment Officer
of their Quantitative Investment Management Team. He has a BA
from Syracuse University and an MBA from New York
University.
Duration and Termination.
Unless earlier terminated as described below, the
Management Agreement will remain in effect for two years from
its effective date. Thereafter, it will remain in effect from
year to year if approved annually (a) by the Board of Directors
of the Corporation or with respect to any Fund, by the vote of a
majority of the outstanding voting securities of such Fund and
(b) by a majority of the directors of the Corporation who are
not parties to the Management Agreement or interested persons
(as defined in the Investment Company Act) of any such party.
The Management Agreement is not assignable and will
automatically terminate in the event of its assignment. In
addition, such contract may be terminated with respect to a Fund
by the vote of a majority of the outstanding voting securities
of such Fund, or by the Investment Adviser without penalty on 60
days written notice to the other party.
The Underlying Funds.
Mercury or certain of its affiliates 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 Funds portfolio and constantly reviews the
Underlying Funds 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 of the Underlying Funds to
provide investment advisory services and to pay all compensation
of and furnish office space for officers and employees of the
Underlying Funds connected with investment and economic
research, trading and investment management of the Underlying
Funds, as well as the fees of all directors who are affiliated
persons of the investment adviser to the Underlying Fund or any
of its affiliates. Each Underlying Fund pays, or causes to be
paid, all other expenses incurred in the operation of the
Underlying Fund (except to the extent paid by the Distributor),
including, among other things, taxes, expenses for legal and
auditing services, costs of printing proxies, stock certificates
(if any), shareholder reports and 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
expenses of non-interested 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. The Distributor will
pay certain promotional expenses of the Underlying Funds
incurred in connection with the continuous offering of shares of
each of the Underlying
Funds. Accounting services are provided to each Underlying Fund by
its investment adviser to the Underlying Funds, and the
Underlying Fund reimburses the investment adviser to the
Underlying Fund or its affiliate for its costs in connection
with such services.
Transfer Agency Services.
Financial Data Services, Inc. (the Transfer Agent
), an affiliate of FAM, acts as each Funds Transfer
Agent pursuant to the Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement (the
Transfer Agency Agreement). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Transfer Agent receives a fee for each
shareholder account and is entitled to reimbursement 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. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commerce the month
following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the
Transfer Agency Agreement, the term account includes
any shareholder account.
Distribution Expenses.
The Corporation, on behalf of each Fund, has entered into
a distribution agreement with the Distributor with respect to
each class of Fund shares in connection with the continuous
offering of such class of shares (each , a Distribution
Agreement). Each Distribution Agreement obligates the
Distributor to pay certain expenses in connection with the
offering of the applicable class of shares of the Funds. After
the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to
shareholders, the Distributor pays for the printing and
distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for
other supplementary sales literature and advertising costs. Each
Distribution Agreement is subject to the same renewal
requirements and termination provisions as the Management
Agreement described above.
Code of Ethics
The Directors, the Board of Directors of each
Underlying Fund, the investment adviser to each Underlying Fund,
the Investment Adviser and the Distributor have adopted a Code
of Ethics under Rule 17j-1 of the Investment Company Act (the
Code). The Code significantly restricts the personal
investing activities of all employees of the Corporation, the
Investment Adviser and the Distributor and, as described below,
impose additional, more onerous, restrictions on fund investment
personnel.
The Code requires, among other things, that all
employees of the investment adviser and the Distributor
pre-clear any personal securities investment (with limited
exceptions, such as government securities). The pre-clearance
requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to
all employees of the investment 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 or its
affiliated advisers. Furthermore, the Code provides 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.
PURCHASE OF SHARES
Shares. Reference is
made to Account ChoicesHow to Buy, Sell, Transfer
and Exchange Shares in the Prospectus. 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 ServicesExchange Privilege
below.
Distribution Services.
MFD, an affiliate of the Investment Adviser and of Merrill
Lynch, with offices at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536 (mailing address: P.O. Box 9081, Princeton, New
Jersey 08543-9081) acts as Distributor for each
Fund.
Each Fund offers its shares at a public offering
price equal to the next determined net asset value per share
plus any sales charge applicable to the class of shares selected
by the investor. The applicable offering price for purchase
orders is based upon the net asset value of a Fund next
determined after receipt of the purchase order by the
Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock
Exchange (the NYSE) (generally 4:00 p.m., Eastern
time) which includes orders received after the determination of
net asset value on the previous day, the applicable offering
price will be based on the net asset value on the day the order
is placed with the Distributor, provided that the orders are
received by the Distributor prior to 30 minutes after the close
of business on the NYSE on that day. If the purchase orders are
not received prior to 30 minutes after the close of business on
the NYSE on that day, such orders shall be deemed received on
the next business day. Dealers have the responsibility of
submitting purchase orders to the Fund not later than 30 minutes
after the close of business on the NYSE in order to purchase
shares at that days offering price.
Each Fund or the Distributor may suspend the
continuous offering of a Funds shares of any class at any
time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to
time. Any order may be rejected by a Fund or the Distributor.
Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change.
Certain securities dealers may charge a fee to process a sale of
shares. For example, the fee charged by Merrill Lynch is
currently $5.35. Purchases made directly through the Transfer
Agent are not subject to a processing fee.
Initial Sales Charge AlternativesClass I
and Class A Shares
Investors who prefer an initial sales charge
alternative may elect to purchase Class A shares or, if an
eligible investor, Class I shares. Investors choosing the
initial sales charge alternative who are eligible to purchase
Class I shares would purchase Class I shares rather than Class A
shares because there is an account maintenance fee imposed on
Class A shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge
alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class I or Class A
shares, because over time the accumulated ongoing account
maintenance and distributions fees on Class B or Class C shares
may exceed the initial sales charges, and, in the case of Class
A shares, the account maintenance fee. Although some investors
who previously purchased Class I shares may no longer be
eligible to purchase Class I shares of other Mercury funds,
those previously purchased Class I shares, together with Class
A, Class B and Class C share holdings, will count toward a right
of accumulation which may qualify the investor for a reduced
initial sales charge on new initial sales charge purchases. In
addition, the ongoing Class B and Class C account maintenance
and distribution fees will cause Class B and Class C shares to
have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing
Class A account maintenance fees will cause Class A shares to
have a higher expense ratio, pay lower dividends and have a
lower total return than Class I shares.
The term purchase, as used in the
Prospectus and this Statement of Additional Information in
connection with an investment in Class I and Class A shares of 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 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.
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 Directors 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 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
Reductions in or exemptions from the imposition of a
sales charge are due to the nature of the investors and/or the
reduced sales efforts that will be needed to obtain such
investments.
Reinvested Dividends.
No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment
of dividends.
Right of Accumulation.
Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to
purchase shares of 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 purchasers 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 purchasers 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 Funds
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
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.
Members of the Boards of Directors of the
Corporation, and of other investment companies advised by
Mercury or certain of its affiliates, directors and employees of
ML & Co. and its subsidiaries (the term subsidiaries,
when used herein with respect to ML & Co., includes,
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. The Fund realizes economies of
scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Funds. Employees and
Directors or trustees wishing to purchase shares of a Fund must
satisfy each Funds suitability standards.
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.
Managed Trusts. Class
I shares are offered at net asset value to certain trusts to
which trust institutions, thrifts and bank trust departments
provide discretionary trustee services.
Acquisition of Certain Investment Companies.
Class A shares may be offered at net
asset value in connection with the acquisition of the assets of
or merger or consolidation with a personal holding company or a
public or private investment company.
Employer-Sponsored Retirement or Savings Plans
and Certain Other Arrangements.
Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class I or Class A
shares at net asset value, based on the number of employees or
number of employees eligible to participate in the plan and/or
the aggregate amount invested by the plan in specified
investments. Certain other plans may purchase Class B shares
with a waiver of the contingent deferred sales charge (CDSC
) upon redemption, based on similar criteria. Such Class B
shares will convert into Class A shares approximately ten years
after the plan
purchases the first share of any Mercury mutual fund. Minimum
purchase requirements may be waived or varied for such plans.
For additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other
arrangements, call your plan administrator or your selected
dealer.
Purchases Through Certain Financial Advisers.
Reduced sales charges may be applicable
for purchases of Class I or Class A shares of a 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 of each Fund 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.
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 Funds 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 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 Class A, Class B and Class C shares, and there is no
assurance that the Directors 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 fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale
of shares of another class. Payments of the distribution fee on
Class B shares will terminate upon conversion of those Class B
shares to Class A shares as set forth under Account Choices
How to Buy, Sell, Transfer and Exchange Shares in
the Prospectus.
In their consideration of each Distribution Plan,
the 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 non-interested Directors shall be committed to the
discretion of the non-interested Directors then in office. In
approving each Distribution Plan in accordance with Rule 12b-1,
the non-interested Directors concluded that there is reasonable
likelihood that such Distribution Plan will benefit 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 non-interested 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
non-interested Directors, including a majority of the
non-interested Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at
a meeting called for that purpose. Rule 12b-1 further requires
that 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 ChoicesHow
to Buy, Sell, Transfer and Exchange Shares in the
Prospectus.
Each Fund is required to redeem for cash all shares
of the Fund upon receipt of a written request in proper form.
The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of
redemption. 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 Corporation will generally pay redemptions in
cash; however, at the discretion of the Investment Adviser, the
Corporation may pay a redemption or repurchase of shares in an
amount of $10,000,000 or more (which amount may be decreased or
increased by the Investment Adviser from time to time) with
portfolio securities.
Shares are redeemable at the option of the
Corporation, if in the opinion of the Corporation, ownership of
the shares has or may become concentrated to the extent that
would cause the Corporation or a Fund to be deemed a personal
holding company within the meaning of the Code. 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 (i.e., three or more purchases and/or sales
within a 90 day period) with the intention of capturing
short-term profits resulting from market volatility.
Because of the high cost of maintaining smaller
shareholder accounts, the Funds may redeem the shares in your
account (without charging any deferred sales charge) if the net
asset value of your account falls below $500 due to redemptions
you have made. You will be notified that the value of your
account is less than $500 before the Funds make an involuntary
redemption. You will then have 60 days to make an additional
investment to bring the value of your account to at least $500
before the Funds take any action. This involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers
to Minors Act accounts (UGMA/UTMA accounts
).
The right to redeem shares or to receive payment
with respect to any such redemption may be suspended for more
than seven days only for periods during which trading on the
NYSE is restricted as determined by the Commission or during
which the NYSE is closed (other than customary weekend and
holiday closings), for any period during which an emergency
exists, as defined by the Commission, as a result of which
disposal of portfolio securities or determination of the net
asset value of a Fund is not reasonably practicable, and for
such other periods as the Commission may by order permit for the
protection of shareholders of a Fund.
The value of shares at the time of redemption may be
more or less than the shareholders cost, depending in part
on the market value of the securities held by a Fund at such
time.
The Corporation on behalf of the Funds has entered
into a joint committed line of credit with other investment
companies advised by the Investment Adviser and its affiliates
and a syndicate of banks that is intended to provide the Funds
with a temporary source of cash to be used to meet redemption
requests from Fund shareholders in extraordinary or emergency
circumstances.
Redemption
A shareholder wishing to redeem shares held with the
Transfer Agent may do so by tendering the shares directly to the
Funds Transfer Agent, Financial Data Services, Inc., P.O.
Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by
a written letter requesting redemption. Redemption requests
should not be sent to the Corporation. The redemption request
requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s)
on the Transfer Agents register. The signature(s) on the
redemption request may require guarantee by an eligible
guarantor institution as 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.
In the event a signature guarantee is required, notarized
signatures are not sufficient. In general, signature guarantees
are waived on redemptions of less than $50,000 as long as the
following requirements are met: (i) all requests require the
signature(s) of all persons whose name(s) are recorded on the
Transfer Agents register, (ii) all checks must be mailed
to the stencil address of record on the Transfer Agents
register and (iii) the stencil address must not have changed
within 30 days. Certain rules may apply regarding certain
account types such as, but not limited to, UGMA/UTMA accounts,
Joint Tenancies with Rights of Survivorship, contra broker
transactions, and institutional accounts. In certain instances,
the Transfer Agent may require additional documents such as, but
not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of
receipt of a proper notice of redemption.
At various times a Fund may be requested to redeem
shares for which it has not yet received good payment
(e.g., cash, Federal funds or certified check drawn on a
U.S bank). The Fund may delay or cause to be delayed the mailing
of a redemption check until such time as good payment
(e.g., cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of such Fund
shares, which will usually not exceed 10 days.
Repurchase
Each Fund will also repurchase shares through a
shareholders 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 the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received,
provided that the request for repurchase is submitted to the
dealer prior to the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern time) and such request is
received by a Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers
have the responsibility of submitting such repurchase requests
to a Fund not later than 30 minutes after the close of business
on the NYSE in order to obtain that days 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 PrivilegeClass 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 ChargesClass B and Class
C Shares
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
ChoicesPricing of SharesClass B and Class C Shares
Deferred Sales Charge Options, while Class B shares
redeemed within six years of purchase are subject to a CDSC
under most circumstances, the charge may be reduced or waived in
certain instances. These include certain post-retirement
withdrawals from an IRA or other retirement plan or redemption
of Class B shares in certain circumstances following the death
of a Class B shareholder. In the 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 Funds 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 or (g) involuntary
termination of an account in which Fund shares are held or for
withdrawals through the Systematic Withdrawal Plan.
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 shareholders 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. The Class C CDSC may be waived
in connection with participation in certain fee-based programs,
involuntary termination of an account in which fund shares are
held, and withdrawals through the Systematic Withdrawal
Plan.
In determining whether a Class C CDSC is applicable
to a redemption, the calculation will be determined in the
manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first of
shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares
held longest during the one-year period. The charge will not be
applied to dollar amounts representing an increase in the net
asset value since the time of purchase. A transfer of shares
from a shareholders 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 Class C SharesDeferred 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 charge, 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 ServicesFee-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 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 Purchase of SharesDistribution 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
Subject to policies established by the Directors,
the Investment Adviser is primarily responsible for the
execution of the Funds portfolio transactions and the
allocation of brokerage. The Funds have no obligation to deal
with any broker or group of brokers in the execution of
transactions in portfolio securities and do not use any
particular broker or dealer. In executing transactions with
brokers and dealers, the Investment Adviser seeks to obtain the
best net results for the Funds, taking into account such factors
as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and
operational facilities of the firm and the firms risk in
positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive commission rates, the
Funds do not necessarily pay the lowest spread or commission
available. In addition, consistent with the Conduct Rules of the
NASD and policies established by the Directors, the Investment
Adviser may consider sales of shares of a Fund as a factor in
the selection of brokers or dealers to execute portfolio
transactions for the Fund; however, whether or not a particular
broker or dealer sells shares of a series neither qualifies nor
disqualifies such broker or dealer to execute transactions for
the Fund.
Subject to obtaining the best net results, brokers
who provide supplemental investment research to the Investment
Adviser may receive orders for transactions by a Fund. Such
supplemental research services ordinarily consist of assessments
and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition
to and not in lieu of the services required to be performed by
the Investment Adviser under the Management Agreement, and the
expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser, a
Fund will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting
the same transaction. Certain supplemental research services may
primarily benefit one or more other investment companies or
other accounts for which the Investment Adviser exercises
investment discretion. Conversely, a Fund may be the primary
beneficiary of the supplemental research services received as a
result of portfolio transactions effected for such other
accounts or investment companies.
The Funds anticipate that their respective brokerage
transactions involving securities of issuers domiciled in
countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such
countries. Brokerage commissions and other transaction costs on
foreign stock exchange transactions generally are higher than in
the United States, although a Fund will endeavor to achieve the
best net results in effecting its portfolio transactions. There
generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United
States.
The Funds may invest in certain securities traded in the OTC
market and intends to deal directly with the 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 a Fund
and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the
purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own
accounts, a Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with
such transactions. However, an affiliated person of a Fund may
serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition,
a Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill
Lynch serves as placement agent except pursuant to procedures
adopted by the Directors that either comply with rules adopted
by the Commission or with interpretations of the Commission
staff. See Investment Objectives and Policies
Investment Restrictions.
Section 11(a) of the Exchange Act generally
prohibits members of the United States national securities
exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless
the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually
furnishes the account with the aggregate compensation received
by the member in effecting such transactions, and (iii) complies
with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for a Fund
in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate
consents have been obtained from the Funds and annual statements
as to aggregate compensation will be provided to the
Funds.
The Directors have considered the possibility of
seeking to recapture for the benefit of the Funds
brokerage commissions and other expenses of possible portfolio
transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fee
paid by the Funds to the Investment Adviser. After considering
all factors deemed relevant, the Board of Directors of the
Corporation made a determination not to seek such recapture. The
Board of Directors of the Corporation will consider this matter
from time to time.
Because of different objectives or other factors, a
particular security may be bought for one or more clients of the
Investment Adviser or an affiliate when one or more clients of
the Investment Adviser or an affiliate are selling the same
security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the
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.
PRICING OF SHARES
Determination of Net Asset
Value
Reference is made to Account ChoicesHow
Shares are Priced in the Prospectus.
The net asset value of the shares of all classes 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, based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m., Eastern time. Any assets or
liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing
market rates as quoted by
one or more banks or dealers on the day of valuation. The NYSE is
not open for trading on New Years Day, Martin Luther King,
Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
The net asset value is computed by dividing the
value of the securities held by a Fund plus any cash or other
assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by
the total number of shares outstanding at such time. 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 investors interest in the
Underlying Fund will be determined as of 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 investors share of the aggregate interests in such
Underlying Fund. Any additions or withdrawals to be effected on
that day will then be effected. The investors 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 investors
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
investors interest in such Underlying Fund after the close
of business of the NYSE, based on prices at the time of
closing.
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.
Moreover, the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset
value of Class A shares reflecting the distribution and higher
transfer agency fees applicable with respect to Class B and
Class C 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, which will differ by approximately the amount of the
expense accrual differentials between the classes.
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
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 or yield
equivalent obtained from one or more dealers or pricing services
approved by the Directors. Short positions in securities traded
in the OTC market are valued at the last available ask price.
Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and
most representative market. When a 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 ask 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.
The value of swaps, including interest rate swaps, caps and
floors, will be determined by obtaining dealer quotations. Other
investments, including financial futures contracts and related
options, are stated at market value. Obligations with remaining
maturities of 60 days or less are valued at amortized cost
unless the Investment Adviser believes that this method no
longer produces fair valuations. Repurchase agreements will be
valued at cost plus accrued interests. 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 Directors. Such valuations and procedures will
be reviewed periodically by the Directors.
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 Directors or
Trustees of the Trust as applicable. 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 Directors or Trustees of the
Trust. 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 may not be reflected in the
computation of a Funds or Underlying Funds net asset
value. If events materially affecting the value of such
securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by the
Board of Directors of the Corporation.
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
Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive
statements, at least quarterly, from the Transfer Agent. These
statements will serve as transaction confirmations for automatic
investment purchases and the reinvestment of dividends. The
statements will also show any other activity in the account
since the preceding statement. Shareholders will receive
separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the
reinvestment of dividends. A shareholder with an account held at
the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer
Agent.
The Funds do not issue share certificates.
Shareholders may transfer their Fund shares to another
securities dealer that has entered into a selected dealer
agreement with the Distributor. Certain shareholder services may
not be available for the transferred shares. After the transfer,
the shareholder may purchase additional shares of funds owned
before the transfer and all future trading of these assets must
be coordinated by the new firm. If a shareholder wishes to
transfer his or her shares to a securities dealer that has not
entered into a selected dealer agreement with the Distributor,
the shareholder must either (i) redeem his or her shares, paying
any applicable
CDSC or (ii) continue to maintain an Investment Account at the
Transfer Agent for those shares. The shareholder may also
request the new securities dealer to maintain the shares in an
account at the Transfer Agent registered in the name of the
securities dealer for the benefit of the shareholder whether the
securities dealer has entered into a selected dealer agreement
or not.
Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from
a selected dealer to another brokerage firm or financial
institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery
of shares of a Fund, a shareholder must either redeem the
shares, paying any applicable CDSC, so that the cash proceeds
can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at a
selected dealer for those shares.
Automatic Investment Plan
A shareholder may make additions to an Investment
Account at any time by purchasing Class I shares (if an eligible
Class I investor) or Class A, Class B or Class C shares at the
applicable public offering price. These purchases may be made
either through the shareholders securities dealer or by
mail directly to the Transfer Agent, acting as agent for such
securities dealer. You may also add to your account by
automatically investing a specific amount in a Fund on a
periodic basis through your selected dealer. The current minimum
for such automatic additional investments is $100. This minimum
may be waived or revised under certain
circumstances.
Automatic Dividend Reinvestment
Plan
Unless specific instructions are given as to the
method of payment, dividends will be automatically reinvested,
without sales charge, in additional full and fractional shares
of a Fund. Such reinvestment will be at the net asset value of
shares of a Fund as determined after the close of business on
the NYSE as the payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends.
Shareholders may, at any time, by written
notification to their selected dealer if the shareholders
account is maintained with a selected dealer or by written
notification or by telephone (1-888-763-2260) to the Transfer
Agent, if the account is maintained with the Transfer Agent,
elect to have subsequent dividends, paid in cash, rather than
reinvested in shares of a Fund or vice versa (provided that, in
the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder
will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). Commencing
ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. A Fund is not responsible
for any failure of delivery to the shareholders address of
record and no interest will accrue on amounts represented by
uncashed dividend checks. Cash payments can also be directly
deposited to the shareholders bank account.
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 shareholders 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 net asset value determined as
of the close of business on the following business day. The
check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made on the next business
day following redemption. When a shareholder is making
systematic withdrawals, dividends on all shares in the
Investment Account are reinvested automatically in shares of the
Funds. A shareholders 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 shareholders original investment may be
reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities. 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 years
scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which
the shareholder has elected to make systematic
withdrawals.
With respect to redemptions of Class B and Class C
shares pursuant to a systematic withdrawal plan, the maximum
number of Class B or Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of
such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise
might be due on such redemption of Class B or Class C shares
will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See Account Choices
Pricing of SharesClass B and Class C Shares
Deferred Sales Charge Options in the Prospectus.
Where the systematic withdrawal plan is applied to Class B
shares, upon conversion of the last Class B shares in an account
to Class A shares, a shareholder must make a new election to
join the 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 and Education Savings
Plans
The minimum initial purchase to establish a
retirement or an education savings plan is $100. Dividends
received in each of the plans are exempt from Federal taxation
until distributed from the plans. Different tax rules apply to
Roth IRA plans and education savings plans. Investors
considering participation in any such retirement or education
savings plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisors with respect
to the establishment and maintenance of any such
plan.
Exchange Privilege
U.S. shareholders of each class of shares of a Fund
have an exchange privilege with 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 a
second fund, but does not hold Class I shares of the second fund
in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class I shares of the second fund,
the shareholder will receive Class A shares of the second fund
as 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 the second Mercury mutual
fund. Class A, Class B and Class C shares are exchangeable with
shares of the same class of other Mercury mutual funds. For
purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is
tacked to the holding period of the newly acquired
shares of the other fund as more fully described below. Class I,
Class A, Class B and Class C shares also are exchangeable for
shares of Summit, a money market fund specifically designated
for exchange by holders of Class I, Class A, Class B or Class C
shares. Class I and Class A shares will be exchanged for Class A
shares of Summit, and Class B and Class C shares will be
exchanged for Class B shares of Summit. Summit Class A and Class
B shares do not include any front-end sales charge or CDSC;
however, Summit Class B shares pay a 12b-1 distribution fee of
0.75% and are subject to a CDSC payable as if the shareholder
still held shares of the Mercury fund used to acquire the Summit
Class B shares.
Exchanges of Class I or Class A shares outstanding (
outstanding Class I or Class A shares) for Class I
or Class A shares of another Mercury mutual fund, or for Class A
shares of Summit (new Class I or Class A shares) are
transacted on the basis of relative net asset value per Class I
or Class A share, respectively, plus an amount equal to the
difference, if any, between the sales charge previously paid on
the outstanding Class I or Class A shares and the sales charge
payable at the time of the exchange on the new Class I or Class
A shares. With respect to outstanding Class I or Class A shares
as to which previous exchanges have taken place, the sales
charge previously paid shall include the aggregate of the
sales charges paid with respect to such Class I or Class A
shares in the initial purchase and any subsequent exchange.
Class I or Class A shares issued pursuant to dividend
reinvestment are sold on a no-load basis in each of the Funds
offering Class I or Class A shares. For purposes of the exchange
privilege, dividend reinvestment Class I and Class A shares
shall be deemed to have been sold with a sales charge equal to
the sales charge previously paid on the Class I or Class A
shares on which the dividend was paid. Based on this formula,
Class I and Class A shares of 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 Funds 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 Funds 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 Funds 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 Funds Class B
shares to the four year holding period for the new Mercury Fund
Class B shares, the investor will be deemed to have held the new
Mercury Fund Class B shares for more than six years.
Before effecting an exchange, shareholders should
obtain a currently effective prospectus of the fund into which
the exchange is to be made. To exercise the exchange privilege,
shareholders should contact their financial 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 of a Fund at net asset value. Under
specified circumstances, participants in certain Programs may
deposit other classes of shares, which will be exchanged for
Class I shares. Initial or deferred sales charges 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 Programs
client agreement and from the shareholders selected
dealer.
DIVIDENDS AND TAXES
Dividends
The Corporation intends to distribute substantially
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 ServicesAutomatic
Dividend Reinvestment Plan for information concerning the
manner in which dividends may be reinvested automatically in
shares of the Funds. Shareholders may elect in writing to
receive any such dividends in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash. The per share dividends
on Class B and Class C shares will be lower than the per share
dividends on Class I and Class A shares as a result of the
account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares;
similarly, the per share dividends on Class A shares will be
lower than the per share dividends on Class I shares as a result
of the account maintenance fees applicable with respect to the
Class A shares. See Pricing of SharesDetermination
of Net Asset Value. Within 60 days after the end of a Fund
s taxable year, each shareholder will receive notification
summarizing the dividends he or she received that year. This
notification will also indicate whether those dividends should
be treated as ordinary income or long term capital
gains.
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 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. Because the Mercury QA
International Underlying Fund invests a large portion of its
assets in securities of foreign issuers, it is not anticipated
that a significant portion, if any, of the dividends paid by the
Mercury QA International Underlying Fund will be eligible for
the dividends received deduction. 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 foreign
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 Funds assets at the close of a
taxable year consists of stock or securities in foreign
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 Funds
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
taxpayers 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 Funds investment company taxable
income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the
Funds 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 shareholders Fund
shares.
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 Corporations
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 shareholders basis in the Class A shares
acquired will be the same as such shareholders 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 shareholders
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.
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 contracts 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 the Master Aggregate
Bond Index Series of Quantitative Master Series Trust in which
each such Fund invests 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 Funds
investments from the Series and to retain an investment adviser
to manage the Funds assets in accordance with the
investment policies applicable to the respective Fund. See
Investment Objectives and Policies.
The foregoing is a general and abbreviated summary
of the applicable provisions of the Code and the Treasury
regulations presently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and the
Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative or
administrative action either prospectively or
retroactively.
Ordinary income and capital gain dividends 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 Funds
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 as in the case of Class B and Class C shares
and the maximum sales charge in the case of Class I and Class A
shares. Dividends paid by a Fund with respect to all shares, to
the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the
same amount, except that account maintenance and distribution
charges and any incremental transfer agency costs relating to
each class of shares will be borne exclusively by that class.
Each Fund will include performance data for all classes of
shares of each Fund in any advertisement or information
including performance data of each Fund.
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.
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 may be deducted.
On occasion, a Fund may compare its performance to
various indices, including, the S&P 500, the S&P
500/Barra Value Index, the S&P 500/Barra Growth Index, the S
&P 400, the S&P 600, the Standard & Poors 1500
Composite Stock Price 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. In
addition, 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. As with other
performance data, performance comparisons should not be
considered indicative of the Funds relative performance
for any future period.
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
approximately 166,666,667 shares each of Class I, Class A, Class
B and Class C shares for each of the three Funds: Mercury QA
Strategy Growth and Income Fund, Mercury QA Strategy Long-Term
Growth Fund and Mercury QA Strategy All-Equity 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 the vote of shareholders,
except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights
with respect to matters relating to such distribution
expenditures (except that Class B shareholders may vote on any
material changes to expenses charged under the Class A
Distribution Plan). Voting rights are not cumulative, so that
the holders of more than 50% of the shares voting in the
election of directors can, if they choose to do so, elect all
the directors of the Corporation, in which event the holders of
the remaining shares would be unable to elect any person as a
director.
There normally will be no meeting of shareholders
for the purpose of electing directors unless and until such time
as less than a majority of the directors holding office have
been elected by the shareholders, at which time the directors
then in office will call a shareholders meeting for the
election of directors. Shareholders may, in accordance with the
terms of the 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.
Mercury Asset Management US, a division of FAM,
provided the initial capital for each Fund by purchasing
approximately 16,667 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
Pricing of SharesDetermination of Net Asset Value.
Prior to the offering of each Funds shares,
Mercury Asset Management US, a division of FAM, 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 Funds
estimated net assets and projected number of shares outstanding
on the date its shares are offered for sale to public investors
is as follows:
Mercury QA Strategy Growth and Income
Fund
|
|
Class
I
|
|
Class
A
|
|
Class
B
|
|
Class
C
|
Net
Assets |
|
25,000 |
|
25,000 |
|
25,000 |
|
25,000 |
Number of Shares Outstanding |
|
2,500 |
|
2,500 |
|
2,500 |
|
2,500 |
Net
Asset Value Per Share (net assets divided by number of shares
outstanding) |
|
$10.00 |
|
$10.00 |
|
$10.00 |
|
$10.00 |
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 |
*
|
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 ChoicesClass B and Class C
SharesDeferred Sales Charge Options in the
Prospectus and Redemption of SharesDeferred Sales
ChargesClass B and Class C Shares
herein.
|
Mercury QA Strategy Long Term Growth
Fund
|
|
Class
I
|
|
Class
A
|
|
Class
B
|
|
Class
C
|
Net
Assets |
|
25,000 |
|
25,000 |
|
25,000 |
|
25,000 |
Number of Shares Outstanding |
|
2,500 |
|
2,500 |
|
2,500 |
|
2,500 |
Net
Asset Value Per Share (net assets divided by number of shares
outstanding) |
|
$10.00 |
|
$10.00 |
|
$10.00 |
|
$10.00 |
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 |
*
|
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 ChoicesClass B and Class C
SharesDeferred Sales Charge Options in the
Prospectus and Redemption of SharesDeferred Sales
ChargesClass B and Class C Shares
herein.
|
Mercury QA Strategy All-Equity
Fund
|
|
Class
I
|
|
Class
A
|
|
Class
B
|
|
Class
C
|
Net
Assets |
|
25,000 |
|
25,000 |
|
25,000 |
|
25,000 |
Number of Shares Outstanding |
|
2,500 |
|
2,500 |
|
2,500 |
|
2,500 |
Net
Asset Value Per Share (net assets divided by number of shares
outstanding) |
|
$10.00 |
|
$10.00 |
|
$10.00 |
|
$10.00 |
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 |
*
|
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 ChoicesClass B and Class C
SharesDeferred Sales Charge Options in the
Prospectus and Redemption of SharesDeferred Sales
ChargesClass B and Class C Shares
herein.
|
Independent Auditors
Deloitte & Touche LLP
, Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Corporation. The independent
auditors are responsible for auditing the annual financial
statements of the Funds.
Custodian
The Chase Manhattan Bank, 4 Chase MetroTech, 18th
Floor, Brooklyn, New York 11245 acts as the custodian of each
Funds 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
Funds cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on
the Funds 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 Funds 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, The Chrysler
Building, 405 Lexington Avenue, New York, New York 10174, 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.
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.
INDEPENDENT AUDITORS REPORT
The Board of Directors and
Shareholder,
Mercury QA Strategy Series, Inc.:
We have audited the accompanying statements of
assets and liabilities of Mercury QA Strategy Growth and Income
Fund, Mercury QA Strategy Long-Term Growth Fund, and Mercury QA
Strategy All-Equity Fund of Mercury QA Strategy Series, Inc. as
of February 25, 2000. These financial statements are the
responsibility of the Series management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such statements of assets and
liabilities present fairly, in all material respects, the
financial position of Mercury QA Strategy Growth and Income
Fund, Mercury QA Strategy Long-Term Growth Fund, and Mercury QA
Strategy All-Equity Fund of Mercury QA Strategy Series, Inc. as
of February 25, 2000, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
March 1, 2000
MERCURY QA STRATEGY SERIES, INC.
STATEMENTS OF ASSETS AND
LIABILITIES
February 25, 2000
|
|
Mercury QA
Strategy Growth
and Income
Fund
|
|
Mercury QA
Strategy
Long-Term
Growth Fund
|
|
Mercury QA
Strategy
All-Equity
Fund
|
ASSETS |
|
|
|
|
|
|
Cash in
Bank (Note 1) |
|
$100,000 |
|
$100,000 |
|
$100,000 |
Prepaid
registration fees and offering costs (Note 3) |
|
229,334 |
|
229,334 |
|
229,334 |
|
|
|
|
|
|
|
Total
Assets |
|
329,334 |
|
329,334 |
|
329,334 |
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
Liabilities and accrued expenses |
|
229,334 |
|
229,334 |
|
229,334 |
|
|
|
|
|
|
|
NET ASSETS 2,500 Class I shares of Common Stock
per Fund,
2,500 Class A shares of Common
Stock per Fund, 2,500 Class B
shares of Common Stock per Fund,
2,500 Class C shares of
Common Stock per Fund (all classes
par value $0.0001)
outstanding with 2,000,000,000
shares authorized) (Note 1) |
|
$100,000 |
|
$100,000 |
|
$100,000 |
|
|
|
|
|
|
|
NET ASSETS CONSIST OF: |
|
|
|
|
|
|
Class I
Shares of Common Stock, $0.0001 par value,
166,666,667 shares authorized
per Fund |
|
$
1 |
|
$
1 |
|
$
1 |
Class A
Shares of Common Stock, $0.0001 par value,
166,666,667 shares authorized
per Fund |
|
1 |
|
1 |
|
1 |
Class B
Shares of Common Stock, $0.0001 par value,
166,666,667 shares authorized
per Fund |
|
1 |
|
1 |
|
1 |
Class C
Shares of Common Stock, $0.0001 par value,
166,666,667 shares authorized
per Fund |
|
1 |
|
1 |
|
1 |
Paid-in
Capital in excess of par |
|
99,996 |
|
99,996 |
|
99,996 |
|
|
|
|
|
|
|
NET ASSETS |
|
$100,000 |
|
$100,000 |
|
$100,000 |
|
|
|
|
|
|
|
NET ASSET VALUE: |
|
|
|
|
|
|
Class I
Based on net assets of $25,000 and 2,500 shares
outstanding |
|
$
10.00 |
|
$
10.00 |
|
$
10.00 |
|
|
|
|
|
|
|
Class A
Based on net assets of $25,000 and 2,500 shares
outstanding |
|
$
10.00 |
|
$
10.00 |
|
$
10.00 |
|
|
|
|
|
|
|
Class B
Based on net assets of $25,000 and 2,500 shares
outstanding |
|
$
10.00 |
|
$
10.00 |
|
$
10.00 |
|
|
|
|
|
|
|
Class C
Based on net assets of $25,000 and 2,500 shares
outstanding |
|
$
10.00 |
|
$
10.00 |
|
$
10.00 |
|
|
|
|
|
|
|
Notes to Financial Statements
(1)
|
Mercury QA Strategy Series, Inc. (the
Corporation) was organized as a Maryland
corporation on August 17, 1999 and consists of three series,
Mercury QA Strategy Growth and Income Fund, Mercury QA
Strategy Long-Term Growth Fund and Mercury QA Strategy
All-Equity Fund (the Funds). The Corporation is
registered under the Investment Company Act of 1940 as a
non-diversified mutual fund. To date, the Corporation has not
had any transactions other than those relating to
organizational matters and the sale of 7,500 Class I shares,
7,500 Class A shares, 7,500 Class B shares and 7,500 Class C
shares of Common Stock (2500 shares of each class of each
Fund) to Mercury Asset Management US, a division of Fund Asset
Management L.P. (the Investment Adviser
).
|
(2)
|
The Corporation has entered into an
administration agreement (the Administration Agreement
) with the Investment Adviser, and a distribution
agreement (the Distribution Agreement) with
Mercury Funds Distributor Inc., a division of Princeton Funds
Distributor, Inc. (the Distributor). (See
Management of the FundAdministration Arrangements
in the Statement of Additional Information.) Certain
officers and/or directors of the Corporation are officers
and/or directors of the Investment Adviser and the
Distributor.
|
(3)
|
Prepaid registration fees are charged to income
as the related shares are issued. Prepaid offering costs
consist of legal and printing fees related to preparing the
initial registration statement, and will be amortized over a
12 month period beginning with the commencement of operations
of the Fund. The Investment Adviser, on behalf of the Funds,
will incur organization costs estimated at
$72,000.
|
APPENDIX A
Ratings of Fixed Income
Securities
Description of Moodys 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: Moodys 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.
Description of Moodys Commercial Paper
Ratings
The term commercial paper as used by
Moodys means promissory obligations not having an original
maturity in excess of nine months. Moodys 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).
Moodys 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. Moodys 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. Moodys 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.
Issuers rated Not Prime do not fall within
any of the Prime rating categories.
If an issuer represents to Moodys 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, Moodys 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. Moodys 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 Moodys 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 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: Moodys 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 & Poors
Corporate Debt Ratings
A Standard & Poors 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 &
Poors 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 & Poors. Capacity to pay interest and
repay principal is extremely strong.
|
AA |
Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the
highest-rated issues only in small degree.
|
A |
Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated
categories.
|
BBB |
Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in
higher-rated categories.
|
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
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 & Poors 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 & Poors 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 & Poors
Commercial Paper Ratings
A Standard & Poors 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.
|
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 & Poors by the
issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information.
Description of Standard & Poors
Preferred Stock Ratings
A Standard & Poors 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 & Poors 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 issuers
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.
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 & Poors earnings and
dividend rankings for common stocks.
The ratings are based on current information
furnished to Standard & Poors by the issuer, and
obtained by Standard & Poors 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 Fitchs
assessment of the issuers 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 issuers 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 obligors ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are
not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally
rated F-1+.
|
A |
Bonds considered to be investment grade and of
satisfactory credit quality. The obligors 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 obligors 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 Fitchs
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 Fitchs assessment of the likelihood of
timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For
defaulted bonds, the rating (DDD to D)
is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special
features of the issue, its relationship to other obligations of
the issuer, the current and prospective financial condition and
operating performance of the issuer and any guarantor, as well
as the economic and political environment that might affect the
issuers 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 obligors 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,
DD,D |
Bonds are in default on interest and/or
principal payments. Such bonds are extremely 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
Fitchs 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 issuers 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+.
|
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.
|
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Code #19091-0300
PART C. OTHER INFORMATION
Item 23.
Exhibits:
Exhibit
Number
|
1 |
|
(a) |
|
|
|
Articles of
Incorporation of Registrant.(1) |
1 |
|
(b) |
|
|
|
Articles of
Amendment to Articles of Incorporation of
Registrant. |
2 |
|
|
|
|
|
By-Laws of
Registrant.(1) |
3 |
|
|
|
|
|
Instrument
Defining Rights of Shareholders. Incorporated by reference to
Exhibits 1 and 2 above. |
4 |
|
|
|
|
|
Form of
Management Agreement between Registrant and Mercury Asset
Management US, a
division of Fund Asset Management, L.P. |
5 |
|
(a) |
|
|
|
Form of Class
I Shares Distribution Agreement between Registrant and Mercury
Funds Distributor, a
division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
5 |
|
(b) |
|
|
|
Form of Class
A Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
5 |
|
(c) |
|
|
|
Form of Class
B Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
5 |
|
(d) |
|
|
|
Form of Class
C Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
6 |
|
|
|
|
|
None. |
7 |
|
|
|
|
|
Form of
Custody Agreement. |
8 |
|
(a) |
|
|
|
Form of
Administration Agreement between Registrant and Mercury Asset
Management US, a
division of Fund Asset Management, L.P. |
8 |
|
(b) |
|
|
|
Form of
Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency
Agreement between Registrant and Financial Data Services,
Inc. |
8 |
|
(c) |
|
|
|
License
Agreement relating to Use of Name among Mercury Asset
Management International Ltd.,
Mercury Asset Management Group Ltd. and Mercury Funds
Distributor, a division of Princeton
Funds Distributor, Inc.(2) |
8 |
|
(d) |
|
|
|
Form of
License Agreement relating to Use of Name between Fund Asset
Management, L.P. and
Registrant. |
8 |
|
(e) |
|
|
|
Credit
Agreement between Registrant and a syndicate of
banks.(3) |
8 |
|
(f) |
|
|
|
Form of Fee
Waiver Agreement between Registrant and Mercury Asset
Management US, a division
of Fund Asset Management, L.P. |
9 |
|
|
|
|
|
Opinion and
consent of Swidler Berlin Shereff Friedman, LLP
, counsel for Registrant. |
10 |
|
|
|
|
|
Consent of
Deloitte & Touche LLP, independent
auditors for Registrant. |
11 |
|
|
|
|
|
None. |
12 |
|
|
|
|
|
Form of
Certificate of Fund Asset Management, L.P. |
13 |
|
(a) |
|
|
|
Form of Class
A Shares Distribution Plan and Class A Shares Plan
Sub-Agreement. |
13 |
|
(b) |
|
|
|
Form of Class
B Shares Distribution Plan and Class B Shares Plan
Sub-Agreement. |
13 |
|
(c) |
|
|
|
Form of Class
C Shares Distribution Plan and Class C Shares Plan
Sub-Agreement. |
14 |
|
(a) |
|
|
|
Rule 18f-3
Plan. |
14 |
|
(b) |
|
|
|
Powers of
Attorney for Officers, Directors and Trustees. |
15 |
|
|
|
|
|
Not
applicable. |
16 |
|
|
|
|
|
Code of
Ethics. |
(1)
|
Incorporated by reference to identically
numbered exhibit to Registrants initial Registration
Statement on Form N-1A (file Nos. 333-88849 and
811-09617).
|
(2)
|
Incorporated by reference to Exhibit No. 8(c)
to Pre-Effective Amendment No. 1 of Mercury Pan-European
Growth Fund of Mercury Asset Management Funds, Inc.s
Registration Statement on Form N-1A (File Nos. 333-56205 and
811-08797).
|
(3)
|
Incorporated by reference to Exhibit 8(b) to
the Registration Statement on Form N-1A of Master Premier
Growth Trust (File No. 811-09733), filed December 21,
1999.
|
Item 24. Persons
Controlled By or Under Common Control with
Registrant.
Prior to the effective date of this Registration
Statement, Mercury QA Strategy Series, Inc. (the Registrant
) will sell shares of each Fund of the Registrant to
Mercury Asset Management US (the Investment Adviser
), a division of Fund Asset Management, L.P. (FAM
). Accordingly, prior to the offering of each Funds
shares, the Investment Adviser will be each Funds sole
shareholder and deemed to be a controlling person of each
Fund.
FAM is a Delaware limited partnership and an
indirect wholly-owned subsidiary of Merrill Lynch & Co. Inc.
(ML & Co.) and Princeton Services. Therefore,
prior to the offering of each Funds shares, the Registrant
and FAM will be under common control.
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 V of the Registrants Articles of
Incorporation provides that each acting and former director and
officer of the Corporation shall be indemnified by the
Corporation to the full extent permitted by the Maryland General
Corporation Law, subject to the requirements of the Investment
Company Act of 1940.
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.
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 and hold harmless the
Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as
amended (the Act), against certain types of civil
liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information,
or annual or interim reports.
Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and
controlling persons of the Registrant and the principal
underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that 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 the Investment Adviser, a division of
FAM, is P.O. Box 9011, Princeton, New Jersey 08543-9011. FAM,
doing business as FAM or Mercury Asset Management US, acts, or
has acted since December 31, 1997, as the investment adviser for
the following open-end registered investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc.,
Financial Institutions Series Trust, Mercury Master U.S. Small
Cap Growth Portfolio of Mercury Asset Management Master Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Focus Twenty Fund, Inc., Merrill Lynch
Funds for Institutions Series, Merrill Lynch Large Cap Series
Funds, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Premier Growth Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc. and The Municipal Fund Accumulation Program, Inc.; and the
following closed-end investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch
Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California
Insured Fund IV, Inc., MuniHoldings California Insured Fund V,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Florida
Insured Fund V, MuniHoldings Insured Fund, Inc., MuniHoldings
Insured Fund II, Inc., MuniHoldings Insured Fund III, Inc.,
MuniHoldings Insured Fund IV, Inc., MuniHoldings Michigan
Insured Fund, Inc., MuniHoldings Michigan Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund II, Inc., MuniHoldings New Jersey Insured
Fund III, Inc., MuniHoldings New Jersey Insured Fund IV, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings New York
Insured Fund II, Inc., MuniHoldings New York Insured Fund III,
Inc., MuniHoldings New York Insured Fund IV, Inc., MuniHoldings
Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., and Worldwide DollarVest Fund, Inc.
Set forth below is a list of each executive officer
and partner of FAM indicating each business, profession,
vocation or employment of a substantial nature in which each
such person or entity has been engaged since December 31, 1997
for his or her own account or in the capacity of director,
officer, employer, partner or trustee.
Name
|
|
Positions
with the
Investment Adviser
|
|
Other
Substantial Business,
Profession, Vocation or
Employment
|
ML & Co.
|
|
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 |
|
|
Terry K.
Glenn |
|
Executive Vice
President |
|
Executive Vice
President of MLAM;
Executive Vice President and Director of
Princeton Services; President and
Director of Princeton Funds Distributor,
Inc. (PFD); Director of Financial Data
Services, Inc.; President of Princeton
Administrators |
|
|
Gregory A.
Bundy |
|
Chief
Operating Officer and
Managing Director |
|
Chief
Operating Officer and Managing
Director of MLAM; Chief Operating
Officer and Managing Director of
Princeton Services; Co-CEO of Merrill
Lynch Australia from 1997 to 1999 |
|
|
Donald C.
Burke |
|
Senior Vice
President,
Treasurer and Director of
Taxation |
|
Senior Vice
President and of Treasurer
MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of PFO; First
Vice President of MLAM from 1997 to
1999; Vice President of MLAM from
1990 to 1997 |
|
|
Michael G.
Clark |
|
Senior Vice
President |
|
Senior Vice
President of MLAM; Senior
Vice President of Princeton Services;
Treasurer and Director of PFD; First Vice
President of MLAM from 1997 to 1999;
Vice President of MLAM from 1996 to
1997 |
|
Name
|
|
Positions
with the
Investment Adviser
|
|
Other
Substantial Business,
Profession, Vocation or
Employment
|
Robert C.
Doll |
|
Senior Vice
President |
|
Senior Vice
President of MLAM; Senior
Vice President of Princeton Services;
Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999 |
|
|
Linda L.
Federici |
|
Senior Vice
President |
|
Senior Vice
President of MLAM; Senior
Vice President of Princeton Services |
|
|
Vincent R.
Giordano |
|
Senior Vice
President |
|
Senior Vice
President of MLAM; Senior
Vice President of Princeton Services |
|
|
Michael J.
Hennewinkel |
|
Senior Vice
President and
General Counsel |
|
Senior Vice
President and General Counsel
of MLAM; Senior Vice President of
Princeton Services |
|
|
Philip L.
Kirstein |
|
Senior Vice
President and
Secretary |
|
Senior Vice
President and Secretary of
MLAM; Senior Vice President, Director
and Secretary of Princeton Services |
|
|
Debra W.
Landsman-Yaros |
|
Senior Vice
President |
|
Senior Vice
President of MLAM; Senior
Vice President of Princeton Services;
Vice President of PFD |
|
|
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 |
Mr. Glenn is President and Mr. Burke is Vice
President and Treasurer of all or substantially all of the
investment companies described in the following paragraph. Mr.
Glenn is director of such companies. Messrs. Doll, Giordano 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,
also acts, or has acted, 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 Corporate High Yield Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised
by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High
Income Municipal Bond Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. MLAM also acts as sub-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors
Trust.
Mercury Asset Management International Ltd., an
affiliate of MLAM, acts as the investment adviser or sub-adviser
for the following open-end registered investment companies:
Mercury Master Global Balanced Portfolio of Mercury Asset
Management Master Trust (the MAMMT); Mercury Master
Gold and Mining Portfolio of the MAMMT; Mercury Master
International Portfolio of the MAMMT; Mercury Master Pan-European
Growth Portfolio of the MAMMT; Mercury Master U.S. Large Cap
Portfolio of the MAMMT; Mercury Master U.S. Small Cap Growth
Portfolio of the MAMMT and Mercury V.I. U.S. Large Cap Fund of
Mercury Asset Management V.I. Funds, Inc.
Item 27. Principal
Underwriters.
(a) Mercury Funds Distributor, a division
of Princeton Funds Distributor, Inc. (MFD or the
Distributor) acts as the principal underwriter for
the Registrant and for each of the following open-end investment
companies:
|
Mercury Gold
and Mining Fund of Mercury Asset Management Funds, Inc.;
Mercury 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. Breen, Crook, Fatseas and Wasel is One Financial Center,
23rd Floor, Boston, Massachusetts 02111-2665.
Name
|
|
(2)
Positions and Offices
with the Distributor
|
|
(3)
Positions and Offices
with Registrant
|
Terry
K. Glenn |
|
President and
Director |
|
President and
Director |
Michael G. Clark |
|
Treasurer and
Director |
|
None |
Thomas
J. Verage |
|
Director |
|
None |
Robert
W. Crook |
|
Senior Vice
President |
|
None |
Michael J. Brady |
|
Vice
President |
|
None |
William M. Breen |
|
Vice
President |
|
None |
Donald
C. Burke |
|
Vice
President |
|
Vice President
and Treasurer |
James
T. Fatseas |
|
Vice
President |
|
None |
Debra
W. Landsman-Yaros |
|
Vice
President |
|
None |
Michelle T. Lau |
|
Vice
President |
|
None |
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 QA Strategy Series, 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, The Chase Manhattan Bank, 4 Chase
MetroTech, 18th Floor, Brooklyn, New York 11245;
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 FundManagement 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant
certifies that it has duly caused this Pre-Effective Amendment
No. 1 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 1st day of March,
2000.
|
MERCURY
QA STRATEGY
SERIES
, INC
.
|
|
(Terry K. Glenn, President and
Director)
|
Pursuant to the requirements of the Securities Act of
1933, this Pre-Effective Amendment No. 1 to the Registration
Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
/S
/ TERRY
K. GLENN
(Terry K. Glenn) |
|
President and
Director
(Principal Executive Officer) |
|
March 1,
2000 |
|
|
*
(Donald C. Burke) |
|
Vice President
and Treasurer
(Principal Financial Officer
and Principal Accounting
Officer) |
|
|
|
|
*
(Jack B. Sunderland) |
|
Director |
|
|
|
|
*
(Stephen B. Swensrud) |
|
Director |
|
|
|
*
(J. Thomas Touchton) |
|
Director |
|
|
|
/S
/ TERRY
K. GLENN
*By:
(Terry K. Glenn, Attorney-in-Fact) |
|
|
|
March 1,
2000 |
INDEX TO EXHIBITS
Exhibit
Number
|
|
Description
|
1(b) |
|
Articles of
Amendment of Registrant. |
|
|
4 |
|
Management
Agreement between Registrant and Mercury Asset Management US,
a division of
Fund Asset Management, L.P. |
|
|
5(a) |
|
Form of Class
I Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
|
|
5(b) |
|
Form of Class
A Shares Distribution Agreement between Registrant and Mercury
Funds
Distributor, Inc., a division of Princeton Funds Distributor,
Inc. (including Selected Dealer
Agreements). |
|
|
5(c) |
|
Form of Class
B Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
Inc., a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
|
|
5(d) |
|
Form of Class
C Shares Distribution Agreement between Registrant and Mercury
Funds Distributor,
Inc., a division of Princeton Funds Distributor, Inc. (including
Selected Dealer Agreements). |
|
|
7 |
|
Form of
Custody Agreement. |
|
|
8(a) |
|
Form of
Administration Agreement between Registrant and Mercury Asset
Management US, a
division of Fund Asset Management, L.P. |
|
|
8(b) |
|
Form of
Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency
Agreement between Registrant and Financial Data Services,
Inc. |
|
|
8(d) |
|
Form of
License Agreement relating to Use of Name between Fund Asset
Management, L.P. and
Registrant. |
|
|
8(f) |
|
Form of Fee
Waiver Agreement between Registrant and Mercury Asset
Management US, a division
of Fund Asset Management, L.P. |
|
|
9 |
|
Opinion and
consent of Swidler Berlin Shereff Friedman, LLP, counsel for
Registrant. |
|
|
10 |
|
Consent of
Deloitte & Touche LLP, independent auditors for
Registrant. |
|
|
12 |
|
Form of
Certificate of Fund Asset Management, L.P. |
|
|
13(a) |
|
Form of Class
A Shares Distribution Plan and Class A Shares Plan
Sub-Agreement. |
|
|
13(b) |
|
Form of Class
B Shares Distribution Plan and Class B Shares Plan
Sub-Agreement. |
|
|
13(c) |
|
Form of Class
C Shares Distribution Plan and Class C Shares Plan
Sub-Agreement. |
|
|
14(a) |
|
Rule 18f-3
Plan. |
|
|
14(b) |
|
Powers of
Attorney for Officers, Directors and Trustees. |
|
|
16 |
|
Code of
Ethics. |