<PAGE>
As filed with the Securities and Exchange
Commission on October 8, 1999
Securities Act File No.
Investment Company Act File No. 811-09611
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
_________________________________________
Mercury Quantitative Series Fund, Inc.
(Exact name of Registrant as specified in charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (609) 282-2800
TERRY K. GLENN
P.O. Box 9011
Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
Copies to:
Counsel for the Fund: and
JOEL H. GOLDBERG, ESQ. MICHAEL J. HENNEWINKEL, ESQ.
Swidler Berlin Shereff Friedman, LLP P.O. Box 9011
919 Third Avenue Princeton, New Jersey 08543-9011
New York, New York 10022
----------------------------------------------
It is proposed that this filing will become effective
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
[The information contained 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 is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.]
PROSPECTUS
MERCURY [QUANTITATIVE] LARGE CAP FUND
MERCURY [QUANTITATIVE] LARGE CAP VALUE FUND
MERCURY [QUANTITATIVE] LARGE CAP GROWTH FUND
MERCURY [QUANTITATIVE] MID CAP FUND
MERCURY [QUANTITATIVE] SMALL CAP FUND
AND
MERCURY [QUANTITATIVE] INTERNATIONAL FUND
OF
MERCURY [QUANTITATIVE] SERIES FUND, INC.
___________, 1999
A subscription period for shares of the Funds will end on _______, 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.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND FACTS............................................................. 1
ABOUT THE MERCURY [QUANTITATIVE] FUNDS............................ 1
FEES AND EXPENSES................................................. 5
ABOUT THE DETAILS...................................................... 13
HOW THE FUNDS INVEST.............................................. 13
INVESTMENT RISKS.................................................. 16
ABOUT THE PORTFOLIO MANAGER....................................... 21
STATEMENT OF ADDITIONAL INFORMATION............................... 22
ACCOUNT CHOICES........................................................ 22
PRICING OF SHARES................................................. 22
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES.................... 28
HOW SHARES ARE PRICED............................................. 32
FEE-BASED PROGRAMS................................................ 33
DIVIDENDS, CAPITAL GAINS AND TAXES................................ 33
THE MANAGEMENT TEAM.................................................... 34
MANAGEMENT OF THE FUNDS........................................... 34
MASTER/FEEDER STRUCTURE........................................... 36
TO LEARN MORE.......................................................... 38
SHAREHOLDER REPORTS............................................... 38
STATEMENT OF ADDITIONAL INFORMATION............................... 38
</TABLE>
<PAGE>
FUND FACTS
----------
ABOUT THE MERCURY [QUANTITATIVE] FUNDS
What is each Fund's objective?
- ------------------------------
Mercury [Quantitative] Large Cap Fund
The investment objective of the Mercury [Quantitative] Large Cap Fund (the
"Large Cap Fund") is primarily to provide long-term growth of capital, and
secondarily to provide dividend income.
Mercury [Quantitative] Large Cap Value Fund
The investment objective of the Mercury [Quantitative] Large Cap Value Fund (the
"Large Cap Value Fund") is primarily to provide long-term growth of capital, and
secondarily to provide dividend income.
Mercury [Quantitative] Large Cap Growth Fund
The investment objective of the Mercury [Quantitative] Large Cap Growth Fund
(the "Large Cap Growth Fund") is to provide long-term growth of capital.
Mercury [Quantitative] Mid Cap Fund
The investment objective of the Mercury [Quantitative] Mid Cap Fund (the "Mid
Cap Fund") is to provide long-term growth of capital.
Mercury [Quantitative] Small Cap Fund
The investment objective of the Mercury [Quantitative] Small Cap Fund (the
"Small Cap Fund") is to provide long-term growth of capital.
Mercury [Quantitative] International Fund
The investment objective of the Mercury [Quantitative] International Fund (the
"International Fund") is primarily to provide long-term growth of capital, and
secondarily to provide dividend income.
What are the Funds' main investment strategies?
- -----------------------------------------------
Each Fund (other than the International Fund) will invest, under normal
circumstances, at least 65% of its total assets in equity securities of U.S.
issuers, including foreign issuers that are traded in the United States. The
International Fund will invest, under normal circumstances, at least
1
<PAGE>
65% of its total assets in equity securities of companies whose primary trading
markets are located outside of the United States.
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this Prospectus in
the sidebar.
- --------------------------------------------------------------------------------
Large-capitalization companies -- companies that generally have market
capitalizations within the range of market capitalizations of companies included
in the Standard & Poor's 500 Composite Stock Price Index (the "S & P 500").
Standard & Poor's 500 Composite Stock Price Index -- S & P 500 is 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.
"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.
Mid-capitalization companies -- companies that generally have market
capitalizations within the range of market capitalizations of companies included
in the Standard & Poor's Mid Cap 400 Index (the "S & P 400").
Standard & Poor's Mid Cap 400 Index -- the S&P 400 is a market-weighted index
composed of common stocks issued by 400 U.S. mid-capitalization companies in a
wide range of businesses.
Small-capitalization companies -- companies that generally have market
capitalizations no greater than the market capitalization of the largest company
included in the Russell 2000 Index.
Russell 2000 Index - the Russell 2000 is a market-weighted index composed of
common stocks issued by 2,000 U.S. smaller-capitalization companies in a wide
range of businesses.
Derivative instrument - a contract, such as an option or a future, whose value
is based on the performance of an underlying asset.
- --------------------------------------------------------------------------------
The investment adviser will seek to maximize each Fund's expected return by
constructing a portfolio of investments that have risk and style characteristics
similar to those of a particular market segment. The market segment for each of
the Funds is as follows:
<TABLE>
<CAPTION>
Fund Market Segment
- -------------------------------------------------------------------
<S> <C>
Large Cap Fund stocks of large-capitalization companies
- -------------------------------------------------------------------
Large Cap Value Fund stocks of large-capitalization companies
selected through a "value" strategy
- -------------------------------------------------------------------
Large Cap Growth Fund stocks of large-capitalization companies
selected through a "growth" strategy
- -------------------------------------------------------------------
Mid Cap Fund stocks of mid-capitalization companies
- -------------------------------------------------------------------
Small Cap Fund stocks of small-capitalization companies
- -------------------------------------------------------------------
International Fund stocks of companies whose primary trading
markets are located outside of the United
States with an emphasis on larger
capitalization companies in these markets
- -------------------------------------------------------------------
</TABLE>
Each Fund seeks a broad representation of stocks from its market segment in most
major sectors of the U.S. economy, or in the case of the International Fund,
markets located outside the United States. The Funds will select their
investments on the basis of fundamental research performed by the investment
adviser and portfolio construction techniques. Each Fund will also invest in
derivative instruments that the investment adviser believes may serve as
substitutes for individual securities in an attempt to broadly represent a
particular market or market segment. In this regard, the investment adviser may
also seek to take advantage of short term trading opportunities that may arise
from differences in price between such substitutes and the underlying securities
or other differences in price that may occur when the same (or a similar)
security, currency or commodity is traded in different markets.
Each Fund's investments in fixed-income securities are limited to securities
that are considered to be cash equivalents.
A Fund may change its investment objective without shareholder approval.
Each Fund invests all of its assets in a Series of [Index] Master Series Trust
that has the same goals as the Fund. All investments will be made at the level
of the Series. This structure is
2
<PAGE>
sometimes called a "master/feeder" structure. Each Fund's investment results
will correspond directly to the investment results of the underlying Series it
invests in. For simplicity, this Prospectus uses the term "Fund" to include the
underlying Series a Fund invests in. We cannot guarantee that the Funds will
achieve their objectives.
What are the main risks of investing in the Funds?
- --------------------------------------------------
As with any mutual fund, the value of each Fund's investments -- and therefore
the value of a Fund's shares -- may go up or down. If the value of a Fund's
investments goes down, you may lose money. Changes in the value of the Funds'
investments may occur because a stock market is rising or falling. At other
times, there are specific factors that may affect the value of a particular
investment. Each Fund is also subject to the risk that the stocks the Fund's
adviser selects will underperform relative to other securities in its market
segment or other funds with similar investment objectives and investment
strategies.
The Small Cap Fund and, to a lesser extent, the Mid Cap Fund are subject to the
risks associated with investment in securities of smaller capitalization
companies. Small companies' securities generally trade in lower volumes and are
subject to greater, less predictable price changes than the securities of
larger, more established companies.
- --------------------------------------------------------------------------------
Volatility -- the amount and frequency of price movement of a security,
commodity, or market.
- --------------------------------------------------------------------------------
The International Fund 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, the
foreign securities in which the International Fund will invest are 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.
Each Fund will attempt to be fully invested at all times, and will not hold a
significant portion of its assets in cash. The Funds will generally not attempt
to hedge against adverse market movements. Therefore, a Fund might go down in
value more than other mutual funds in the event of a general market decline.
Who should invest?
- ------------------
The Mercury [Quantitative] Large Cap Fund may be an appropriate investment for
you if you:
. Want to invest in large U.S. companies
. Are investing with long term goals in mind, such as retirement or
funding a child's education
3
<PAGE>
. Are willing to accept the risk that the value of your investment may
decline
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
The Mercury [Quantitative] Large Cap Value Fund may be an appropriate investment
for you if you:
. Want to invest in large U.S. companies selected through a value
strategy
. Are investing with long term goals in mind, such as retirement or
funding a child's education
. Are willing to accept the risk that the value of your investment may
decline
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
The Mercury [Quantitative] Large Cap Growth Fund may be an appropriate
investment for you if you:
. Want to invest in large U.S. companies selected through a growth
strategy
. Are investing with long term goals in mind, such as retirement or
funding a child's education
. Are willing to accept the risk that the value of your investment may
decline
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
The Mercury [Quantitative] Mid Cap Fund may be an appropriate investment for you
if you:
. Want to invest in medium sized companies and can accept the additional
risk and volatility associated with stocks of these companies
. Are investing with long term goals in mind, such as retirement or
funding a child's education
. Are willing to accept the risk that the value of your investment may
decline
4
<PAGE>
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
The Mercury [Quantitative] Small Cap Fund may be an appropriate investment for
you if you:
. Want to invest in smaller capitalization U.S. companies and can accept
the additional risk and volatility associated with stocks of these
companies
. Are investing with long term goals, such as retirement or funding a
child's education
. Are willing to accept the risk that the value of your investment may
decline
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
The Mercury [Quantitative] International Fund may be an appropriate investment
for you if you:
. Are looking for exposure to a variety of foreign markets and can
accept the additional risk and volatility associated with foreign
investing
. Are investing with long term goals, such as retirement or funding a
child's education
. Are willing to accept the risk that the value of your investment may
decline
. Are not looking for a significant amount of current income
. Want a professionally managed portfolio
FEES AND EXPENSES
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.
5
<PAGE>
- --------------------------------------------------------------------------------
UNDERSTANDING EXPENSES
- ----------------------
Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which all mutual funds may charge:
Expenses paid directly by the shareholder:
- -----------------------------------------
Shareholder fees -- these include sales charges and redemption fees, which you
may pay when you buy or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
- -------------------------------------------
Annual Fund Operating Expenses -- expenses that cover the costs of operating the
Fund.
Management Fee -- a fee paid to the investment adviser for managing the Fund.
Distribution Fees - fees used to support the Fund's marketing and distribution
efforts, such as advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate dealers for
account maintenance activities.
- --------------------------------------------------------------------------------
The tables show the different fees and expenses that you may pay if you buy and
hold the different classes of shares of a Fund. Future expenses may be greater
or less than those indicated below.
Mercury [Quantitative] Large Cap Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
<CAPTION>
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency ____% ____% ____% ____%
fees)(g)
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
____% ____% ____% ____%
Total Other Expenses
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
Mercury [Quantitative] Large Cap Value Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency ____% ____% ____% ____%
fees)(g)
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Other Expenses ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
Mercury [Quantitative] Large Cap Growth Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency ____% ____% ____% ____%
fees)(g)
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Other Expenses ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Mercury [Quantitative] Mid Cap Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
<CAPTION>
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency ____% ____% ____% ____%
fees)(g)
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Other Expenses ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
Mercury [Quantitative] Small Cap Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Other Expenses ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
Mercury [Quantitative] International Fund
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from Class I Class A Class B(b) Class C
your investment):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on 5.25%(c) 5.25%(c) None None
purchases (as a percentage of offering price)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a None(d) None(d) 4.00%(c) 1.00%(c)
percentage of original purchase price or
redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on None None None None
Dividend Reinvestments
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------------------------------------
<CAPTION>
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)(a):
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fee(e) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(f) None 0.25% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Administration Fees(h) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Other Expenses ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(i) ____% ____% ____% ____%
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) The fees and expenses include the expenses of both the Fund and the Series
it invests in.
(b) 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.
(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) Paid by the Series. The investment adviser or its affiliate provides
accounting services to the Series at its cost.
9
<PAGE>
(f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all other
materials. If you hold Class B or C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would have
paid if you had bought one of the other classes. Class B and C shares pay a
Distribution Fee of 0.75% and a Service (Account Maintenance) Fee of 0.25%.
Class A shares pay only a Service (Account Maintenance) Fee of 0.25%.
(g) Based on estimated amounts for the current fiscal year. The Transfer Agent
is an affiliate of the investment adviser. The Fund pays the Transfer Agent a
fee for each shareholder account and reimburses it for out-of-pocket expenses.
The fee ranges from $11.00 to $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) Paid by the Fund. The administrator provides accounting services to the Fund
at its cost.
(i) In addition, certain securities dealers may charge a fee to process a
purchase or sale of shares.
Examples
These examples are intended to help you compare the cost of investing in a Fund
with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in a Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that such Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
Mercury [Quantitative] Large Cap Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
10
<PAGE>
Mercury [Quantitative] Large Cap Value Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Mercury [Quantitative] Large Cap Growth Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Mercury [Quantitative] Mid Cap Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
11
<PAGE>
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Mercury [Quantitative] Small Cap Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Mercury [Quantitative] International Fund
Expenses if you did redeem your shares:
---
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
Expenses if you did not redeem your shares:
-------
Class I Class A Class B Class C
- -------------------------------------------------
One year $ $ $ $
- -------------------------------------------------
Three years $ $ $ $
- -------------------------------------------------
12
<PAGE>
ABOUT THE DETAILS
-----------------
HOW THE FUNDS INVEST
Each Fund (other than the International Fund) will invest, under normal
circumstances, at least 65% of its total assets in equity securities of U.S.
issuers, including foreign issuers that are traded in the United States. The
International Fund will invest, under normal circumstances, at least 65% of its
total assets, in equity securities of companies whose primary trading markets
are located outside of the United States.
- --------------------------------------------------------------------------------
About the Series Management Team-The Funds' portfolio is managed by Mercury
Asset Management US, [all of whose members participate in the team's research
process and stock selection.] The senior investment professionals in this group
include Phillip Green, Sidney Hoots and Frank Salerno. Messrs. Green, Hoots and
Salerno are primarily responsible for the day-to-day management of the Funds'
portfolio.
About the Investment Adviser - Mercury Asset Management US, a division of Fund
Asset Management, L.P., is the investment adviser.
- --------------------------------------------------------------------------------
The investment adviser will seek to maximize each Fund's expected return by
constructing a portfolio of investments that have risk and style characteristics
similar to those of a particular market segment. The market segment for each of
the Funds is as follows:
<TABLE>
<CAPTION>
Fund Market Segment
- -------------------------------------------------------------------
<S> <C>
Large Cap Fund stocks of large-capitalization companies
- -------------------------------------------------------------------
Large Cap Value Fund stocks of large-capitalization companies
selected through a "value" strategy
- -------------------------------------------------------------------
Large Cap Growth Fund stocks of large-capitalization companies
selected through a "growth" strategy
- -------------------------------------------------------------------
Mid Cap Fund stocks of mid-capitalization companies
- -------------------------------------------------------------------
Small Cap Fund stocks of small-capitalization companies
- -------------------------------------------------------------------
International Fund stocks of companies whose primary trading
markets are located outside of the United
States with an emphasis on larger
capitalization companies in these markets
- -------------------------------------------------------------------
</TABLE>
The investment adviser will principally use two strategies for selection of
investments for each Fund. The first strategy involves the evaluation and
selection of stocks based on fundamental measures, such as
. earnings (surprises and analysts' revisions)
. momentum (price and earnings)
. valuation (enterprise value, price versus cash flows, and dividend
discount models)
13
<PAGE>
For each Fund, the investment adviser will emphasize identifying and purchasing
those stocks that it believes are priced most attractively and which appear to
present good opportunities for gain, based on its fundamental research. The
Large Cap Value Fund will focus 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 believes offer promising long-term prospects. The
Large Cap Growth Fund will focus on stocks of companies that are expected to
have better prospects for earnings growth than the growth rate of the general
domestic economy.
Secondarily, the investment adviser will use portfolio construction techniques
that seek to maintain a disciplined and style controlled strategy for each Fund.
This means that the investment adviser will seek to identify and purchase stocks
that help to build a portfolio that is representative of each Fund's respective
market segment. The investment adviser will employ fundamental research and
portfolio construction techniques together in order to seek Fund performance
that exceeds that of the particular market segment.
- --------------------------------------------------------------------------------
Options -- exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price within a specified time period.
Index -- an index measures the market prices of a specific group of securities
in a particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
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.
Swaps -- private contracts involving the obligation of each party to exchange
specified payments, which may be based on the value of an index or asset, with
the other party at specified times.
Warrant - a security that entitles the holder to buy a proportionate amount of
common stock at a specified price within a specified time period.
Bonds- debt obligations issued by governments, corporations and other issuers.
Convertible bonds - bonds that are exchangeable for a fixed number of other
securities (usually common stock) at a set price or formula.
Short sales - sale of a security or commodity futures contract not owned by the
seller; a technique used to take advantage of an anticipated decline in the
price.
- --------------------------------------------------------------------------------
In addition, to achieve further efficiencies in, and/or add value to, a Fund,
each Fund will also invest in derivative instruments that it believes may serve
as substitutes for individual securities in an attempt to broadly represent a
particular market or market segment. The derivative instruments in which each
Fund may invest include the purchase and writing of options on securities
indices 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 the index. Each Fund will normally invest a
substantial portion of its assets in options and futures contracts correlated
with an index representing the Fund's particular market segment. Derivatives
allow the Funds to increase exposure to the index quickly and at less cost than
buying or selling stocks. Each Fund will invest in options, futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. Each Fund will also invest in derivatives whenever the
investment adviser believes a derivative (including futures, total return index
swaps, options, warrants and convertible bonds) presents price or return
characteristics superior to those of stocks represented in the index. The
International Fund will use futures as an efficient and less costly way of
emphasizing or de-emphasizing investment in particular countries represented in
its market segment. The Funds will consider derivatives that provide exposure to
equity indices or individual stocks to be equity securities for purposes of the
percentages described above.
Each Fund may engage in certain types of investment transactions, including
short-term trading opportunities, that seek to profit from differences in price
when the same (or a similar) security, currency or commodity is traded in two or
more markets. For example, the Funds may attempt to exploit discrepancies
between (i) the value of a futures contract (such as an S & P 500 futures
contract) or other derivatives and the value of a particular index, (ii) the
implied value of an option embedded in a convertible bond and the actual value
of the option, (iii) the value of different share classes of a company or in a
single share class listed on more than one exchange, and (iv) the value of the
stock of a company subject to an announced but not yet completed merger,
takeover or other significant corporate event and the expected value of the
stock upon completion of such event. Each Fund may also enter into short sales
of various types of securities and financial
14
<PAGE>
instruments, including securities and financial instruments not represented in
an index correlating with the Fund's particular market segment, in connection
with such transactions.
- --------------------------------------------------------------------------------
Standard & Poor's 500/Barra Value Index -- the S&P 500/Barra Value Index
consists of the common stocks in the S&P 500 that are considered to be "value"
stocks.
Standard & Poor's 500/Barra Growth Index -- The S&P 500/Barra Growth Index
consists of the common stocks in the S&P 500 that are considered to be "growth"
stocks.
Morgan Stanley Capital International Europe, Asia and Far East Capitalization
Weighted Index -- the EAFE Index is composed of equity securities of 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 weighting
of the EAFE Index is based on the market capitalization of each of the countries
in the index.
- --------------------------------------------------------------------------------
Each of the market segments targeted by a Fund is reflected in a broad-based
market index. Therefore, while none of the Funds is an index fund that seeks to
replicate an index, it is expected that each Fund will have risk and style
characteristics similar to the index listed below:
<TABLE>
<CAPTION>
Fund Index
- ------------------------------------------------------------------
<S> <C>
Large Cap Fund S & P 500
- ------------------------------------------------------------------
Large Cap Value Fund Standard & Poor's 500/Barra Value Index
- ------------------------------------------------------------------
Large Cap Growth Fund Standard & Poor's 500/Barra Growth Index
- ------------------------------------------------------------------
Mid Cap Fund S & P 400
- ------------------------------------------------------------------
Small Cap Fund Russell 2000 Index
- ------------------------------------------------------------------
International Fund Morgan Stanley Capital International
Europe, Asia and Far East Capitalization
Weighted Index
- ------------------------------------------------------------------
</TABLE>
In addition to the investment strategies described above, each Fund may also
invest in illiquid securities and repurchase agreements, and may engage in
securities lending. Furthermore, each Fund may invest in new issues, convertible
securities, foreign securities, and foreign currency exchange contracts, and
sell covered call options. For more information on these and other investments
of the Fund, see the Statement of Additional Information.
Each 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. To
the extent a Fund invests in short term money market instruments, it will
generally also invest in options, futures or other derivatives in order to
maintain full exposure to the particular market segment. The Funds will not
invest in options, futures, other derivative instruments or short term money
market instruments in order to lessen the Funds' exposure to common stocks as a
defensive strategy, but will instead attempt to remain fully invested at all
times.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that a Fund's performance will be positive for any period of time.
15
<PAGE>
- --------------------------------------------------------------------------------
Forwards -- private contracts involving the obligation of the seller to deliver,
and the buyer to receive, certain assets (or a money payment based on the change
in value of certain assets or an index) at a specified time.
Options on futures - an option where the underlying asset is a futures contract.
Indexed securities -- debt obligations that return a variable amount of
principal or interest based on the value of an index at a specified time.
- --------------------------------------------------------------------------------
All Funds
Stock Market Risk -- Stock market risk is the risk that the stock markets will
go down in value, including the possibility that the markets will go down
sharply and unpredictably.
Selection Risk -- Selection risk is the risk that a Fund's investments may
perform differently from securities in the particular market segment overall.
Derivatives -- Derivatives allow a Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments. A Fund
may use the following types of derivative instruments including: futures,
forwards and options, options on futures, swaps and indexed securities.
Derivatives are volatile and involve significant risks, which may include:
Leverage risk -- the risk associated with certain types of investments
or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain
investments or trading strategies that involve leverage can result in
losses that greatly exceed the amount originally invested.
Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to a Fund.
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of
an investment.
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
A Fund may use derivatives for anticipatory hedging and for non-hedging
purposes. Anticipatory hedging is a strategy in which a Fund uses a derivative
to offset the risk that securities in which such Fund intends to invest will
increase in value before such Fund has an opportunity to purchase the
securities. A Fund will use derivatives for anticipatory hedging in order to
gain exposure efficiently to their underlying indexes in the event such Fund
receives cash inflows. Each Fund may also use derivatives in connection with
the investment strategy that seeks to profit from differences in price when the
same (or a similar) security, currency or commodity is traded in two or more
markets.
16
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
- --------------------------------------------------------------------------------
Correlation Risk -- Each Fund may purchase an asset and concurrently sell that
asset in a different market, or sell a related asset, in order to capture small
price discrepancies between markets or related assets. This strategy involving
related assets carries the risk that the value of the related assets will not
track or affect each other in the manner anticipated by the investment adviser.
This strategy generally assumes that the price of related assets will converge
to some historic or quantitative relationship, and that price discrepancies from
this relationship will disappear. In the event the price discrepancies do not
disappear or widen, however, a Fund could lose money on a transaction.
Merger Transaction Risk -- A Fund may buy stock of the target company in an
announced merger transaction prior to the consummation of such transaction. In
that circumstance, the Fund would expect to receive an amount (whether in cash,
stock of the acquiring company or a combination of both) in excess of the
purchase price paid by the Fund for the target company's stock. This strategy is
subject to the risk that the merger transaction may be canceled, delayed or
restructured in which case the Fund's holding of the target company's stock may
not result in any profit for the Fund and may lose significant value.
Borrowing and Leverage -- The Funds may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on a Fund's portfolio. Borrowing will cost
a Fund interest expense and other fees. The cost of borrowing may reduce a
Fund's return.
Certain securities that a Fund buys may create leverage, including, for example,
futures, forward commitments and options.
Illiquid Securities -- Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. A Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so may be less able to
predict a loss. In addition, if Fund management 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.
Securities Lending -- Each Fund may lend securities to financial institutions
that provide cash or government securities as collateral. Securities lending
involves the risk that the borrower may
17
<PAGE>
fail to return the securities in a timely manner or at all. As a result, a Fund
may lose money and there may be a delay in recovering the loaned securities. A
Fund could also lose money if it does not recover the securities and the value
of the collateral falls. These events could trigger adverse tax consequences to
a Fund.
Short Sales -- A Fund may borrow the security sold short to make delivery to the
buyer. The Fund must then replace the security it has borrowed. If the price of
a security sold short goes up between the time of the short sale and the time
the Fund must deliver the security to the lender, the Fund will incur a loss.
The Fund must also pay the lender any interest accrued during the period of the
loan.
Mercury [Quantitative] Small Cap Fund
Small Cap Risk -- Small cap companies may have limited product lines or markets.
They may be less financially secure than larger, more established companies.
They may depend on a small number of key personnel. If a product fails, or if
management changes, or there are other adverse developments, the Fund's
investment in a small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject to greater
and more unpredictable price changes than larger cap securities or the stock
market as a whole. Investing in small caps securities requires a long-term view.
When selling a large quantity of a particular stock, the 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.
Mercury [Quantitative] Mid Cap Fund and Mercury [Quantitative] Small Cap Fund
Volatility -- Stocks of small and medium sized companies tend to be more
volatile than stocks of larger companies and can be particularly sensitive to
expected changes in interest rates, borrowing costs and earnings.
Mercury [Quantitative] International Fund
Foreign Market Risk -- Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that the Fund will
lose money. In particular, the Fund is subject to the risk that because there
are generally fewer investors in foreign exchanges and a smaller number of
securities traded each day, it may be difficult for the Fund to buy and sell
certain securities on those exchanges. In addition, prices of foreign securities
may fluctuate more than prices of securities traded in the United States.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national
18
<PAGE>
product, reinvestment of capital, resources, and balance of payments position.
Certain such economies may rely heavily on particular industries or foreign
capital and are more vulnerable to diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers, and other protectionist or
retaliatory measures. Investments in foreign markets may also be adversely
affected by governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of assets, or the
imposition of punitive taxes. In addition, the governments of certain countries
may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain industries. Any of these actions could severely
affect security prices, impair the Fund's ability to purchase or sell foreign
securities or transfer the Fund's assets or income back into the United States,
or otherwise adversely affect the Fund's operations. Other foreign market risks
include foreign exchange controls, difficulties in pricing securities, defaults
on foreign government securities, difficulties in enforcing favorable legal
judgments in foreign courts, and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk -- Securities in which the International Fund
invests are usually denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value of the
securities of the Fund. Generally, when the U.S. dollar rises in value against a
foreign currency, your investment in a security denominated in that currency
loses value because the currency is worth fewer U.S. dollars. Conversely, when
the U.S. dollar decreases in value against a foreign currency, your investment
in a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk is generally known as "currency risk" which
is the possibility that a stronger U.S. dollar will reduce returns for U.S.
investors investing overseas and a weak U.S. dollar will increase returns for
U.S. investors investing overseas.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Accounting standards in
other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as United
States accounting standards, it may be harder for the Fund's portfolio manager
to completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces the
amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The
International Fund generally holds the foreign securities and cash in which it
invests outside the United States in
19
<PAGE>
foreign banks and securities depositories. Certain of such foreign banks and
securities depositories may be recently organized or new to the foreign custody
business and/or may have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on the Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to buy, sell, and hold securities in
certain foreign markets than in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense to invest in
foreign markets reduces the amount the Fund can earn on its investments and
typically results in a higher operating expense ratio for the Fund than
investment companies invested only in the United States.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Fund to carry out transactions. If the
Fund cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any losses
incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single European currency (the "euro"), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the International Fund in a number of situations, including as
follows:
. If the transition to euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and
other disruptions of the markets could occur.
20
<PAGE>
. Withdrawal from EMU by a participating country could also have a
negative effect on the Fund's investments, for example if securities
redenominated in euros are transferred back into that country's
national currency.
ABOUT THE PORTFOLIO MANAGERS
[Prior performance information for comparable accounts to be added]
21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the Funds, including how they
invest, please see the Statement of Additional Information.
ACCOUNT CHOICES
---------------
PRICING OF SHARES
Each Fund offers four classes of shares, each with its own sales charge and
expense structure allowing you to invest in the way that best suits your needs.
Each share class 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 A shares, you generally pay a sales charge
at the time of purchase. If you buy Class A shares, you also pay an ongoing
account maintenance fee of 0.25%. You may be eligible for a sales charge waiver.
If you select Class B or C shares, which are not subject to an initial sales
charge, you will invest the full amount of your purchase price. However, the
Funds have adopted a plan under Rule 12b-1 of the Investment Company Act of
1940, as amended, and you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
Each Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.
22
<PAGE>
To better understand the pricing of each Fund's shares, we have summarized the
information below:
<TABLE>
<CAPTION>
Class I Class A Class B Class C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability? Limited to certain Generally available Generally available Generally available
investors including: through selected through selected through selected
. Current Class I securities dealers. securities dealers. securities dealers.
shareholders
. Certain
Retirement Plans
. Participants of
certain sponsored
programs
. Certain affiliates
of selected
securities dealers
- ---------------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time Yes. Payable at time No. Entire purchase No. Entire purchase
of purchase. Lower of purchase. Lower price is invested in price is invested in
sales charges sales charges shares of the Fund. shares of the Fund.
available for certain available for certain
larger investments. larger investments.
- ---------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be No. (May be Yes. Payable if you Yes. Payable if you
Charge? charged for charged for redeem within six redeem within one
purchases over $1 purchases over $1 years of purchase. year of purchase.
million that are million that are
redeemed within one redeemed within one
year.) year.)
- ---------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee. Maintenance Fee. Maintenance Fee.
Distribution Fees? No Distribution Fee. 0.75% Distribution 0.75% Distribution
Fee. Fee.
- ---------------------------------------------------------------------------------------------------------------------
Conversion to No. No. Yes, automatically No.
Class A shares? after approximately
8 years.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Class I and A Shares -- Initial Sales Charge Options
The public offering price of Class I and Class A shares during the subscription
period is $10.00 per share. If you select Class I or A shares, you will pay a
sales charge at the time of purchase (whether during or after the subscription
period) as shown in the following table. During the subscription period,
securities dealers will receive compensation equal to the entire sales charge
(and therefore, may be deemed to be underwriters). After the subscription
period, the dealer compensation will be as shown in the last column.
<TABLE>
<CAPTION>
Your Investment As a % of As a % of Your Dealer
Offering Price Investment/*/ Compensation
as a % of
Offering Price
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than $50,000 4.75% 4.99% 4.50%
$50,000 but less than $100,000 4.00% 4.17% 3.75%
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C> <C>
$100,000 but less than $250,000 3.00% 3.09% 2.75%
$250,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over** 0.00% 0.00% 0.00%
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class I or A shares, you may not pay an
initial sales charge. However, if you redeem your shares within one year after
purchase, you may be charged a deferred sales charge. This charge is 1% of the
lesser of the original cost of the shares being redeemed or your redemption
proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or
more of Class I and A shares by certain employer sponsored retirement or
savings plans.
No initial sales charge applies to Class I or Class A shares that you buy
through reinvestment of dividends or distributions.
- --------------------------------------------------------------------------------
Right of Accumulation -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.
Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Mercury mutual funds that you agree to buy within a
13 month period. Certain restrictions apply.
- --------------------------------------------------------------------------------
A reduced or waived sales charge on a purchase of Class I or A shares 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 of mutual funds sponsored by
Mercury or its affiliates, employees of Mercury and its affiliates, and
employees of selected dealers.
- - Certain fee-based programs managed by Mercury or its affiliates.
- - Certain fee-based programs managed by selected dealers that have an
agreement with Mercury.
- - Purchases through certain financial advisers that meet and adhere to
standards established by Mercury.
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 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 an account maintenance fee, while
Class I shares are not.
24
<PAGE>
If you redeem Class I or Class A shares and within 30 days buy new shares of the
same class, 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 C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under a distribution
plan that each Fund has adopted under Rule 12b-1 under the Investment Company
Act of 1940. The Distributor uses the money that it receives from the deferred
sales charge and the distribution fees to cover the costs of marketing,
advertising and compensating the financial consultant or other dealer who
assists you in your decision to purchase the shares of such Fund.
Class B Shares
If you redeem Class B shares 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:
<TABLE>
<CAPTION>
Year Since Purchase Sales Charge*
- --------------------------------------------------
<S> <C>
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%
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired by
dividend or capital gain reinvestment are not subject to a deferred sales
charge. Mercury funds may not all have identical deferred sales charge
schedules. In the event of an exchange for the shares of another Mercury fund,
the higher charge, if any, would apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
25
<PAGE>
- - Certain post-retirement withdrawals from an IRA or other retirement plan if
you are over 59 1/2 years old (certain legal documentation may be required at
the time of liquidation establishing eligibility for qualified distribution).
- - Redemption by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers.
- - Redemption in connection with participation in certain fee-based programs
managed by Mercury or its affiliates.
- - Redemption in connection with participation in certain fee-based programs
managed by selected dealers that have agreements with Mercury.
- - 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 shares of a Fund are held
(certain legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution).
- - Withdrawal through the Systematic Withdrawal Plan of up to 10% per year of
your account value at the time the plan is established.
Your Class B shares convert automatically into Class A shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class A shares are subject to lower annual expenses than Class B shares.
The conversion of Class B shares to Class A shares is not a taxable event for
federal income tax purposes.
Different conversion schedules may apply to Class B shares of different Mercury
mutual funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, a Fund's eight year conversion schedule
will apply. If you exchange your Class B shares in a Fund for Class B shares of
a fund with a longer conversion schedule, the other fund's conversion schedule
will apply. In any event, the length of time that you hold the original and
exchanged Class B shares in both funds will count toward the conversion
schedule.
The conversion schedule may be modified in certain other cases as well.
Class C Shares
If you redeem Class C shares 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
26
<PAGE>
when you redeem shares that you acquire through reinvestment of Fund dividends
or distributions. The deferred sales charge relating to Class C shares may be
reduced or waived in connection with certain fee-based programs. 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. The Funds do not
issue share certificates.
<TABLE>
<CAPTION>
If you want to Your choices Information important for you to know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy shares First, select the share Please refer to the pricing of shares table on
class appropriate for you page . Be sure to read this Prospectus carefully.
- ---------------------------------------------------------------------------------------------------
Next, determine the The minimum initial investment for each Fund
amount of your is $1,000 for all accounts except:
investment - $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be
waived or reduced under certain circumstances.)
- ---------------------------------------------------------------------------------------------------
Have your financial The price of your shares is based on the next
consultant or securities calculation of net asset value after your order is
dealer submit your placed. Any purchase orders placed within
purchase order fifteen minutes after the close of business on the
New York Stock Exchange will be priced at the
net asset value determined that day.
Purchase orders received after that time will be
priced at the net asset value determined on the
next business day. A Fund may reject any order
to buy shares and may suspend the sale of shares
at any time. Certain securities dealers may
charge a fee to process a purchase. For example,
the fee charged by Merrill Lynch, Pierce, Fenner
& Smith Incorporated is currently $5.35. The
fees charged by other securities dealers may be
- ---------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
If you want to Your choices Information important for you to know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
higher or lower.
- ---------------------------------------------------------------------------------------------------
Or contact the Transfer Instead of purchasing through a financial
Agent consultant or securities dealer, you can purchase
shares of a Fund by calling the Transfer Agent to
request an application and mailing a purchase
order directly to the Transfer Agent at the
address on the inside back cover of this
Prospectus.
- ---------------------------------------------------------------------------------------------------
Add to your Purchase additional The minimum investment for additional
investment shares purchases is $100 for all accounts except:
- $50 for certain fee-based programs
- $1 for retirement plans
(The minimums for additional purchases may be
waived under certain circumstances.)
- ---------------------------------------------------------------------------------------------------
Acquire additional shares All dividends and capital gains distributions are
through the automatic automatically reinvested without a sales charge.
dividend reinvestment
plan
- ---------------------------------------------------------------------------------------------------
Participate in the You may automatically invest a specific amount
automatic investment in a Fund on a periodic basis through your
plan securities dealer:
- The current minimum for such automatic
investments is $50. The minimum may be
waived or revised under certain circumstances.
- ---------------------------------------------------------------------------------------------------
Transfer shares Transfer to a To transfer your shares of a Fund to another
to another participating securities securities dealer, authorized dealer agreements
securities dealer must be in place between the Distributor and the
dealer transferring securities dealer and the Distributor
and the receiving securities dealer. All
shareholder services will be available for all
transferred shares. All future trading of these
shares must be coordinated by the receiving
securities dealer.
- ---------------------------------------------------------------------------------------------------
Transfer to a non- You cannot transfer your shares of a Fund to a
participating securities securities dealer that does not have an authorized
- ---------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
If you want to Your choices Information important for you to know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
dealer dealer agreement with the Distributor. You must
either:
- Transfer your shares to an account with the
Transfer Agent; or
- Sell your shares.
- ---------------------------------------------------------------------------------------------------
Sell your Have your financial The price of your shares is based on the next
shares consultant or securities calculation of net asset value after your order is
dealer submit your sales placed. For your redemption request to be priced
order at the net asset value on the day of your request,
you must submit your request to your dealer
within fifteen minutes after that day's close of
business on the New York Stock Exchange (the
New York Stock Exchange generally closes at
4:00 p.m. Eastern time). Any redemption request
placed after that time will be priced at the net
asset value at the close of business on the next
business day. Dealers must submit redemption
requests to the applicable Fund not more than
thirty minutes after the close of business on the
New York Stock Exchange on the day the
request was received.
Certain securities dealers may charge a fee to
process a sale of shares. For example, the fee
charged by Merrill Lynch, Pierce, Fenner &
Smith Incorporated is currently $5.35. The fees
charged by other securities dealers may be
higher or lower.
A Fund may reject an order to sell shares under
certain circumstances.
- ---------------------------------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent
Agent by writing to the Transfer Agent at the address
on the inside back cover of this Prospectus. All
shareholders on the account must sign the letter
and signatures must be guaranteed. Depending
on the type of account and/or type of
distribution, certain additional documentation
- ---------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
If you want to Your choices Information important for you to know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
may be required. The Transfer Agent will
normally mail sale proceeds within seven days
following receipt of a properly completed
request. If you make a sales order request before
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 Participate in the Fund's You can generally arrange through your selected
systematically Systematic Redemption dealer for systematic sales of shares of a fixed
Program dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to
certain conditions. You must have dividends and
other distributions automatically reinvested. For
Class B and C shares your total annual
withdrawals cannot be more than 10% of the
value of your shares at the time the Program is
established. The deferred sales charge is waived
for systematic sales of shares. Ask your financial
consultant for details.
- ---------------------------------------------------------------------------------------------------
Exchange your Select the fund into You can exchange your shares of a Fund for
shares which you want to shares of other Mercury mutual funds or for
exchange. Be sure to shares of the Summit Cash Reserves Fund. You
read that fund's must have held the shares used in the exchange
prospectus. for at least 15 calendar days before you can
exchange to another fund.
Each class of shares of a Fund is generally
exchangeable for shares of the same class of
another Mercury fund. 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
- ---------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
If you want to Your choices Information important for you to know
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
shares for shares of a fund with a higher initial
sales charge than you originally paid, you may
be charged the difference at the time of
exchange. If you exchange Class B or Class C
shares for shares of a fund with a different
deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B
or Class C shares in both funds will count when
determining your holding period for calculating
a deferred sales charge at redemption. Your time
in both funds will also count when determining
the holding period for a conversion from Class B
to Class A shares.
Although there is currently no limit on the
number of exchanges that you can make, the
exchange privilege may be modified or
terminated at any time in the future.
</TABLE>
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, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase or
redemption order is placed. Net asset value is generally calculated by valuing
each security or other asset at its closing price for the day. Many of the
International Fund's investments are traded on non-U.S. 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 Fund's net asset value. Non-U.S. securities sometimes trade on
days that the New York Stock Exchange is closed. As a result, the International
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's 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 Trustees.
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.
31
<PAGE>
Also, dividends paid on Class I and Class A shares will generally be higher than
dividends paid on Class B and Class C shares because Class I and Class A shares
have lower expenses.
FEE-BASED PROGRAMS
If you participate in certain fee-based programs offered by Mercury or an
affiliate of Mercury, or by selected dealers that have an agreement with
Mercury, you may be able to buy Class I shares at net asset value, including
through exchange from other share classes. Sales charges on the shares being
exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of shares of a Fund 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.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
"Buying a dividend"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before a Fund pays a dividend or distribution. The reason?
If you buy shares when a Fund has realized but not yet distributed income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable distribution. Before
investing you may want to consult your tax advisor.
- --------------------------------------------------------------------------------
Each Fund will distribute any net investment income and any net realized long or
short-term capital gains at least annually. Each Fund may also pay a special
distribution at the end of the calendar year to comply with federal tax
requirements. Dividends may be reinvested automatically in shares of a Fund 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 a Fund, contact your
financial consultant about which option you would like. If your account is with
the Transfer Agent, and you would like to receive dividends in cash, contact the
Transfer Agent.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem shares of a Fund or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Each Fund
intends to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends received by individuals are generally
taxed at different rates than ordinary income dividends.
In some years (when over 50% of the International Fund's assets consist of
foreign securities at its fiscal year end), the International Fund intends to
make an election that results in your being
32
<PAGE>
able to claim your share of foreign taxes paid by the Fund as a deduction or
foreign tax credit on your personal income tax return. The amount of such taxes
will also be reported to you as income from the Fund.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, a Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
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.
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.
THE MANAGEMENT TEAM
-------------------
MANAGEMENT OF THE FUNDS
Mercury Asset Management U.S., a division of Fund Asset Management, L.P.,
manages the underlying Series' investments and their business operations under
the overall supervision of the Board of Trustees of [Index] Master Series Trust.
The investment adviser has the responsibility for making all investment
decisions for the Funds.
The senior investment professionals in the group that have managed the Funds'
respective portfolios since the Funds started operations include:
Phillip Green is a Senior Vice President of the Funds and Portfolio Manager of
_______________. [Remainder of Green Bio to be provided]
Sidney Hoots is a Senior Vice President of the Funds and Portfolio Manager of
_______________. [Remainder of Hoots bio to be provided]
Frank Salerno is a Senior Vice President of the Funds and the Portfolio Manager
of ___________. Mr. Salerno joined the investment adviser and its affiliates in
1999. Prior to joining the investment adviser and its affiliates, Mr. Salerno
was a Senior Portfolio Manager for quantitative products and index funds and
Managing Director and Chief Investment Officer of Structured Investments at
Bankers Trust Company. He joined Bankers Trust Company in 1981.
33
<PAGE>
Mercury and its affiliates manage portfolios with over $_______ billion in
assets (as of ________ 1999) for individuals and institutions seeking
investments worldwide. This amount includes assets managed for its affiliates.
The management agreement between the [Index] Master Series Trust and the
investment adviser gives the investment adviser the responsibility for making
all investment decisions.
The investment adviser is paid a fee by each Series as a percentage of the
respective Series' average daily net assets as follows:
<TABLE>
<CAPTION>
Series Annual Fee Rate
- ------ ---------------
<S> <C>
[Quantitative] Large Cap Series 0.60%
[Quantitative] Large Cap Value Series 0.60%
[Quantitative] Large Cap Growth Series 0.60%
[Quantitative] Mid Cap Series 0.70%
[Quantitative] Small Cap Series 0.75%
[Quantitative] International Series 0.75%
</TABLE>
The Funds do not have an investment adviser since each Fund's assets are
invested in its corresponding Series. Mercury Asset Management U.S. provides
administrative services to the Funds.
The table below shows the fee payable to the Administrator as a percentage of
the respective Fund's average daily net assets:
<TABLE>
<CAPTION>
Fund Annual Fee Rate
- ---- ---------------
<S> <C>
Large Cap Fund 0.35%
Large Cap Value Fund 0.35%
Large Cap Growth Fund 0.35%
Mid Cap Fund 0.35%
Small Cap Fund 0.35%
International Fund 0.35%
</TABLE>
MASTER/FEEDER STRUCTURE
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their respective investment
objectives by investing all of their respective assets in the corresponding
Series of the [Index] Master Series Trust. Investors in each Fund will acquire
an indirect interest in the respective underlying Series.
34
<PAGE>
Other "feeder" funds may also invest in the "master" Series. This structure may
enable the Funds to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.
A Fund may withdraw from the respective underlying Series at any time and may
invest all of its assets in another pooled investment vehicle or retain an
investment adviser to manage such Fund's assets directly.
Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than a Fund over the
operations of the respective underlying Series.
Whenever the respective underlying Series holds a vote of its feeder funds, a
Fund will pass the vote through to its own shareholders.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900
(commonly known as the "Year 2000 Problem"). The Funds could be adversely
affected if the computer systems used by the Funds' management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Funds' management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Funds' other service providers have told the Funds' management that they
also expect to resolve the Year 2000 Problem, and the Funds' management will
continue to monitor the situation as the year 2000 approaches. However, if the
problem has not been fully addressed, the Funds could be negatively affected.
The Year 2000 Problem could also have a negative impact on the companies in
which the Funds invest. This negative impact may be greater for companies in
foreign markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Funds invest have
Year 2000 Problems, the Funds' returns could be adversely affected.
35
<PAGE>
Funds
Mercury [Quantitative] Large Cap Fund
Mercury [Quantitative] Large Cap Value Fund
Mercury [Quantitative] Large Cap Growth Fund
Mercury [Quantitative] Mid Cap Fund
Mercury [Quantitative] Small Cap Fund
Mercury [Quantitative] International Fund
of Mercury Quantitative Series Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(1-888-763-2260)
Investment Adviser and Administrator
Mercury Asset Management U.S.,
a division of Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Transfer Agent
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(1-888-763-2260)
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
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
[To come]
Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
36
<PAGE>
TO LEARN MORE
-------------
SHAREHOLDER REPORTS
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Funds' annual report you
will find a discussion of the 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 shares in a Fund 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 to the Funds at
Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062
or by calling 1-888-763-2260.
Contact your financial consultant or the Funds at the telephone number or
address indicated on the inside back cover of this Prospectus if you have any
questions.
Information about the Funds (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file # 811-09611
-------------
Code # _________________
(C)[Fund Asset Management, L.P.]
37
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Mercury [Quantitative] Large Cap Fund
Mercury [Quantitative] Large Cap Value Fund
Mercury [Quantitative] Large Cap Growth Fund
Mercury [Quantitative] Mid Cap Fund
Mercury [Quantitative] Small Cap Fund
Mercury [Quantitative] International Fund
of Mercury [Quantitative] Funds, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011
No. (888) 763-2260
------------------------
Mercury [Quantitative] Large Cap Fund, Mercury [Quantitative] Large Cap
Value Fund, Mercury [Quantitative] Large Cap Growth Fund, Mercury [Quantitative]
Mid Cap Fund, Mercury [Quantitative] Small Cap Fund and Mercury [Quantitative]
International Fund (each a "Fund," and collectively the "Funds" are each
separate series of Mercury [Quantitative] Funds, Inc. (the "Corporation"). Each
Fund is a separate diversified series of an open-end investment company
(commonly known as a mutual fund). The Mercury [Quantitative] Large Cap Growth
Fund, Mercury [Quantitative] Mid Cap Fund, Mercury [Quantitative] Small Cap Fund
each seek to provide long-term growth of capital. The Mercury [Quantitative]
Large Cap Fund, Mercury [Quantitative] Large Cap Value Fund and Mercury
[Quantitative] International Fund each seek to provide long-term growth of
capital and secondarily, to provide dividend income. Each Fund seeks to
maximize the expected return by constructing a portfolio of investments that
have risk and style characteristics similar to that of a particular market
segment. Each Fund seeks to achieve its objective by investing all of its assets
in the series (collectively, the "Series," and each, a "Series") of [Index]
Master Series Trust (the "Trust") that has the same investment objective as the
Fund. Each Fund's investment experience will correspond directly to the
investment experience of the respective Series in which it invests. There can
be no assurance that the investment objective of the Funds will be achieved.
Each Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. This permits an investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances. The Funds'
distributor is Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc. ("MFD" or the "Distributor").
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Corporation, dated [___________],
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
the Funds at 888-763-2260 or your financial consultant, or by writing to the
address listed above. The Prospectus is incorporated by reference to this
Statement of Additional Information, and this Statement of Additional
Information has been incorporated by reference to the Prospectus.
Mercury Asset Management US, a division of Fund Asset Management, L.P. --
Investment Adviser
Mercury Funds Distributor -- Distributor
------------------------
The date of this Statement of Additional Information is [--], 1999.
<PAGE>
Table of Contents
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Page
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INVESTMENT OBJECTIVES AND POLICIES.................................. 1
Other Investment Policies, Practices and Risk Factors.............. 2
Additional Information Concerning the Indices......................18
Investment Restrictions............................................21
MANAGEMENT OF THE FUND..............................................23
Directors and Officers.............................................23
Administration Arrangements........................................25
Management and Advisory Arrangements...............................26
Code of Ethics.....................................................27
PURCHASE OF SHARES..................................................28
Initial Sales Charge Alternatives -- Class I and Class A Shares....28
Reduced Initial Sales Charges......................................29
Distribution Plans.................................................32
Limitations on the Payment of Deferred Sales Charges...............34
REDEMPTION OF SHARES................................................34
Redemption.........................................................35
Repurchase.........................................................36
Reinstatement Privilege -- Class I and Class A Shares..............36
Deferred Sales Charges -- Class B and Class C Shares...............36
PORTFOLIO TRANSACTIONS AND BROKERAGE................................39
DETERMINATION OF NET ASSET VALUE....................................41
SHAREHOLDER SERVICES................................................43
Investment Account.................................................43
Automatic Investment Plan..........................................43
Automatic Dividend Reinvestment Plan...............................44
Systematic Withdrawal Plan.........................................44
Retirement Plans...................................................45
Exchange Privilege.................................................45
Fee-Based Programs.................................................47
DIVIDENDS AND TAXES.................................................48
Dividends..........................................................48
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Taxes..............................................................48
Tax Treatment of Options and Futures Transactions..................51
Other Tax Matters..................................................51
PERFORMANCE DATA....................................................52
GENERAL INFORMATION.................................................53
Description of Shares..............................................53
Computation of Offering Price Per Share............................54
Independent Auditors...............................................58
Custodian..........................................................58
Transfer Agent.....................................................58
Legal Counsel......................................................59
Reports to Shareholders............................................59
Additional Information.............................................59
APPENDIX A..........................................................A-1
ii
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a separately managed, diversified mutual fund with its own
investment objective and policies.
The table below lists the investment objective of each Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Fund Investment Objective
- ------------------------------------------------------------------------------------------
<S> <C>
Mercury [Quantitative] Large Cap Fund primarily to provide long-term growth of
capital, and secondarily to provide dividend
income
- ------------------------------------------------------------------------------------------
Mercury [Quantitative] Large Cap Value primarily to provide long-term growth of
Fund capital, and secondarily to provide dividend
income
- ------------------------------------------------------------------------------------------
Mercury [Quantitative] Large Cap Growth to provide long-term growth of capital
Fund
- ------------------------------------------------------------------------------------------
Mercury [Quantitative] Mid Cap Fund to provide long-term growth of capital
- ------------------------------------------------------------------------------------------
Mercury [Quantitative] Small Cap Fund to provide long-term growth of capital
- ------------------------------------------------------------------------------------------
Mercury [Quantitative] International Fund primarily to provide long-term growth of
capital, and secondarily to provide dividend
income
- ------------------------------------------------------------------------------------------
</TABLE>
Each Fund seeks to achieve its objective by investing all of its assets in
the series of the Trust that has the same investment objective as the Fund. All
investments are made at the level of the Series. Each Fund's investment
experience and results will correspond directly to the investment experience of
the respective Series in which it invests. For simplicity, however, with
respect to investment objective, policies and restrictions, this Statement of
Additional Information, like the Prospectus, uses the term "Fund" to include the
underlying Series in which the Fund invests. Reference is made to the discussion
under "How the Funds Invest" in the Prospectus for information, with respect to
each Fund's and each Series' investment objectives and policies. There can be
no assurance that the investment objectives of the Funds will be achieved.
The investment objective of each Fund is not a fundamental policy and may
be changed without shareholder approval.
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Other Investment Policies, Practices and Risk Factors
Cash Management. Generally, the investment adviser will employ futures and
---------------
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the investment adviser, a portion of 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 S&P or,
if unrated, of comparable quality in the opinion of the investment adviser;
(iii) commercial paper; (iv) bank obligations, including negotiable certificates
of deposit, time deposits and bankers' acceptances; and (v) repurchase
agreements. At the time the Funds invest in commercial paper, bank obligations
or repurchase agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or
outstanding commercial paper, bank obligations or other short-term obligations
rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are available,
the instrument must be of comparable quality in the opinion of the investment
adviser.
Short Sales. In connection with the use of certain instruments based upon
-----------
or consisting of one or more baskets of securities or instruments, the
investment adviser may sell a security a Fund does not own, or in an amount
greater than the Fund owns (i.e., make short sales). Such transactions will be
used 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. The Fund is then obligated to replace
the security borrowed. The price at the time of replacement may be more or less
than the price at which the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security, the Fund may be
required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Fund replaces the borrowed security, it will (a) maintain in a
segregated account with its custodian cash or liquid securities at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current market value of the security sold
short or (b) otherwise cover its short position.
Foreign Investment Risks
------------------------
International Investing. International investments involve certain risks
-----------------------
not typically involved in domestic investments, including fluctuations in
foreign exchange rates, future political and economic developments, different
legal systems and the existence or possible imposition of exchange controls or
other U.S. or non-U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial and social factors. Because the Mercury [Quantitative]
International Fund will (and each other 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
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<PAGE>
appreciation or depreciation of investments insofar as U.S. investors are
concerned. Foreign currency exchange rates are determined by forces of supply
and demand in the foreign exchange markets. These forces are, in turn, affected
by international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. With respect
to certain countries, there may be the possibility of expropriation of assets,
confiscatory taxation, high rates of inflation, political or social instability
or diplomatic developments that could affect investments in those countries. In
addition, certain non-U.S. investments may be subject to non-U.S. withholding
taxes. As a result, management of a Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country.
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty on European Union (the "Maastricht Treaty")
seeks to set out a framework for a European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other
things, EMU establishes a single common European currency (the "euro") that was
introduced on January 1, 1999 and has replaced the existing national currencies
of all EMU participants. The use of notes and coins of the relevant national
currencies will be phased out by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were or are being redenominated in the euro, and
thereafter, will be listed, traded, and make dividend and other payments only in
euros.
No assurance can be given that EMU will continue to proceed as planned,
that the changes planned for the EU can be successfully implemented, or that
these changes will result in the economic and monetary unity and stability
intended. There is a possibility that EMU will not be completed, or will be
completed but then partially or completely unwound. Because any participating
country may opt out of EMU within the first three years, it is also possible
that a significant participant could choose to abandon EMU, which would diminish
its credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating countries,
including sharp appreciation or depreciation of the participants' national
currencies and a significant increase in exchange rate volatility, a resurgence
in economic protectionism, an undermining of confidence in the European markets,
an undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause disruption of
the financial markets as securities that have been redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on a Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to the Fund's shareholders under foreign or, in
certain limited circumstances, U.S. tax laws.
3
<PAGE>
Many of the securities held by the Fund will not be registered in the U.S.
with the Commission nor will the issuers thereof be subject to the Commission's
reporting requirements. Accordingly, there may be less publicly available
information about a non-U.S. company than about a U.S. company, and non-U.S.
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those which U.S. companies are subject.
Non-U.S. financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many non-U.S. companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The non-U.S. markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
a Fund incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon and could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to the Funds due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Brokerage
commissions and other transaction costs on non-U.S. securities exchanges are
generally higher than in the United States. In some countries, there is less
governmental supervision and regulation of exchanges, brokers and issuers than
there is in the United States.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In accordance with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), a Fund may invest 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 a Fund's ability to invest
in any equity security of an issuer that, in its most recent fiscal year,
derived more than 15% of its revenues from "securities related activities" as
defined by the rules thereunder. These provisions may restrict the Fund's
investments in certain foreign banks and other financial institutions.
4
<PAGE>
The Mercury [Quantitative] International Fund will invest in a diverse
array of countries. The securities markets of many countries have at times in
the past moved relatively independently of one another due to different
economic, financial, political and social factors. When such lack of
correlation or negative correlation in movements of these securities markets
occurs, it may reduce risk for the Fund's portfolio as a whole. This negative
correlation also may offset unrealized gains the Fund has derived from movements
in a particular market. To the extent the various markets move independently,
total portfolio volatility is reduced when the various markets are combined into
a single portfolio. Of course, movements in the various securities markets may
be offset by changes in foreign currency exchange rates, where the different
markets are denominated in different currencies. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
Investment in Emerging Markets. The Mercury [Quantitative] International
------------------------------
Fund has 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. The Fund will invest in countries with emerging
capital markets in Eastern Europe.
Investments in the securities of issuers domiciled in countries with
emerging capital markets involve certain additional risks not involved in
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other non-U.S. or U.S.
governmental laws or restrictions applicable to such investments, (iv) national
policies that may limit the Fund's investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests,
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to
withholding taxes on investment income, some countries with emerging market 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 the 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 the Fund could lose the entire value of its investments in the
affected markets.
5
<PAGE>
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
the Fund's acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because
the Fund will need to use brokers and counterparties that are less well
capitalized, and custody and registration of assets in some countries may be
unrealiable.
In Russia, for example, registrars are not subject to effective government
supervision nor are they always independent from issuers. The possibility of
fraud, negligence, undue influence being exerted by the issuers or refusal to
recognize ownership exists, which along with other factors could result in the
registration being completely lost. Therefore, investors should be aware that
the Fund would absorb any loss resulting from these registration problems and
may have no successful claim for compensation. Some of these concerns may also
exist in other emerging capital markets.
When-issued Securities and Forward Commitments. The Funds may purchase or
----------------------------------------------
sell securities that they are entitled to receive on a when-issued basis. The
Funds 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. The
Funds enter into these transactions to obtain what is considered an advantageous
price at the time of entering into the transaction. The Funds have not
established any limit on the percentage of its assets that may be committed in
connection with these transactions. When a Fund is purchasing securities in
these transactions, it maintains a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other liquid securities in
an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the
delivery date may be more or less than the purchase price. The Funds 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
6
<PAGE>
liquid investments. Investment of a Fund's assets in illiquid securities may
restrict the ability of a Fund to dispose of its investments in a timely fashion
and for a fair price as well as its ability to take advantage of market
opportunities. The risks associated with illiquidity will be particularly acute
where a Fund's operations require cash, such as when the Fund redeems shares or
pays dividends, and could result in the Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid investments.
Each Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity,
could be less than those originally paid by a Fund or less than their fair
market value.
In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed
securities held by a Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of a Fund's investments in
private placements may consist of direct investments and may include investments
in smaller, less-seasoned issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial resources, or they
may be dependent on a limited management group. In making investments in such
securities, a Fund may obtain access to material nonpublic information which may
restrict the Fund's ability to conduct portfolio transactions in such
securities.
144A Securities. Each Fund may purchase restricted securities that can be
---------------
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Directors of the Funds have determined to treat as liquid
Rule 144A securities that are either (i) freely tradable in their primary
markets offshore or (ii) non-investment grade debt securities that the
investment adviser determines are as liquid as publicly registered non-
investment grade debt securities. The Directors of the Funds have adopted
guidelines and delegated to the investment adviser the daily function of
determining and monitoring liquidity of restricted securities. The Directors of
the Funds however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will continue to develop, the Directors of the Funds will
carefully monitor the Fund's investments in these securities. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
7
<PAGE>
Standby Commitment Agreements. The Funds may enter into standby commitment
-----------------------------
agreements. These agreements commit the Funds, for a stated period of time, to
purchase a stated amount of fixed-income securities that may be issued and sold
to a 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. A Fund will enter into such agreements for the purpose of
investing in the security underlying the commitment at a yield and price that is
considered advantageous to the Fund. A Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and will limit its
investment in such commitments so that the aggregate purchase price of
securities subject to such commitments, together with the value of all other
illiquid securities, will not exceed 15% of its net assets taken at the time of
the commitment. The Fund will maintain a segregated account with its custodian
of cash, cash equivalents, U.S. Government securities or other liquid
securities in an aggregate amount equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment
period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. Each Fund may invest in securities pursuant to
---------------------
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which Mercury Asset
Management US, a division of Fund Asset Management, L.P. ("Mercury" or the
"Investment Adviser" or the "Administrator") 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 the Fund
from fluctuations in the market value of the underlying security during such
period. A Fund may not invest more than 15% of its net assets in repurchase
agreements maturing in more than seven days (together with other illiquid
securities). Repurchase agreements may be construed to be collateralized loans
by the purchaser to the seller secured by the securities transferred to the
purchaser. A Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the
8
<PAGE>
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 the Fund shall be dependent upon intervening fluctuations of the market value
of such security and the accrued interest on the security. In such event, the
Fund would have rights against the seller for breach of contract with respect to
any losses arising from market fluctuations following the failure of the seller
to perform.
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.
9
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To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
Warrants. A warrant gives a Fund the right to buy a quantity of stock.
--------
The warrant specifies the amount of underlying stock, the purchase (or
"exercise") price, and the date the warrant expires. A Fund has no obligation to
exercise the warrant and buy the stock.
A warrant has value only if the Fund exercises it before it expires. If
the price of the underlying stock does not rise above the exercise price before
the warrant expires, the warrant generally expires without any value and the
Fund loses any amount it paid for the warrant. Thus, investments in warrants
may involve substantially more risk than investments in common stock. Warrants
may trade in the same markets as their underlying stock; however, the price of
the warrant does not necessarily move with the price of the underlying stock.
Buying a warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no right to dividends or votes on the underlying
stock. A warrant does not carry any right to assets of the issuer, and for this
reason investments in warrants may be more speculative than other equity-based
investments.
New Issues. Each Fund may purchase newly issued securities, sometimes with
----------
the intent of quickly selling such securities in the secondary market for an
amount higher than the issue price ("Hot IPOs"). Newly issued securities lack
established trading histories and may be issued by companies with limited
operating histories. The Fund also would bear the risk of the security trading
at a discount to the issue price.
Securities Lending. Each Fund may lend securities with a value not
------------------
exceeding 33 1/3% of its total assets. In return, a Fund receives collateral in
an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
If cash collateral is received by a Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to a Fund as collateral, the Fund and the borrower negotiate
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a rate for the loan premium to be received by the Fund for lending its portfolio
securities. In either event, the total yield on a Fund's portfolio is increased
by loans of its portfolio securities. A Fund may receive a flat fee for its
loans. The loans are terminable at any time and the borrower, after notice, is
required to return borrowed securities within five business days. A Fund may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, a Fund could
experience delays and costs in gaining access to the collateral and could suffer
a loss to the extent the value of the collateral falls below the market value of
the borrowed securities.
Borrowing and Leverage. The use of leverage by a Fund creates an
----------------------
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
a Fund's shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowings are outstanding.
Borrowings will create interest expenses for the Fund which can exceed the
income from the assets purchased with the borrowings. To the extent the income
or capital appreciation derived from securities purchased with borrowed funds
exceeds the interest a Fund will have to pay on the borrowings, the Fund's
return will be greater than if leverage had not been used. Conversely, if the
income or capital appreciation from the securities purchased with such borrowed
funds is not sufficient to cover the cost of borrowing, the return to the Fund
will be less than if leverage had not been used, and therefore the amount
available for distribution to shareholders as dividends and other distributions
will be reduced. In the latter case, the investment adviser in its best
judgment nevertheless may determine to maintain a Fund's leveraged position if
it expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing a
Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require a
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
To the extent allowed by law and as permitted by the Funds' investment
policies as set forth in the Prospectus and herein, the Funds at times may
borrow from affiliates of the Investment Adviser, provided that the terms of
such borrowings are no less favorable than those available from comparable
sources of funds in the marketplace.
Small Cap. An investment in the Mercury [Quantitative] Small Cap Fund and,
---------
to a lesser extent, the Mercury [Quantitative] Mid Cap Fund, involves greater
risk than is customarily associated with funds that invest in more established
companies. The securities of smaller
11
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companies may be subject to more abrupt or erratic market movements than larger,
more established companies or the market average in general. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. Because of these factors, the Funds
believe that their shares may be suitable for investment by persons who can
invest without concern for current income and who are in a financial position to
assume above-average investment risk in search of above-average long-term
reward. It is not intended as a complete investment program but is designed for
those long-term investors who are prepared to experience above-average
fluctuations in net asset value.
While the issuers in which the Funds will primarily invest may offer
greater opportunities for capital appreciation than large cap issuers,
investments in smaller companies may involve greater risks and thus may be
considered speculative. Full development of these companies and trends
frequently takes time and, for this reason, each Fund should be considered as a
long-term investment and not as a vehicle for seeking short-term profits.
The securities in which the Funds invest will often be traded only in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Funds of portfolio securities, to
meet redemptions or otherwise, may require the Funds to sell these securities at
a discount from market prices.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of their
business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve,
may be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Strategies Involving Options, Futures, Swaps, Indexed Instruments and
Foreign Exchange Transactions
Each Fund will also invest in derivative instruments that it believes may
serve as substitutes for individual securities in an attempt to broadly
represent a particular market or market segment. The derivative instruments in
which each Fund may invest include the purchase and writing of options on
securities indices 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.
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
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<PAGE>
subscriptions, provide liquidity, to invest uncommitted cash balances, for non-
hedging purposes and in connection with short-term trading opportunities.
In addition, the Mercury [Quantitative] International 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 Fund's 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 the Fund's cash flow
and cash management needs.
Indexed Securities
------------------
The Funds may invest in securities, futures or other instruments the
potential return of which is based on the change in particular measurements of
value or rate (an "index"). As an illustration, a Fund may invest in a debt
security or total return swap that pays interest and returns principal based on
the change in the value of a securities index or a basket of securities. If a
Fund invests in such securities, it may be subject, in the case of a debt
security to reduced or eliminated interest payments or loss of principal, or, in
the case of a total return swap, substantial payments to the counterparty in the
event of an adverse movement in the relevant index.
Options on Securities and Securities Indices
--------------------------------------------
Purchasing Options. Each Fund is authorized to purchase put options on
------------------
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When a Fund
purchases a put option, in consideration for an upfront payment (the "option
premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Fund will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.
Each Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices. 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
13
<PAGE>
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.
When a Fund writes a put option, in return for an option premium the Fund gives
another party the right to sell to the Fund a specified security at the exercise
price on or before the expiration date, in the case of an option on a security,
or agrees to pay to another party an amount based on any decline in a specified
securities index below a specified level on or before the expiration date, in
the case of an option on a securities index. The Funds may write put options to
earn income through the receipt of option premiums. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, a Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. A Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case
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<PAGE>
of an option on a security) or is writing the put in connection with trading
strategies involving combinations of options - for example, the sale and
purchase of options on the same security or index but different expiration dates
or exercise prices (a technique called a "spread").
Each Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, a Fund will only write
call or put options that are "covered." A put option will be considered covered
if a Fund has segregated assets with respect to such option in the manner
described in "Risk Factors in Derivatives" below. A call option will be
considered covered if a Fund owns the securities it would be required to deliver
upon exercise of the option (or, in the case of option on a securities index,
securities which substantially replicate the performance of such index) or owns
a call option, warrant or convertible instrument which is immediately
exercisable for, or convertible into, such security.
Types of Options. Each Fund may engage in transactions in options on
----------------
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and seller,
but generally do not require the parties to post margin and are subject to
greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives" below.
Futures
-------
Each Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that obligate a purchaser to
take delivery, and a seller to make delivery, of a specific amount of an asset
at a specified future date at a specified price. An index futures contract is a
contract to buy or sell units of a particular index of securities at a specified
future date at a price agreed upon when the contract is made. Index futures
contracts typically specify that no delivery of the actual securities making up
the index takes place. Instead, upon termination of the contract, final
settlement is made in cash based on the difference between the contract price
and the actual price on the termination date of the units of the index. No
price is paid upon entering into a futures contract. Rather, upon purchasing or
selling a futures contract, the Fund is required to deposit collateral
("margin") equal to a percentage (generally less than 10%) of the contract value
with the Futures Commission Merchants (the "FCM") effecting a Fund's
transactions or in a third party account with a Fund's custodian. Each day
thereafter until the futures position is closed, the Fund will pay additional
margin representing any loss experienced as a result of the futures position the
prior day or be entitled to a payment representing any profit experienced as a
result of the futures position the prior day.
Whether the margin is deposited with the FCM or with the custodian, the
margin may be deemed to be in the FCM's custody, and, consequently, in the event
of default due to the FCM's
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<PAGE>
bankruptcy, the margin may be subject to pro rata treatment as the FCM's assets,
which could result in potential losses to a Fund and its shareholders. Even if a
transaction is profitable, a Fund may not get back the same assets which were
deposited as margin or may receive payment in cash.
The sale of a futures contract limits a Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future contract's expiration date. In the event the market
value of the portfolio holdings correlated with the futures contract increases
rather than decreases, however, a Fund will realize a loss on the futures
position and a lower return on the portfolio holdings than would have been
realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
relating to a futures contract, however, a Fund may realize a loss relating to
the futures position.
A Fund will further limit transactions in futures and options on futures to
the extent necessary to prevent the Fund from being deemed a "commodity pool
operator" under regulations of the Commodity Futures Trading Commission.
Swaps
-----
Each Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which a swap has more attractive risk
or return characteristics than direct investment or in which direct investment
is restricted by local law or is otherwise impractical.
Foreign Exchange Transactions. The Mercury [Quantitative] International
-----------------------------
Fund may engage in futures contracts on foreign currencies and foreign currency
forward and spot transactions in connection with transactions or anticipated
transactions in securities denominated in foreign currencies. Specifically, the
Fund may purchase or sell a currency to settle a security transaction or sell a
currency in which the Fund has received or anticipates receiving a dividend or
distribution.
Risk Factors in Derivatives
---------------------------
Each Fund intends to enter into transactions involving derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives," below. However, there
can be no assurance that, at any specific time, either a liquid secondary market
will exist for a derivative or that
16
<PAGE>
a Fund will otherwise be able to sell such instrument at an acceptable price. It
may therefore not be possible to close a position in a derivative without
incurring substantial losses, if at all.
Certain transactions in derivatives (e.g., futures transactions, sales of
put options) may expose a Fund to potential losses which exceed the amount
originally invested by the Fund in such instruments. When a Fund engages in
such a transaction, the Fund will deposit in a segregated account at its
custodian liquid securities with a value at least equal to the Fund's exposure,
on a marked-to-market basis, to the transaction (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund has
assets available to satisfy its obligations with respect to the transaction, but
will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
--------------------------------------------------------------------------
Derivatives
- -----------
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options may be substantially less liquid than other instruments in
which a Fund may invest. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable price.
The absence of liquidity may also make it more difficult for a Fund to ascertain
a market value for such instruments. A Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold, or
(ii) for which the Investment Adviser anticipates the Fund can receive on each
business day at least two independent bids or offers, unless a quotation from
only one dealer is available, in which case that dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
The Funds have therefore adopted an investment policy pursuant to which they
will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transactions, the sum of the market value of
OTC options currently outstanding which are held by a Fund, the market value of
the securities underlying OTC call options currently outstanding which have been
sold by a Fund, and margin deposits on the Fund's outstanding OTC options
exceeds 15% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund which are deemed to be illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by a Fund to a dealer
in U.S. government securities recognized as a "primary dealer" by the Federal
Reserve Bank of New York and the Fund has the unconditional contractual right to
repurchase such OTC option at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's exercise price).
Because derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that a Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty, the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
derivatives traded in OTC markets only with financial
17
<PAGE>
institutions which have substantial capital or which have provided the Fund with
a third-party guaranty or other credit enhancement.
Additional Limitations on the Use of Derivatives
------------------------------------------------
The Funds may not use any derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
Additional Information Concerning Market Segments
None of the Funds is an index fund -- that is, none of the Funds seeks to
replicate the performance of a particular index. However, each Fund generally
will invest in the equity market segment with risk and style characteristics
similar to those of the respective index that is described below:
Standard and Poor's 500 Composite Stock Price Index (Mercury [Quantitative]
Large Cap Fund)
The Standard and Poor's 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 Standard & Poor's Rating Group ("S&P"), a
division of the McGraw-Hill Companies, Inc. S&P chooses stocks for inclusion in
the S&P 500 based on market capitalization, trading activity and the overall mix
of industries represented in the index, among other factors.
Standard and Poor's 500/Barra Value Index (Mercury [Quantitative] Large Cap
Value Fund)
The Standard and Poor's 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
Poor's 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
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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 company's 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 Poor's 500/Barra Growth Index (Mercury [Quantitative] Large
Cap Growth Fund)
The 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 company's 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.
19
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Standard & Poor's Mid Cap 400 Index (Mercury [Quantitative] Mid Cap Fund)
The 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
index's 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.
Russell 2000 Index (Mercury [Quantitative] Small Cap Fund)
The Russell 2000 Index ("Russell 2000") is composed of the common stocks of
the 1,001st through the 3000th largest U.S. companies by market capitalization,
as determined by the Frank Russell Company. The stocks represented in the index
are issued by U.S. small-capitalization companies in a wide range of businesses.
The Russell 2000 is generally considered broadly representative of the
performance of publicly traded U.S. smaller-capitalization stocks. The Russell
2000 is a market-weighted index, which means that the largest stocks represented
in the index have the most effect on the index's performance.
The Frank Russell Company updates the Russell 2000 once each year, at which
time there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Fund). Stocks of companies that merge,
are acquired or otherwise cease to exist during the year are not replaced in the
index.
Morgan Stanley Capital International Europe, Asia and Far East
Capitalization Weighted Index (Mercury [Quantitative] International Fund)
The Morgan Stanley Capital International Europe, Asia and Far East
Capitalization Weighted Index ("EAFE Index") is composed of equity securities
of 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 United Kingdom. The weighting of the EAFE Index among these
countries is based upon each country's relative market capitalizations, rather
than its gross domestic product. The stocks in the EAFE Index are chosen by
Morgan Stanley Capital International ("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.
20
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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 that none of the following restrictions shall
prevent a Fund from investing all of its assets in shares of another registered
investment company with the same investment objective (in a master/feeder
structure), each Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its total assets, taken at market value,
in the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management. Investments by the 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.
4. 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.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that a Fund may lend its portfolio securities, provided that
the lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Corporation's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. 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
21
<PAGE>
for the clearance of purchases and sales of portfolio securities and (iv)
each Fund may purchase securities on margin to the extent permitted by
applicable law. No Fund may pledge its assets other than to secure such
borrowings or, to the extent permitted by a Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, forward commitment transactions and similar
investment strategies.
8. Underwrite securities of other issuers except insofar as a Fund
technically may be deemed an underwriter under the Securities Act, in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except
to the extent that a Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
The Trust has adopted investment restrictions substantially identical to
the foregoing, which are fundamental policies of the Trust and may not be
changed with respect to any Series without the approval of the holders of a
majority of the interests of the Series.
In addition, 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 the Fund's
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of a Fund's total assets are invested in the
securities of a single issuer, or any two or more issuers which are controlled
by the Fund and engaged in the same, similar or related businesses, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets are invested in securities of a single
issuer, and the Fund does not own more than 10% of the outstanding voting
securities of a single issuer. The U.S. Government, its agencies and
instrumentalities and other regulated investment companies are not included
within the definition of "issuer" for purposes of the diversification
requirements of the Code. These requirements will be satisfied at the Series
level and not at the level of the Funds based upon a ruling received from the
Internal Revenue Service ("IRS") which entitles the Funds to "look through" the
shares of the Series to the underlying investments of the Series for purposes of
these diversification requirements.
In addition, the Trust and the Corporation have adopted as an operating
policy, which may be changed by the Trustees and the Directors without
shareholder approval, that no Series or Fund, respectively, will 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.
22
<PAGE>
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.
Portfolio securities of the Funds generally may not be purchased from, sold
or loaned to the investment adviser or its affiliates or any of their directors,
general partners, officers or employees, acting as principal, unless pursuant to
a rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Funds and Series
are prohibited from engaging in certain transactions involving Merrill Lynch,
the Investment Adviser, or any of its affiliates, except for brokerage
transactions permitted under the Investment Company Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
Investment Company Act. See "Portfolio Transactions and Brokerage" below. Rule
10f-3 under the Investment Company Act sets forth conditions under which the
Funds may purchase from an underwriting syndicate of which Merrill Lynch is a
member.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Corporation are expected to consist of [four]
individuals, three of whom are not "interested persons" of the Corporation as
defined in the Investment Company Act. The Directors are responsible for the
overall supervision of the operations of the Funds and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act. Information about the Directors and executive officers of the
Corporation, their ages and their principal occupations for at least the last
five years are set forth below. Unless otherwise noted, the address of each
executive officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-
9011.
<TABLE>
<CAPTION>
Position(s) With
Name and Age the Corporation Principal Occupation(s) During Past 5 Years
- -------------------------- ------------------------------ -----------------------------------------------------
<S> <C> <C>
[Terry K. Glenn, 58] [[Vice] President and Director/(1)(2)/] [Executive Vice President of the Investment Adviser
and certain of its affiliates since 1983; Executive
Vice President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; President of
Princeton Funds Distributor, Inc. ("PFD") since
1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.]
[Jack B. Sunderland, 70 [Director /(2)/] [President and Director of American Independent Oil
P.O. Box 7 Company, Inc. (energy company) since 1987;
West Cornwall, CT 06796] Member of Council on Foreign Relations since
1971.]
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Position(s) With
Name and Age the Corporation Principal Occupation(s) During Past 5 Years
- -------------------------- ------------------------------ -----------------------------------------------------
<S> <C> <C>
[Stephen B. Swensrud, 66 [Director/(2)/] [Chairman, Fernwood Advisors (investment adviser)
24 Federal Street, Suite 400 since 1996; Principal, Fernwood Associates
Boston, MA 02110] (financial consultant) since 1975.]
[J. Thomas Touchton, 60 [Director/(2)/] [Managing Partner of the Witt-Touchton Company
Suite 3405 and its predecessor The Witt Co. (private investment
One Tampa City Center partnership) since 1972; Trustee Emeritus of
Tampa, FL 33602] Washington and Lee University; Director of TECO
Energy Inc. (electric utility holding company).]
[Frank Salerno, 39] [Senior Vice President and [First Vice President of the Investment Adviser and
Portfolio Manager/(1) (2)/] its affiliate since 1999; Managing Director of
Bankers Trust Company from 1992 to 1999; Senior
Portfolio Manager for quantitative products and
index funds and Chief Investment Officer of
Structured Investments at Bankers Trust Company
from 1989 to 1999.]
[Phillip Green, --] [Senior Vice President and [To be Provided]
Portfolio Manager/(1) (2)/]
[Sidney Hoots, --] [Senior Vice President & [To be Provided]
Portfolio Manager]
[Donald C. Burke, 39] [Vice President and [Senior Vice President and Treasurer of the
Treasurer/(1) (2)/] Investment Adviser and its affiliates since 1999;
Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since
1999; First Vice President of affiliates of the
Investment Adviser from 1997 to 1999; Director of
Taxation of affiliates of the Investment Adviser
since 1990; Vice President of affiliates of the
Investment Adviser from 1990 to 1997.]
[Ira Shapiro] [President/(1) (2)/] [To be Provided]
[Phillip Kirstein] [Treasurer/(1) (2)/] [To be Provided]
[Allan J. Oster, 36] [Secretary/(1) (2)/] [Consultant (Legal Advisory) of the Investment
Adviser and its affiliates since 1999; Associate,
Drinker Biddle & Reath LLP, 1996-1999; Senior
Counsel, U.S. Securities and Exchange
Commission, 1991-1996.]
</TABLE>
24
<PAGE>
- ----------------
(1) Interested person, as defined in the Investment Company Act, of the
Corporation.
(2) Such Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or its affiliates
acts as investment adviser.
As of the date of this Statement of Additional Information, the officers
and Directors of the Corporation as a group ([ ] persons) owned an
aggregate of less than 1% of the outstanding shares of common stock of Merrill
Lynch & Co., Inc. ("ML & Co.") and owned an aggregate of less than 1% of the
outstanding shares of any of the Funds.
Compensation of Directors/Trustees
The Corporation and the Trust expect to pay each Director/Trustee not
affiliated with the Investment Adviser or an affiliate of the Investment Adviser
(each a "non-affiliated Director/Trustee"), a fee of $[______] per year plus
$[_______] per in-person meeting attended, together with such individual's
actual out-of-pocket expenses relating to attendance at meetings. The
Corporation and the Trust also expect to compensate members of the Audit and
Nominating Committee, which consists of all of the non-affiliated
Directors/Trustees, at the rate of $[_______] annually for service to the funds.
The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay to the non-affiliated Directors/Trustees for their
first full fiscal year and the aggregate compensation paid by all investment
companies advised by Mercury, Fund Asset Management, L.P. ("FAM"), or their
affiliates ("Mercury and Affiliates-Advised Funds") to the non-affiliated
Directors/Trustees for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION> Total Compensation From
Pension or Retirement Corporation/Trust and
Benefits Accrued as Mercury and Affiliates-
Aggregate Compensation Part of Corporation/Trust Advised Funds Paid to
Name of Director from Corporation/Trust Expenses Directors/Trustees(1)
- ------------------- ----------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Jack B. Sunderland 133,600
Stephen B. Swensrud 195,583
J. Thomas Touchton 133,600
</TABLE>
- ----------------
(1) The Directors/Trustees serve on the boards of Mercury and Affiliates-
Advised Funds as follows: Mr. Sunderland ([ ] registered investment company
consisting of [ ] portfolios); Mr. Swensrud ([ ] registered investment
companies consisting of [ ] portfolios); and Mr. Touchton ([ ] registered
investment companies consisting of [ ] portfolios).
The Directors of the Corporation may be eligible for reduced sales charges
on purchases of Class I shares. See "Reduced Initial Sales Charges -- Purchase
Privileges of Certain Persons."
25
<PAGE>
Administration Arrangements
The Corporation has entered into an administration agreement with the
Administrator (the "Administration Agreement"). As discussed in the Prospectus,
the Administrator receives for its services to the Funds monthly compensation at
the annual rate of 0.35% of the average daily net assets of each Fund.
The Administration Agreement obligates the Administrator to provide certain
administrative services to the Corporation and the Funds and to pay all
compensation of and furnish office space for officers and employees of the
Corporation as well as the fees of all Directors who are affiliated persons of
the Administrator or any of their affiliates. Each Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of additional
information (except to the extent paid by the Distributor), 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, 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 Fund. The
Distributor will pay certain of the expenses of the Funds incurred in connection
with the offering of their shares.
Duration and Termination. Unless earlier terminated as described below,
the Administration Agreement will remain in effect for two years from its
effective date. Thereafter, it will remain in effect from year to year with
respect to each Fund if approved annually (a) by the Directors and (b) by a
majority of the Directors who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such party. Such
contract is not assignable and may be terminated with respect to a Fund without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Management and Advisory Arrangements
Management Services. Each Fund invests all of its assets in shares of the
corresponding Series of the Trust. Accordingly, the Funds do not invest
directly in portfolio securities and do not require investment advisory
services. All portfolio management occurs at the level of the Trust. The Trust
has entered into a management agreement with the Investment Adviser (the
"Management Agreement"). The Investment Adviser provides the Trust with
investment advisory and management services. Subject to the supervision of the
Board of Trustees, the Investment Adviser is responsible for the actual
management of each Series' portfolio and constantly reviews the Series' holdings
in light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Series.
26
<PAGE>
Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients of the Investment Adviser or an affiliate when one or more
clients of the Investment Adviser or an affiliate are selling the same security.
If purchases or sales of securities arise for consideration at or about the same
time that would involve 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.
As discussed in the Prospectus, the Investment Adviser receives for its
services to the Series monthly compensation at the annual rate of 0.25% of the
average daily net assets of each Series.
Payment of Series Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Trust
connected with investment and economic research, trading and investment
management of the Trust, as well as the fees of all Trustees who are affiliated
persons of the Investment Adviser or any of their affiliates. Each Series pays
all other expenses incurred in the operation of the Series, (except to the
extent paid by the Distributor), including, among other things, taxes, expenses
for legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports, copies of the Registration Statements, charges of the
custodian, any sub-custodian and transfer agent, expenses of portfolio
transactions, expenses of redemption of shares, Commission fees, expenses of
registering the shares under federal, state or foreign laws, fees and out-of-
pocket expenses of unaffiliated Trustees, accounting and pricing costs
(including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Trust or the Series. The Distributor
will pay certain of the expenses of the Trust incurred in connection with the
offering of its shares of beneficial interest of each of the Series.
Organization of the Investment Adviser. Mercury Asset Management US, a
division of FAM, is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536. FAM is an indirect wholly owned subsidiary of ML & Co. and Princeton
Services, [each], a financial services holding company. ML & Co. is the parent
company of Merrill Lynch. ML & Co. and Princeton Services are "controlling
persons" of FAM as defined under the Investment Company Act because of their
power to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management Agreement will remain in effect for two years from its effective
date. Thereafter, it will remain in effect from year to year with respect to
each Series if approved annually (a) by the Board of Trustees or by a majority
of the outstanding shares of the Series and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated with respect to a Series without
27
<PAGE>
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Series.
Code of Ethics
The Board of Trustees of the Trust, Board of Directors of the Corporation
and the Investment Adviser have adopted a Code of Ethics under Rule 17j-1 of the
Investment Company Act (together the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees
of the Investment Adviser include a ban on acquiring any securities in a hot IPO
and a prohibition from profiting on short-term trading in securities. In
addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any Fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" that prohibit trading by investment personnel of the Trust within
periods of trading by the Series in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares. Each Fund issues four classes of shares: shares of Class I and
Class A are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Each Class I, Class A, Class B and Class C share of a Fund
represents an identical interest in the investment portfolio of the Fund, and
has the same rights, except that Class A, Class B and Class C shares bear the
expenses of the ongoing account maintenance fees (also known as service fees)
and Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from the
deferred sales charge arrangements. Class A, Class B and Class C shares each
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which the account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class A distribution
plan). Each class has different exchange privileges. See "Shareholder Services
- -- Exchange Privilege" below.
MFD, an affiliate of the Investment Adviser and of Merrill Lynch, with
offices at 800 Saunders Mill Road, Plainsboro, New Jersey 08536 (mailing
address: P.O. Box 9081, Princeton, New Jersey 08543-9081) acts as Distributor
for each Fund.
28
<PAGE>
The Corporation has entered into a distribution agreement with the
Distributor in connection with the offering of shares of the Funds (the
"Distribution Agreement"). The Distribution Agreement obligates the Distributor
to pay certain expenses in connection with the offering of the shares of the
Funds. After the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also
pays for other supplementary sales literature and advertising costs. The
Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Advisory Agreement described above.
A Fund may reject any order to buy shares and may suspend the offering of
its shares at any time.
Initial Sales Charge Alternatives -- Class I and Class A Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class I shares should purchase Class I shares rather than Class A
shares because there is an account maintenance fee imposed on Class A shares.
Eligible Class I Investors. Class I shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class I shares. Investors that currently own Class I shares of a
Fund in a shareholder account are entitled to purchase additional Class I shares
of a Fund in that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class I shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by Mercury or any of its affiliates. Also
eligible to purchase Class I shares at net asset value are participants in
certain investment programs including certain managed accounts for which a trust
institution, thrift, or bank trust department provides discretionary trustee
services, certain collective investment trusts for which a trust institution,
thrift, or bank trust department serves as trustee, certain purchases made in
connection with certain fee-based programs and certain purchases made through
certain financial advisers that meet and adhere to standards established by
Mercury. In addition, Class I shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees, to members of the Boards
of Mercury and Affiliates-Advised Funds, including the Corporation, and to
employees of certain selected dealers. Class I shares may also be offered at
net asset value to certain accounts over which Mercury or an affiliate exercises
investment discretion.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
shares of a Fund, refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company," as that term is
defined in the Investment Company Act, but does not include purchases by any
such
29
<PAGE>
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of a Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class I and
Class A shares of the Funds will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
No initial sales charges are imposed upon Class I and Class A shares issued
as a result of the automatic reinvestment of dividends or capital gains
distributions.
Rights of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of a Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other Mercury mutual funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class I or Class A shares of a Fund or any other
Mercury mutual funds made within a 13-month period starting with the first
purchase pursuant to the Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the 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 Fund 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
30
<PAGE>
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. Directors of the Corporation,
members of the Boards of other investment companies advised by Mercury or its
affiliates, directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes Mercury, FAM
and certain other entities directly or indirectly wholly owned and controlled by
ML & Co.), employees of certain selected dealers, and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class I
shares of the Fund at net asset value. Under such programs, the Fund realizes
economies of scale by providing incentives to a large group of such individuals
to invest. Furthermore, the individuals who qualify for these programs are
already familiar with the Fund, and, therefore, providing these investment
opportunities to such qualified individuals does not increase the expenditures
of sales-related expenses.
Class A shares of the Funds are offered at net asset value to an investor
who is a former shareholder of The United Kingdom Fund Inc. if the following
conditions are satisfied: first, the investor must purchase Class A shares of
the Fund through a Merrill Lynch Financial Consultant or the Transfer Agent with
proceeds of the liquidation of The United Kingdom Fund Inc.; and second, such
purchase of Class A shares must be made within 60 days after payment of such
proceeds by The United Kingdom Fund Inc.
Class I and Class A shares may also be offered at net asset value to
certain accounts over which Mercury or an affiliate exercises investment
discretion.
Employees and directors or trustees wishing to purchase shares of the Funds
must satisfy the Funds' suitability standards.
Managed Trusts. Class I shares are offered at net asset value to certain
trusts to which trust institutions, thrifts, and bank trust departments provide
discretionary trustee services.
31
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to a Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class A shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the Fund's portfolio
securities shall at all times remain within its control); and (iii) are liquid
securities, the value of which is readily ascertainable, which are not
restricted as to transfer either by law or liquidity of market (except that a
Fund may acquire through such transactions restricted or illiquid securities to
the extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objectives and Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class I or Class A shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan and/or the aggregate amount invested by the plan in
specified investments. Certain other plans may purchase Class B shares with a
waiver of the CDSC upon redemption, based on similar criteria. Such Class B
shares will convert into Class A shares approximately ten years after the plan
purchases the first share of any Mercury mutual fund. Minimum purchase
requirements may be waived or varied for such plans. For additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements, call your plan administrator or your selected
dealer.
Purchases Through Certain Financial Advisers. Reduced sales charges may
be applicable for purchases of Class I or Class A shares of the Fund through
certain financial advisers that meet and adhere to standards established by
Mercury from time to time.
Distribution Plans
Reference is made to "Account Choices -- Pricing of Shares" in the
Prospectus for certain information with respect to separate distribution plans
for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the
Investment Company Act of each Fund (each a "Distribution Plan") with respect to
the account maintenance and/or distribution fees paid by a Fund to the
Distributor with respect to such classes.
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,
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accrued daily and paid monthly, at the annual rate of 0.25% of the average daily
net assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and selected dealers (pursuant to sub-agreements) in
connection with account maintenance activities.
The Distribution Plan for each of the Class B and Class C shares provides
that a Fund also pays the Distributor a distribution fee relating to the shares
of the relevant class, accrued daily and paid monthly, at the annual rate of
0.75% of the average daily net assets of the Fund attributable to the shares of
the relevant class in order to compensate the Distributor and selected dealers
(pursuant to sub-agreements) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class I and Class A
shares of a Fund in that the ongoing distribution fees and deferred sales
charges provide for the financing of the distribution of the Fund's Class B and
Class C shares.
The payments under the Distribution Plans are subject to the provisions of
Rule 12b-1 under the Investment Company Act, and are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors of the Corporation for their consideration in
connection with their deliberations as to the continuance of the Class B and
Class C Distribution Plans. This information is presented annually as of
December 31 of each year on a "fully allocated accrual" basis and quarterly on a
"direct expense and revenue/cash" basis. On the fully allocated basis, revenues
consist of the account maintenance fees, the distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees, the
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
The Funds have no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and selected dealers in
connection with the Class A, Class B and Class C shares, and there is no
assurance that the Directors of the Corporation will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends to
seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance 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
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Class B shares will terminate upon conversion of those Class B shares to Class A
shares as set forth under "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
In their consideration of each Distribution Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to each Fund and each related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors") shall be committed to the discretion
of the Independent Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the Independent Directors concluded that
there is reasonable likelihood that such Distribution Plan will benefit each
Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of a Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by a Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that a Fund preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to each
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
REDEMPTION OF SHARES
Reference is made to "Account Choices -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the redemption
and repurchase of Fund shares.
Each Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. 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.
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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. Merrill Lynch reserves the right
to terminate any account engaging in market-timing mutual funds. For the
purposes of this policy, "market-timing" involves the purchase and sale of
shares of mutual funds within short periods of time with the intention of
capturing short-term profits resulting from market volatility.
Redemption
A shareholder wishing to redeem shares held with the transfer agent may do
so by tendering the shares directly to the Fund's transfer agent, Financial Data
Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062 (the "Transfer
Agent"). Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Redemption requests should not be sent to the Corporation. A
redemption request requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as (his) (her) (their) name(s) appear(s)
on the Transfer Agent's register. The signature(s) on the redemption request
must be guaranteed by an "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times a Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio
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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
shareholder's cost, depending in part on the net asset value of such shares at
such time.
Repurchase
Each Fund will also repurchase shares through a shareholder's listed
securities dealer. The Funds will normally accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, less any applicable
CDSC, provided that the request for repurchase is received by the dealer prior
to the close of business on the NYSE (generally 4:00 p.m., Eastern time) on the
day received and is received by the Fund from such dealer not later than 30
minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price. These repurchase arrangements are for
the convenience of shareholders and do not involve a charge by a Fund (other
than any applicable CDSC). Securities firms that do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Certain
securities dealers may charge a processing fee to confirm a repurchase of
shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees
charged by other securities dealers may be higher or lower. Repurchases made
directly through the Transfer Agent, on accounts held at the Transfer Agent are
not subject to the processing fee. The Corporation reserves the right to reject
any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by a Fund, however, may redeem shares as
set forth above.
Reinstatement Privilege -- Class I and Class A Shares
Shareholders of a Fund who have redeemed their Class I and Class A shares
have a privilege to reinstate their accounts by purchasing Class I or Class A
shares of such Fund, as the case may be, at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's financial consultant within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
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Deferred Sales Charges -- Class 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 Choices -- Pricing of Shares
- -- Class B and C Shares -- Deferred Sales Charge Options," while Class B shares
redeemed within six years of purchase are subject to a CDSC under most
circumstances, the charge may be reduced or waived in certain instances. These
include certain post-retirement withdrawals from an IRA or other retirement plan
or redemption of Class B shares in certain circumstances following the death of
a Class B shareholder. In the case of such withdrawal, the reduction or waiver
applies to: (a) any partial or complete redemption in connection with a
distribution following retirement under a tax-deferred retirement plan on
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
life (or life expectancy) or any redemption resulting from the tax-free return
of an excess contribution to an IRA (certain legal documentation may be required
at the time of liquidation establishing eligibility for qualified distribution);
or (b) any partial or complete redemption following the death or disability (as
defined in the Code) of a Class B shareholder (including one who owns the Class
B shares as joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination of disability
or, if later, reasonably promptly following completion of probate or in
connection with involuntary termination of an account in which a Fund's shares
are held (certain legal documentation may be required at the time of liquidation
establishing eligibility for qualified distribution).
The charge may also be reduced or waived in other instances, such as: (c)
redemptions by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers; (d) redemptions in connection with participation in certain fee-
based programs managed by the Investment Adviser or its affiliates; (e)
redemptions in connection with participation in certain fee-based programs
managed by selected dealers that have agreements with Mercury; or (f)
withdrawals through the Systematic Withdrawal Plan of up to 10% per year of your
account value at the time the plan is established.
In determining whether a Class B CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore it will be assumed that the redemption is first
of shares held for over six years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the six-year
period. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of shares being redeemed and will not be
applied to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a redemption.
Class C shares are subject only to a one-year 1% CDSC. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial
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purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions. The Class C CDSC
may be waived in connection with participation in certain fee-based programs,
involuntary termination of an account in which Fund shares are held, and
withdrawals through the Systematic Withdrawal Plan.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
selected dealers related to providing distribution-related services to a Fund in
connection with the sale of Class B and Class C shares, such as the payment of
compensation to financial consultants for selling Class B and Class C shares,
from its own funds. The combination of the CDSC and the ongoing distribution
fee facilitates the ability of a Fund to sell Class B and Class C shares without
a sales charge being deducted at the time of purchase.
Conversion of Class B Shares to Class A Shares. As discussed in the
Prospectus under "Account Choices -- Pricing of Shares -- Class B and C Shares -
- - Deferred Sales Charge Options," Class B shares of equity Mercury mutual funds
convert automatically to Class A shares approximately eight years after purchase
(the "Conversion Period"). Automatic conversion of Class B shares will occur at
least once each month (on the "Conversion Date") on the basis of the relative
net asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any Mercury mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between Mercury mutual funds and the Class B Retirement Plan was
established), all Class B shares of all Mercury mutual funds held in that Class
B Retirement Plan will be converted into Class A shares of the appropriate
funds. Subsequent to such conversion, that Class B Retirement Plan will be sold
Class A shares of the appropriate funds at net asset value per share.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services --
Fee-Based Programs" below.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the ongoing distribution fee are paid to the Distributor and are used
in whole or in part by the Distributor to defray the
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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 "Distribution Plans" above. Imposition of
the CDSC and the distribution fee on Class B and Class C shares is limited by
the NASD asset-based sales charge rule. See "Limitations on the Payment of
Deferred Sales Charges" above.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Because each Fund will invest exclusively in shares of the corresponding
Series, it is expected that all transactions in portfolio securities will be
entered into by the Series. The Investment Adviser is responsible for making
the Series' portfolio decisions, placing the Series' brokerage business,
evaluating the reasonableness of brokerage commissions and negotiating the
amount of any commissions paid subject to a policy established by the Trust's
Trustees and officers. The Trust has no obligation to deal with any broker or
group of brokers in the execution of transactions in portfolio securities.
Orders for transactions in portfolio securities are placed for the Series with a
number of brokers and dealers, including affiliates of the Investment Adviser.
Where possible, the Trust deals directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. In placing orders, it is the policy of the
Trust to obtain the most favorable net results, taking into account various
factors, including price, commissions, if any, size of the transaction and
difficulty of execution, the firm's general execution and operations facilities
and the firm's risk in positioning the securities involved.
Where applicable, the Investment Adviser surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer that offers the Series the best price and execution or other
services that are of benefit to the Series. Securities firms also may receive
brokerage commissions on transactions including covered call options written by
a Series and the sale of underlying securities upon the exercise of such
options. In addition, consistent with the NASD Conduct Rules and policies
established by the Trustees, the Investment Adviser may consider sales of the
Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Trust.
The portfolio securities of certain of the Series generally are traded on a
principal basis and normally do not involve brokerage commissions. The cost of
portfolio securities transactions effected on a principal basis primarily
consists of dealer or underwriter spreads. While reasonable competitive spreads
or commissions are sought, the Series will not necessarily be paying the lowest
spread or commission available. Transactions with respect to the securities of
small and emerging growth companies in which a Series may invest may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions involving
more widely trading securities.
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Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Investment Adviser may receive orders
for transactions by the Trust. 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. If in the judgment of the Investment Adviser, a
Series (or other accounts managed by the Investment Adviser) will be benefitted
by supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services in excess of
commissions that another broker may have charged for effecting the same
transaction. The expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information, and the
Investment Adviser may use such information in servicing its other accounts.
The Trust invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as
principal in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Trust, including
Merrill Lynch and any of its affiliates, will not serve as the Trust's dealer in
such transactions. However, affiliated persons of the Trust may serve as its
broker in over-the-counter transactions conducted on an agency basis provided
that, among other things, the fee or commission received by such affiliated
broker is reasonable and fair compared to the fee or commission received by non-
affiliated brokers in connection with comparable transactions. In addition, the
Trust may not purchase securities during the existence of any underwriting
syndicate for such securities of which Merrill Lynch serves as placement agent
except pursuant to procedures adopted by the Board of Trustees of the Trust that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff.
Pursuant to Section 11(a) of the Exchange Act, Merrill Lynch may execute
transactions for the Trust on the floor of any U.S. national securities exchange
provided that prior authorization of such transactions is obtained and Merrill
Lynch furnishes a statement to the Trust at least annually setting forth the
compensation it has received in connection with such transactions.
The Trustees of the Trust consider the possibility of recapturing for the
benefit of the Trust brokerage commissions, dealer spreads and other expenses of
possible portfolio transactions, such as underwriting commissions, by conducting
such portfolio transactions through affiliated entities, including Merrill
Lynch. For example, brokerage commissions received by Merrill Lynch could be
offset against the management fee paid by the Trust to the Investment Adviser.
After considering all factors deemed relevant, the Trustees have made a
determination not to seek such recapture. The Trustees will consider this
matter from time to time.
The portfolio turnover rate is calculated by dividing the lesser of a
Series' annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at
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the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. Each Series' portfolio turnover
rate is generally anticipated to be under 100%. A high rate of portfolio
turnover results in correspondingly higher brokerage commission expenses and may
also result in negative tax consequences, such as an increase in capital gains
dividends or in ordinary income dividends.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate when
one or more clients of the Investment Adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at
or about the same time that would involve the Trust, or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Funds is determined once daily
Monday through Friday after the close of business on the NYSE on each day the
NYSE is open for trading (a "Pricing Day"). The close of business on the NYSE
is generally 4:00 p.m., Eastern time. Each Fund also will determine its net
asset value on any day in which there is sufficient trading in the portfolio
securities that the net asset value might be affected materially, but only if on
any such day such Fund is required to sell or redeem shares. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The NYSE is not open for trading
on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value is computed by dividing the value of the securities held by
a Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the fees
payable to the Administrator and the Distributor, and the fees payable
indirectly by each Fund to the Investment Adviser as a shareholder of the
respective Series, are accrued daily.
The principal assets of each Fund will normally be its interest in the
corresponding Series, which will be valued at its net asset value. Net asset
value for the Series is computed by dividing the market value of the securities
held by the Series plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time, rounded to the
nearest cent. Expenses, including the fees payable to the Investment Adviser,
are accrued daily. The value of each investor's (including the respective
Fund's) interest in a Series will be determined after the close of business
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on the NYSE by multiplying the net asset value of the Series by the percentage,
effective for that day, that represents that investor's share of the aggregate
interests in such Series. Any additions or withdrawals to be effected on that
day will then be effected. The investor's percentage of the aggregate beneficial
interests in a Series will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Series 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 Series effected on such day, and (ii) the denominator of which
is the aggregate net asset value of the Series as of such time on such day plus
or minus, as the case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Series by all investors in the Series. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Series after the close of business of the NYSE on
the next Pricing Day of the Series.
The per share net asset value of Class A, Class B and Class C shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. It is expected, however, that the
per share net asset value of the four classes will tend to converge (although
not necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities of the Series, including ADRs, EDRs or GDRs, that are
traded on stock exchanges are valued at the last sale price (regular way) on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Trustees as the primary market. Long positions in securities traded on the
OTC market are valued at the last available bid price in the OTC market prior to
the time of valuation. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. When the Series writes an option, the amount of the premium
received is recorded on the books of the Series as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by a Series are valued at their
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are generally valued at fair value as determined in good faith by or
under the direction of the Trustees. Such valuations and procedures will be
reviewed periodically by the Trustees.
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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 Series' shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of a Series' 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 Trustees.
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services described below that are
designed to facilitate investment in their shares. Full details as to each such
service and copies of the various plans described below can be obtained from the
Funds, the Distributor or your selected dealer.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. A shareholder with
an account held at the Transfer Agent may make additions to his or her
Investment Account at any time by mailing a check directly to the Transfer
Agent.
The Funds do not issue share certificates. Shareholders considering
transferring their Class I or Class A shares from a selected dealer to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class I or Class A shares are to be transferred will not take delivery
of shares of a Fund, a shareholder either must redeem the Class I or Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class I or Class A shares. Shareholders interested in
transferring their Class B or Class C shares from a selected dealer and who do
not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a tax-
deferred retirement account such as an individual retirement account from a
selected dealer to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of a Fund, a shareholder must either redeem the
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm, or such shareholder must continue to maintain a
retirement account at a selected dealer for those shares.
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Automatic Investment Plan
A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if an eligible Class I investor as described in the
Prospectus) or Class A, Class B or Class C shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Transfer Agent, acting as agent for such securities dealer. You
may also add to your account by automatically investing a specific amount in a
Fund on a periodic basis through your selected dealer. The current minimum for
such automatic additional investments is $100. This minimum may be waived or
revised under certain circumstances.
Automatic Dividend Reinvestment Plan
Dividends and distributions from a Fund may be taken in cash or
automatically reinvested in shares of such Fund at net asset value without a
sales charge. You should consult with your financial consultant about which
option you would like. If you choose the reinvestment option, such reinvestment
will be at the net asset value of shares of such Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing or by telephone (1-888-763-
2260), if the shareholder's account is maintained with the Transfer Agent, to
receive either their dividends or capital gains distributions, or both, in cash,
in which event payment will be mailed or direct deposited on or about the
payment date, except that in all circumstances dividends less than ten dollars
will be reinvested.
Shareholders may, at any time, notify their selected dealer in writing if
the shareholder's account is maintained with a selected dealer or notify the
Transfer Agent in writing or by telephone (1-888-763-2260), if the account is
maintained with the Transfer Agent, that they no longer wish to have their
dividend and/or capital gains distributions reinvested in shares of a Fund or
vice versa and, commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. A Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Systematic Withdrawal Plan
A shareholder may elect to make withdrawals from an Investment Account of
Class I, Class A, Class B or Class C shares in the form of payments by check or
through automatic payment by direct deposit to such shareholder's bank account
on either a monthly or quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired shares of a Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with shares having a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. With respect to
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shareholders who hold accounts directly at the Transfer Agent, redemptions will
be made at net asset value as determined as described herein on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. With respect to shareholders who hold accounts with their broker-
dealer, redemptions will be made at net asset value determined as described
herein on the first, second, third or fourth Monday of each month, or the first,
second, third or fourth Monday of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be mailed, or the direct deposit for withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
shares in the Investment Account are reinvested automatically in shares of the
Funds. A shareholder's systematic withdrawal plan may be terminated at any time,
without a charge or penalty, by the shareholder, a Fund, the Transfer Agent or
the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. A Fund will not knowingly accept purchase orders for shares of the
Fund from investors who maintain a systematic withdrawal plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Account Choices --
Pricing of Shares -- Class B and C Shares -- Deferred Sales Charge Options" in
the Prospectus. Where the systematic withdrawal plan is applied to Class B
shares, upon conversion of the last Class B shares in an account to Class A
shares, a shareholder must make a new election to join the systematic withdrawal
program with respect to the Class A shares. If an investor wishes to change the
amount being withdrawn in a systematic withdrawal plan the investor should
contact his or her financial consultant.
Retirement Plans
The minimum initial purchase to establish a retirement plan is $100.
Capital gains and income received in retirement plans are exempt from Federal
taxation until distributed from the plans. Investors considering participations
in any such plan should review specific tax laws relating thereto and should
consult their attorneys or tax advisors with respect to the establishment and
maintenance of any such plan.
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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 a result of the exchange.
Class A shares also may be exchanged for Class I shares of a second Mercury
mutual fund at any time as long as, at the time of the exchange, the shareholder
is eligible to acquire Class I shares of any Mercury mutual fund. Class A,
Class B and Class C shares are exchangeable with shares of the same class of
other Mercury mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other fund as more fully described
below. Class I, Class A, Class B and Class C shares also are exchangeable for
shares of Summit, a money market fund specifically designated for exchange by
holders of Class I, Class A, 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"),
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of another Mercury mutual fund or of Summit on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of a Fund exercising the exchange privilege will continue to be subject to a
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of a Fund acquired through use of the exchange
privilege will be subject to such Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of a Fund for those of another Mercury fund ("new
Mercury Fund") after having held such Fund's Class B shares for two-and-a-half
years. The 3% CDSC that generally would apply to a redemption would not apply to
the exchange. Four years later the investor may decide to redeem the Class B
shares of new Mercury Fund and receive cash. There will be no CDSC due on this
redemption since by "tacking" the two-and-a-half year holding period of the
Fund's Class B shares to the four year holding period for the new Mercury Fund
Class B shares, the investor will be deemed to have held the new Mercury Fund
Class B shares for more than six years.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. To
exercise the exchange privilege, shareholders should contact their financial
consultant, who will advise the Fund of the exchange. Shareholders of a Fund
and shareholders of the other funds described above with shares for which
certificates have not been issued may exercise the exchange privilege by wire
through their securities dealers. The Funds reserve the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The
Funds reserve the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
Fee-Based Programs
Certain fee-based programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit the
purchase of Class I shares at net asset value. Under specified circumstances,
participants in certain Programs may deposit other classes of shares, which will
be exchanged for Class I shares. Initial or deferred sales charges otherwise
due in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in certain Programs may result in the redemption of shares held
therein or the automatic exchange thereof to another class at net asset value.
In addition, upon termination of participation in certain Programs, shares that
have been held for less than specified periods within such Program may be
subject to a fee based upon the current value of such shares. These Programs
also generally prohibit such shares from being transferred to another account,
to another broker-dealer or to the Transfer Agent. Except in limited
circumstances
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(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the imposition
of initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding certain specific Programs offered through particular
selected dealers (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in the
Program's client agreement and from the shareholder's selected dealer.
DIVIDENDS AND TAXES
Dividends
The Corporation intends to distribute all its net investment income, 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 Fund shareholders
annually. From time to time, a Fund may declare a special dividend at or about
the end of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains be
distributed during the calendar year. See "Shareholder Services -- Automatic
Dividend Reinvestment Plan" above for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Funds. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class I and Class A shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares; similarly, the per share dividends and distributions
on Class A shares will be lower than the per share dividends and distributions
on Class I shares as a result of the account maintenance fees applicable with
respect to the Class A shares. See "Determination of Net Asset Value" above.
Within 60 days after the end of a Fund's taxable year, each shareholder will
receive notification summarizing the dividends and distributions he or she
received that year. This notification will also indicate whether those
distributions should be treated as ordinary income or long-term capital gains.
Taxes
The Funds intend to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as a
Fund so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class I, Class A, Class B and Class C
shareholders ("shareholders"). The Funds intend to distribute substantially all
of such income. To qualify for this treatment, a Fund must, among other things,
(a) derive at least 90% of its gross income (without offset for losses from the
sale or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of securities or foreign currencies and certain financial
futures, options and forward contracts; and (b)
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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 cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount no greater than 5% of its assets 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) 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, the Funds 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 Funds invest a large portion of their assets in securities of
non-U.S. issuers, it is not anticipated that a significant portion, if any, of
the dividends paid by a 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 non-U.S. countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. If more
than 50% of the value of a Fund's assets at the close of a taxable year consists
of stock or securities in non-U.S. corporations, shareholders of the Fund may
be able to claim U.S. foreign tax credits with respect to foreign taxes paid by
the Fund, subject to certain provisions and limitations contained in the Code.
For example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by a Fund. During each taxable year that
the Fund is eligible the Fund intends to file an election with the IRS pursuant
to which shareholders of the Fund will include their proportionate share of such
withholding taxes as gross income for U.S. income tax purposes, treat such
proportionate share as taxes paid by them, and deduct such proportionate share
in computing their taxable incomes or, alternatively, subject to certain
limitations, restrictions, and holding period requirements, use them as foreign
tax credits against their U.S. income taxes. No deductions for foreign taxes,
however, may be claimed by noncorporate shareholders who do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such
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shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes. For this purpose, the Fund will allocate
foreign taxes and foreign source income among the Class I, Class A, Class B and
Class C shareholders.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, a Fund may elect capital gain or loss
treatment for such transactions. In general, however, Code Section 988 gains or
losses will increase or decrease the amount of a Fund's investment company
taxable income available to be distributed to shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital gains.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by the Funds to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class A shares. A shareholder's basis in
the Class A shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class A shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain, taxable at the same rates as ordinary
income if the shares were held for not more than 12 months and capital gain
taxable at the maximum rate of 20% if such shares were held for more than 12
months. In the case of a corporation, any such capital gain will
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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 contract will be treated as sold for its fair market value on the
last day of the taxable year. In general, unless a special election is made,
gain or loss from transactions in Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss.
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.
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Other Tax Matters
The Trust and each Fund has received a private letter ruling from the IRS
to the effect that, because each Series is classified as a partnership for tax
purposes, each Fund will be entitled to look to the underlying assets of the
Series in which it has invested for purposes of satisfying various requirements
of the Code applicable to RICs. If any of the facts upon which such ruling is
premised change in any material respect (e.g., if the Trust were required to
register its interests under the Securities Act and the Trust is unable to
obtain a private letter ruling from the IRS or an opinion of counsel indicating
that each Series will continue to be classified as a partnership), then the
Directors will determine, in their discretion, the appropriate course of action
for the Funds. One possible course of action would be to withdraw the Fund's
investments from the Series and to retain an investment adviser to manage the
Fund's assets in accordance with the investment policies applicable to the
respective Fund. See "Investment Objectives and Policies" above.
------------------------
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.
Dividends and gains on the sale or exchange of shares in a Fund may also be
subject to state and local taxes.
Shareholders are urged to consult their own tax advisors regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment in
the Fund.
PERFORMANCE DATA
From time to time a Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return is based on a Fund's historical
performance and is not intended to indicate future performance. Average annual
total return is determined separately for Class I, Class A, Class B and Class C
shares of each Fund in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class I and Class A
shares and the CDSC that would be applicable to a
52
<PAGE>
complete redemption of the investment at the end of the specified period in the
case of Class B and Class C shares.
Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
In order to reflect the reduced sales charges in the case of Class I or
Class A shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by a Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
A Fund may compare its performance to, among other things, the S&P 500, the
S&P 500/Barra Value Index, the S&P 500/Barra Growth Index, the S&P 400, the
Russell 2000, the EAFE Index, the Value Line Composite Index, the Dow Jones
Industrial Average, the MSCI Europe, the MSCI World Index, Salomon Smith Barney
World Government Bond Index, TSE 1st Section (TOPIX) or other published indices,
or to data contained in publications such as Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. ("Morningstar"), other competing universes, Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune
Magazine and CDA Investment Technology, Inc. When comparing its performance to
a market index, a Fund may refer to various statistical measures derived from
the historical performance of the Fund and the index, such as standard deviation
and beta. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.
From time to time, a Fund may include its Morningstar risk-adjusted performance
rating in advertisements or supplemental sales literature. A Fund may from time
to time quote in advertisement or other materials other applicable measures of
performance and may also make references to awards that may be given to the
Investment Adviser.
GENERAL INFORMATION
Description of Shares
The Corporation is a Maryland corporation incorporated on August 13, 1999.
It has an authorized capital of 3,000,000,000 shares of Common Stock, par value
$.0001 per share, of which each Fund is authorized to issue 125,000,000 shares
each of Class I, Class A, Class B and Class C
53
<PAGE>
for each of the six Funds: Mercury [Quantitative] Large Cap Fund, Mercury
[Quantitative] Large Cap Value Fund, Mercury [Quantitative] Large Cap Growth
Fund, Mercury [Quantitative] Mid Cap Fund, Mercury [Quantitative] Small Cap Fund
and Mercury [Quantitative] International Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights with respect to
matters relating to such distribution expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class A Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the 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.
The Trust consists of six Series, and is organized as a Delaware business
trust. Whenever a Fund is requested to vote on any matter relating to the
Series, the Corporation will hold a meeting of the Fund's shareholders and will
cast its vote as instructed by the Fund's shareholders.
[__________] provided the initial capital for each Fund by purchasing
________ shares of each Fund, for an aggregate of $_____________. Such shares
were acquired for investment and can only be disposed of by redemption. To the
extent the organizational expenses of the Corporation are paid by the
Corporation they will be expensed and immediately charged to net asset value.
See "Determination of Net Asset Value" above.
Prior to the offering of each Fund's shares, [__________] will be each
Fund's sole shareholder and deemed a controlling person of each Fund.
54
<PAGE>
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class I, Class
A, Class B and Class C shares of each of the Funds based on the projected value
of each Fund's estimated net assets and projected number of shares outstanding
on the date its shares are offered for sale to public investors is as follows:
Mercury [Quantitative] Large Cap Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
Mercury [Quantitative] Large Cap Value Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
55
<PAGE>
Mercury [Quantitative] Large Cap Growth Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
Mercury [Quantitative] Mid Cap Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
56
<PAGE>
Mercury [Quantitative] Small Cap Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
57
<PAGE>
Mercury [Quantitative] International Fund
<TABLE>
<CAPTION>
Class I Class A Class B Class C
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... [-----------] [-----------] [-----------] [-----------]
Number of Shares.............. [-----------] [-----------] [-----------] [-----------]
Outstanding
Net Asset Value Per Share..... $10.00 $10.00 $10.00 $10.00
(net assets divided by number
of shares outstanding)
Sales Charge (for Class I and. 0.55 0.55 ** **
Class A Shares: 5.25% of
Offering Price (5.54% of net
amount invested))/*/
Offering Price................ $10.55 $10.55 $10.00 $10.00
</TABLE>
- --------------------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Account Choices -- Class B
and Class C Shares -- Deferred Sales Charge Options" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
Independent Auditors
[Name], [Address], has been selected as the independent auditors of the
Corporation and the Trust. The independent auditors are responsible for
auditing the annual financial statements of the Funds.
Custodian
[Name], [Address], acts as the custodian of the assets of each Series.
Under its contract with the Trust, [Name] is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Master [Quantitative] International Series 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 cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly owned subsidiary of ML & Co., acts as each
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement (the
58
<PAGE>
"Transfer Agency Agreement"). The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Corporation and the Trust.
Reports to Shareholders
The Corporation sends to its shareholders at least semi-annually reports
showing the Funds' portfolio and other information. An annual report,
containing financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year, shareholders will receive
Federal income tax information regarding dividends and capital gains
distributions.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Corporation has filed with the Commission under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
59
<PAGE>
APPENDIX A
Ratings of Fixed Income Securities
Description of Moody's Investors Services, Inc.'s Corporate Debt Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present that suggest a susceptibility to impairment sometime in the
future.
Baa Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
A-1
<PAGE>
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended (the "Securities Act") .
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
. Leading market positions in well-established industries
. High rates of return on funds employed
. Conservative capitalization structures with moderate reliance on debt
and ample asset protection
. Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation
. Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternative liquidity is maintained.
A-2
<PAGE>
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a particular
capital structure and that these securities are rated within the universe of
preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba An issue that is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
A-3
<PAGE>
ca An issue that is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
A-4
<PAGE>
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.
A-5
<PAGE>
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
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.
A-6
<PAGE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
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
CCC speculative with respect to the issuer's capacity to pay preferred stock
obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some
quality and protection characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue in default on debt
instruments.
A-7
<PAGE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
Description of Fitch Investment Grade Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
A-8
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
Exhibit
Number
- -------
1 - Articles of Incorporation of Registrant.
2 - By-Laws of Registrant.
3 - Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
4 - Not Applicable.
5(a) - Class I Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(b) - Class A Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(c) - Class B Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
5(d) - Class C Distribution Agreement between Registrant and Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.*
6 - None
7 - Form of Custody Agreement.*
8(a) - Administration Agreement between Registrant and Mercury Asset
Management US, a division of Fund Asset Management, L.P.*
8(b) - 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.*
8(d) - License Agreement relating to Use of Name among Mercury Asset
Management International Ltd., Mercury Asset Management Group Ltd. and
Fund Asset Management, L.P.*
8(e) - License Agreement relating to Use of Name among Mercury Asset
Management International Ltd., Mercury Asset Management Group Ltd. and
Registrant.*
9 - Opinion and consent of Swidler Berlin Shereff Friedman, LLP, counsel
for Registrant.*
10 - Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.*
11 - None.
12 - Certificate of [______]*
13(a)- Class A Distribution Plan and Class A Plan Sub-Agreement.*
13(b)- Class B Distribution Plan and Class B Plan Sub-Agreement.*
13(c)- Class C Distribution Plan and Class C Plan Sub-Agreement.*
14 - Rule 18f-3 Plan.*
15 - Powers of Attorney for Officers, Directors and Trustees.*
- -----------------------------
* To be filed by amendment.
C-1
<PAGE>
Item 24. Persons Controlled By or Under Common Control with Registrant.
Prior to the effective date of this Registration Statement, Mercury
Quantitative Series Fund, Inc. (the "Registrant") will sell shares of each Fund
of the Registrant to [_____]. Prior to the effective date of this Registration
Statement, [Index] Master Series Trust will also sell interests of its Series to
the Registrant. Therefore, the Funds will be under common control by and under
common control with the Registrant.
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 I, Class A, Class B
and Class C Distribution Agreements.
Article V of the Registrant's 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 Corporation to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall not
protect any such person against any liability to the 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
C-2
<PAGE>
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 I, Class A, Class B and Class C Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"Act"), against certain types of civil liabilities arising in connection with
the Registration Statement or the related Prospectus and Statement of Additional
Information or an annual or interim report of the Registrant.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser.
The address of Mercury Asset Management US (the "Investment Adviser"), a
division of Fund Asset Management, L.P. ("FAM"), is P.O. Box 9011, Princeton,
New Jersey 08543-9011. FAM, doing business as FAM or Mercury Asset Management
US, acts, or has acted since [December 31, 1997], as the investment adviser for
the following open-end registered investment companies: Mercury Index Funds,
Inc., Mercury Asset Management Funds, Inc., Mercury Life Strategy Series Fund,
Inc. CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
[Index] Master Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured
Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California Insured Fund IV,
Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniHoldings New York Insured Fund III, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings
New Jersey Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc.,
C-3
<PAGE>
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.
Positions with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc....Limited Partner Financial Services Holding Company;
Limited Partner of Merrill Lynch
Asset Management, L.P. ("MLAM")
Princeton Services....General Partner General Partner of MLAM
Jeffrey M. Peek.......President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
Vice President and Director of the
Global Securities and Economics
division of Merrill Lynch from 1995
to 1997
Terry K. Glenn........Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of Princeton
Funds Distributor, Inc.; Director
of FDS; President of Princeton
Administrators, L.P.
Donald C. Burke.......Senior Vice President Senior Vice President and Treasurer
and Treasurer of MLAM since 1999; Senior Vice
President and Treasurer of
Princeton Services; Vice President
and Treasurer of Princeton Funds
Distributor, Inc.; First Vice
President of MLAM from 1997 to
1999; Vice President of MLAM from
1990 to 1997; Director of Taxation
of MLAM since 1990.
Michael G. Clark......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Mark A. Desario.......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
C-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Linda L. Federici........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano......Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Michael J. Hennewinkel...Senior Vice President, Senior Vice President, Secretary
Secretary and General and General Counsel of MLAM;
Counsel Senior Vice President of Princeton
Services
Philip L. Kirstein.......Senior Vice President Senior Vice President of MLAM;
Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services
Ronald M. Kloss..........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Debra W. Landsman-Yaros..Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of
Princeton Funds Distributor, Inc.
Stephen M. Miller........Senior Vice President Executive Vice President of
Princeton Administrators; Senior
Vice President of Princeton
Services
Joseph T. Monagle, Jr....Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Brian A. Murdock.........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Gregory D. Upah..........Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
Mr. Glenn is President and Mr. Burke is Treasurer of all or substantially
all of the investment companies described in the following paragraph. Mr. Glenn
is director of such companies. Messrs. Giordano, Kirstein, and Monagle are
directors or officers of one or more of such companies.
MLAM, with an address at P.O. Box 9011, Princeton, New Jersey 08543-9011,
an affiliate of the Investment Adviser, also acts, or since ______, 199[ ] 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
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
C-5
<PAGE>
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of
MLAM); and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
Item 27. Principal Underwriters.
(a) Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc.
("MFD") acts as the principal underwriter for the Registrant and for each of the
following open-end investment companies:
Mercury Global Balanced Fund of Mercury Asset Management Funds, Inc.;
Mercury U.S. Large Cap Fund of Mercury Asset Management Funds, Inc.;
Mercury U.S. Small Cap Growth Fund of Mercury Asset Management Funds, Inc.;
Mercury International Fund of Mercury Asset Management Funds, Inc.; Mercury
Pan-European Growth Fund of Mercury Asset Management Funds, Inc.; Summit
Cash Reserves Fund of Financial Institutions Series Trust; Mercury V.I.
U.S. Large Cap Fund of Mercury Asset Management V.I. Funds, Inc.
A separate division of Princeton Funds Distributor, Inc. acts as the
principal underwriter of other investment companies.
(b) Set forth below is information concerning each director and officer of the
Distributor. The principal business address of each such person is P.O. Box
9081, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Crook, Aldrich, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
(1) (2) (3)
Positions and Offices Positions and Offices
Name with Distributor with Registrant
- ------------------------- ---------------------- ---------------------------
Terry K. Glenn........... President and Director Vice President and Director
Michael G. Clark......... Director and Treasurer None
Thomas J. Verage......... Director None
Robert W. Crook.......... Senior Vice President None
Michael J. Brady......... Vice President None
William M. Breen......... Vice President None
James T. Fatseas......... Vice President None
Debra W. Landsman-Yaros.. Vice President None
Michelle T. Lau.......... Vice President None
Donald C. Burke.......... Vice President None
C-6
<PAGE>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with MFD with Registrant
- ---- ---------------------- ---------------------
Salvatore Venezia........ Vice President None
William Wasel............ Vice President None
Robert Harris............ Secretary None
(c) Not Applicable.
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 Quantitative Series Fund, Inc., 800 Scudders
Mill Road, Plainsboro, New Jersey 08536;
(2) the transfer agent, Financial Data Services, Inc., P.O. Box 44062,
Jacksonville, Florida 32232-4062;
(3) the custodian,____________; and
(4) the investment adviser and administrator, Mercury Asset Management US,
a division of Fund Asset Management, L.P., 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Item 29. Management Services.
Other than as set forth under the caption "Management of the Funds" in the
Prospectus constituting Part A of the Registration Statement and under
"Management of the Fund--Management and Advisory Arrangements" in the Statement
of Additional Information constituting Part B of the Registration Statement, the
Registrant is a not party to any Management-related service contract.
Item 30. Undertakings.
None.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 8/th/ day of October, 1999.
Mercury Quantitative Series Fund, Inc.
(Registrant)
By: /s/ Ira P. Shapiro
---------------------------------------
Ira P. Shapiro, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Ira P. Shapiro President and Director October 8, 1999
- ------------------------
Ira P. Shapiro
Vice President and Director
- ------------------------
Terry K. Glenn
/s/ Philip L. Kirstein Treasurer and Director October 8, 1999
- ------------------------
Philip L. Kirstein
C-8
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
1 Articles of Incorporation of Registrant
2 By-Laws of Registrant
<PAGE>
EXHIBIT 1
ARTICLES OF INCORPORATION
MERCURY QUANTITATIVE SERIES FUND, INC.
THE UNDERSIGNED, Maria Gattuso, whose post office address is Swidler Berlin
Shereff Friedman, LLP, 919 Third Avenue, New York, New York 10022, being at
least eighteen years of age, does hereby act as an incorporator, under and by
virtue of the General Corporation Laws of the State of Maryland (the "General
Laws") authorizing the formation of corporations and with the intention of
forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is Mercury Quantitative Series Fund, Inc. (the
"Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed, the powers,
rights and privileges that the Corporation shall be authorized to exercise and
enjoy, and the business or objects to be transacted, carried on and promoted by
it are as follows:
(1) To conduct and carry on business of an investment company of the
management type.
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws and by these
Articles of Incorporation, as its Board of Directors may determine; provided,
however, that the value of the consideration per share to be received by the
Corporation upon the sale or other disposition of any shares of its capital
stock shall not be less than the net asset value per share of such capital stock
outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the designation of, convert,
rename, redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its issued or unissued capital stock of any class
or series, as its Board of Directors may determine, in any manner and to the
extent now or hereafter permitted by the General Laws and by these Articles of
Incorporation.
<PAGE>
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
(6) The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws now or hereafter in force, and the enumeration of the foregoing
purposes, powers, rights and privileges, shall not be deemed to exclude any
powers, rights or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in the
State of Maryland is c/o CSC - Lawyers Incorporating Service Company, 11 E.
Chase Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is CSC - Lawyers Incorporating Service Company, a
corporation of this State, and the post office address of the resident agent is
11 E. Chase Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Three Billion (3,000,000,000) shares, of the
par value of One Hundredth of One Cent ($.0001) per share, and of the aggregate
par value of Three Hundred Thousand Dollars ($300,000). The capital stock
initially consists of six series, known as Mercury Quantitative Large Cap Index
Fund, Mercury Quantitative Large Cap Value Index Fund, Mercury Quantitative
Large Cap Growth Index Fund, Mercury Quantitative Mid Cap Index Fund, Mercury
Quantitative Small Cap Index Fund, Mercury Quantitative International Index Fund
(collectively, the "Series", and each, a "Series"). Each Series shall consist,
until further changed, of Five Hundred Million (500,000,000) shares. The shares
of each Series shall consist, until further changed, of four classes of shares
designated Class I shares, Class A shares, Class B shares and Class C shares
(the "Classes"). Each Class of each Series shall consist, until further changed,
of One Hundred Twenty Five Million (125,000,000) shares.
(2) Unless otherwise expressly provided in the charter of the Corporation,
the Class I, Class A, Class B and Class C shares of each Series shall represent
an equal proportionate interest in the assets belonging to that Series (subject
to the liabilities of that Series) and each share of a particular Series shall
have identical voting, dividend, liquidation and other rights; provided,
--------
however, that notwithstanding anything in the charter of the Corporation to the
contrary:
(i) The Class I, Class A, Class B and Class C shares may be issued and
sold subject to such different sales loads or charges, whether
initial, deferred or contingent, or any combination thereof, as the
Board of Directors may from time
2
<PAGE>
to time establish in accordance with the Investment Company Act of
1940, as amended and in effect from time to time, or any rules,
regulations or orders issued thereunder (collectively, the "Investment
Company Act"), and other applicable law.
(ii) Liabilities of a Series which are determined by or under the
supervision of the Board of Directors to be attributable to a
particular Class of that Series may be charged to that Class and
appropriately reflected in the net asset value of, or dividends
payable on, the shares of that Class of the Series.
(iii) The Class I, Class A, Class B and Class C shares of a
particular Series may have such different exchange and conversion
rights as the Board of Directors shall provide in compliance with the
Investment Company Act.
(3) The Board of Directors may classify and reclassify any unissued shares
of capital stock, of any class or series, into one or more additional or other
classes or series as may be established from time to time by setting or changing
in any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and pursuant to
such classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Dividends on a class or series may be declared or paid
only out of the net assets of that class or series. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular class or series of capital stock may be charged
to and borne solely by such class or series and the bearing of expenses solely
by a class or series of capital stock may be appropriately reflected (in a
manner determined by the Board of Directors) and cause differences in the net
asset value attributable to, and the dividend, redemption and liquidation rights
of, the shares of each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of the Corporation,
including those matters set forth in Article II, Sections (2) and (4) hereof and
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act or by the General Laws, such
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requirement as to a separate vote by that class or series shall apply in lieu of
a general vote of all classes and series as described above, (b) in the event
that the separate vote requirements referred to in (a) above apply with respect
to one or more classes or series, then, subject to paragraph (c) below, the
shares of all other classes and series not entitled to a separate class vote
shall vote as a single class, and (c) as to any matter which does not affect the
interest of a particular class or series, such class or series shall not be
entitled to any vote and only the holders of shares of the affected classes and
series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act), to take such action upon the concurrence of a majority
of the votes entitled to be cast by holders of capital stock of the Corporation
(or a majority of the votes entitled to be cast by holders of a class or series
entitled to vote thereon as a separate class or series).
(7) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, subject to compliance with the requirements of the Investment Company
Act, the Board of Directors shall have the authority to provide that holders of
shares of any class or series shall have the right to convert or exchange said
shares into shares of one or more other classes or series in accordance with
such requirements and procedures as may be established by the Board of
Directors.
(8) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation applicable to that
class or series.
(9) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends; provided, however, that the Corporation shall not be
required to issue share certificates for such fractional shares.
(10) The presence in person or by proxy of the holders of shares entitled
to cast one-third of the votes entitled to be cast shall constitute a quorum at
any meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled to cast one-
third of the votes entitled to be cast by each class entitled to vote as a
separate class shall constitute a quorum.
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<PAGE>
(11) All persons who shall acquire stock in the Corporation, of any class
or series, shall acquire the same subject to the provisions of the charter and
By-Laws of the Corporation. Any reference to "shares," "stock" or "shares of
stock" in these Articles of Incorporation shall be deemed to refer, unless the
context otherwise requires, to the shares of each separate class and/or series.
As used in the charter of the Corporation, the terms "charter" and "Articles of
Incorporation" shall mean and include the Articles of Incorporation of the
Corporation as amended, supplemented and restated from time to time by Articles
of Amendment, Articles Supplementary, Articles of Restatement or otherwise.
(12) The Board of Directors may classify and reclassify any issued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely affect
the rights of holders of such issued shares. The Board's authority pursuant to
this paragraph shall include, but not be limited to, the power to vary among all
the holders of a particular class or series (a) the length of time shares must
be held prior to reclassification to shares of another class or series (the
"Holding Period(s)"), (b) the manner in which the time for such Holding
Period(s) is determined and (c) the class or series into which the particular
class or series is being reclassified; provided, however, that, subject to the
first sentence of this section, with respect to holders of the Corporation's
shares issued on or after the date of the Corporation's first effective
prospectus which sets forth Holding Period(s) (the "First Holding Period
Prospectus"), the Holding Period(s), the manner in which the time for such
Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at the
time such shares, which are the subject of the reclassification, were issued.
(13)(a) Each series of capital stock of the Corporation shall relate to a
separate portfolio of investments. All shares of stock in each series shall be
identical except that there may be variations between the different series as to
the purchase price, determination of net asset value, designations, preferences,
conversion or other rights, voting powers, restrictions, special and relative
rights and limitations as to dividends and on liquidation, qualifications or
terms or conditions of redemption of such shares of stock.
(b) Each series of stock of the Corporation shall have the following
powers, preferences and voting or other special rights, and the qualifications,
restrictions and limitations thereof shall be as follows:
(i) All consideration received by the Corporation for the issue or
sale of stock of each series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds received thereon, including any proceeds derived from the
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sale, exchange or liquidation thereof, and any assets, funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the series of stock with respect to which such assets,
payments or funds were received by the Corporation for all purposes, subject
only to the rights of creditors, and shall be so handled in the books of account
of the Corporation. Such assets, funds and payments, including any proceeds
derived from the sale, exchange or liquidation thereof, and any assets, funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, are herein referred to as "assets belonging to" such series. In the
event that there are any income, earnings, profits, and proceeds thereof,
assets, funds or payments that are not readily identifiable as belonging to any
particular series, the Board of Directors of the Corporation shall allocate them
among any one or more of the series established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deem fair and equitable. Each allocation by the Board of Directors
shall be conclusive and binding on the stockholders of the Corporation of all
series for all purposes.
(ii) The assets belonging to each series of stock shall be charged
with the liabilities in respect of such series, and also shall be charged with
its share of the general liabilities of the Corporation, in proportion to the
asset value of the respective series determined in accordance with the Articles
of Incorporation of the Corporation. The determination of the Board of
Directors shall be conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the same to a given series, and
as to whether the same or general assets of the Corporation are allocable to one
or more series.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be three, which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three. The names of the directors who shall act until their
successors are duly elected and qualify are:
Terry K. Glenn
Philip K. Kirstein
Ira Shapiro
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such limitations as may be
set forth in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws.
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(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation, of
any class or series, acquired by it after the issue thereof, or otherwise) other
than such right, if any, as the Board of Directors, in its discretion, may
determine.
(4) Each acting and former director and officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by the General
Laws, subject to the requirements of the Investment Company Act. No amendment
of these Articles of Incorporation or repeal of any provision hereof shall limit
or eliminate the benefits provided to directors and officers under this
provision in connection with any act or omission that occurred prior to such
amendment or repeal. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled.
(5) To the fullest extent permitted by the General Laws, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) The Board of Directors of the Corporation from time to time may change
the Corporation's name, or change the name or other designation of any class or
series of its stock, without the vote or consent of the stockholders of the
Corporation, in any manner and to the extent now or hereafter permitted by the
General Laws and by these Articles of Incorporation.
(8) Notwithstanding any other provision of these Articles of Incorporation
or the By-Laws of the Corporation, or the General Laws, the Board of Directors
of the Corporation may, upon the affirmative vote of the majority of the entire
Board of Directors and without the vote or consent of the stockholders, dissolve
the Corporation in the manner otherwise provided by the laws of the State of
Maryland.
ARTICLE VI
REDEMPTION
----------
(1) Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation
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<PAGE>
standing in the name of such holder on the books of the Corporation, and all
shares of capital stock issued by the Corporation shall be subject to redemption
by the Corporation, at the redemption price of such shares as in effect from
time to time as may be determined by the Board of Directors of the Corporation
in accordance with the provisions hereof, subject to the right of the Board of
Directors of the Corporation to suspend the right of redemption of shares of
capital stock of the Corporation or postpone the date of payment of such
redemption price in accordance with provisions of applicable law.
(2) All shares of stock of the Corporation shall be redeemable at the
option of the Corporation. The Board of Directors may by resolution from time
to time authorize the Corporation to require the redemption of all or any part
of the outstanding shares of any class or series upon such terms and conditions
as the Board of Directors, in its discretion, shall deem advisable, and upon the
sending of written notice thereof to each holder whose shares are to be
redeemed.
(3) The redemption price of shares of capital stock of the Corporation
shall be the net asset value thereof as determined by the Board of Directors of
the Corporation from time to time in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment of
the redemption price shall be made in cash by the Corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the Corporation.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting or the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share
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certificates, that any and all such determinations shall be binding as
aforesaid. No provision of these Articles of Incorporation shall be effective to
(a) require a waiver of compliance with any provision of the Securities Act of
1933, as amended, or the Investment Company Act or of any valid rule, regulation
or order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE VII
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of Mercury Quantitative
Series Fund, Inc. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be her act and further acknowledges that, to the best
of her knowledge, the matters and facts set forth therein are true in all
material respects under penalties for perjury.
Dated this 13th day of August, 1999
-------------------------
Maria Gattuso
I hereby consent to my designation in this document as resident agent for
Mercury Quantitative Series Fund, Inc.
CSC-Lawyers Incorporation
Service Company
________________________
Resident Agent
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EXHIBIT 99.2
BY-LAWS
OF
MERCURY QUANTITATIVE SERIES FUND, INC.
------------------------
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of Mercury Quantitative
----------------
Series Fund, Inc. (the "Corporation") shall be in the City of Baltimore, State
of Maryland.
Section 2. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. So long as the Corporation is registered as an
--------------
investment company under the Investment Company Act of 1940, as amended (such
term to include the rules and regulations promulgated under the Investment
Company Act of 1940, as amended (collectively, the "Investment Company Act"),
unless otherwise specified or the context otherwise requires), annual meetings
of the stockholders shall not be held, except where required to be held by the
Investment Company Act or by the Maryland General Corporation Law or when called
by the Board of Directors or by an officer or officers of the Corporation
authorized to take such action by the Board of Directors. If in any calendar
year the Corporation is required or elects to hold an annual meeting, the
meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as
the Board of Directors or the officer or officers calling the meeting may
prescribe. At each such annual meeting, the stockholders shall elect a Board of
Directors and transact such other business as may properly come before the
meeting. The provisions of these By-Laws which contemplate the holding of an
annual meeting of stockholders shall be suspended during any calendar year in
which no annual meeting of stockholders is held.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President of the Corporation, or on the
written request of the holders of at least 10% of the outstanding shares of
capital stock of the Corporation entitled to vote at such meeting
<PAGE>
if they comply with the applicable requirements of the Maryland General
Corporation Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be held
-----------------
at such place within the United States as the Board of Directors may from time
to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each stockholders' meeting and, if the meeting
is a special meeting, the purpose or purposes of the special meeting, shall be
given personally or by mail, not less than ten nor more than ninety days before
the date of such meeting, to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 5. Quorum. At all meetings of the stockholders, the holders of
------
shares of stock of the Corporation entitled to cast one-third of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more series or classes of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate series or class shall constitute a quorum. In
the absence of a quorum no business may be transacted, except that the holders
of a majority of the shares of stock present in person or by proxy and entitled
to vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
The absence from any meeting, in person or by proxy, of holders of the number of
shares of stock of the Corporation in excess of a majority thereof which may be
required by the Maryland General Corporation Law, the Investment Company Act, or
other applicable statute, the Articles of Incorporation, or these By-Laws, for
action upon any given matter shall not prevent action at such meeting upon any
other matter or matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the number of shares
of stock of the Corporation required for action in respect of such other matter
or matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board
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(if one has been designated by the Board), or in his absence or inability to
act, the President of the Corporation, or in the absence or inability to act of
the Chairman of the Board and the President of the Corporation, a Vice President
of the Corporation, shall act as chairman of the meeting. The Secretary of the
Corporation, or in his absence or inability to act, any person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have been
so fixed, then at the later of (i) the close of business on the day on which
notice of the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
any corporate action to be taken by vote of the stockholders (other than the
election of directors, which shall be by plurality vote) may be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than ninety nor
less than ten days before the date of the meeting of the stockholders. All
persons who were holders of record of shares at such time, and not others, shall
be entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
----------
stockholders,
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appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may, and on the request of
any stockholder entitled to vote thereto shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, may be required to
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his ability. The
inspectors may be empowered to determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Articles
--------------
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
-------------------
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors; provided, however, that the number of
directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease.
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Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held for that purpose. The term
of office of each director shall be from the time of his election and
qualification until the election of directors next succeeding his election and
until his successor shall have been elected and shall have qualified, or until
his death, or until he shall have resigned or until December 31 of the year in
which he shall have reached seventy-two years of age, or until he shall have
been removed as hereinafter provided in these By-Laws, or as otherwise provided
by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed, with or without cause, by the stockholders by a vote of a majority of
the votes entitled to be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any other
cause, may be filled by a vote of the majority of the Board of Directors then in
office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a special meeting of
the stockholders shall be held as promptly as possible and in any event within
sixty days, for the purpose of filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be called
----------------
by two or more directors of the Corporation or by the Chairman of the Board or
the President of the Corporation.
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Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, addressed to him at his residence or usual place of business, at least
three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of the
-----------------
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act, or other applicable
statute, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board. In the absence of a quorum at
any meeting of the Board, a majority of the directors present thereat may
adjourn such meeting to another time and place until a quorum shall be present
thereat. Notice of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the adjournment and,
unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board may, by resolution adopted by a
------------
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President of the Corporation
or, in his absence or inability to act, another director chosen by a majority of
the directors present, shall act as chairman of the meeting and preside thereat.
The Secretary of the Corporation (or, in his absence or inability to act, any
person appointed by the Chairman) shall act as secretary of the meeting and keep
the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to
-------------------------------------------------
the provisions
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of the Investment Company Act, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writings or writing are filed with the
minutes of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation,
as filed from time to time with the Securities and Exchange Commission and as
required by the Investment Company Act. The Board however, may delegate the
duty of management of the assets and the administration of its day to day
operations to an individual or corporate management company and/or investment
adviser pursuant to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of renewals thereof, of
the Board of Directors and/or the stockholders of the Corporation in accordance
with the provisions of the Investment Company Act.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by resolution adopted by a
-------------------
majority of the entire Board, designate an Executive Committee consisting of two
or more of the directors of the corporation, which committee shall have and may
exercise all the powers and authority of the Board with respect to all matters
other than:
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act, or the taking of any other action required to be taken by the Board of
Directors by the Investment Company Act;
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(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(f) the amendment or repeal of any resolution of the Board unless by its
terms any such resolution may be amended or repealed by such Executive
Committee;
(g) the declaration of dividends and the issuance of capital stock of the
Corporation; and
(h) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may from
-----------------------------
time to time, by resolution adopted by a majority of the whole Board, designate
one or more other committees of the Board, each such committee to consist of
two or more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of
-------
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation, except as may be prescribed by the Board.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number, Qualification, Election and Tenure. The officers of
------------------------------------------
the Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of
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Directors. The Board of Directors may elect or appoint one or more Vice
Presidents and may also appoint such other officers, agents and employees as it
may deem necessary or proper. Any two or more offices may be held by the same
person, except the offices of President and Vice President, but no officer shall
execute, acknowledge or verify any instrument in more than one capacity. Such
officers shall be elected by the Board of Directors each year at a meeting of
the Board of Directors, each to hold office for the ensuing year and until his
successor shall have been duly elected and shall have qualified, or until his
death, or until he shall have resigned, or have been removed, as hereinafter
provided in these By-Laws. The Board may from time to time elect, or delegate to
the President the power to appoint, such officers (including one or more
Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for
the business of the Corporation. Such officers and agents shall have such duties
and shall hold their offices for such terms as may be prescribed by the Board or
by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or Secretary of the Corporation. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President of the Corporation shall be the chief
---------
executive officer of the Corporation. In the absence of the Chairman of the
Board (or if there be none), he
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shall preside at all meetings of the stockholders and of the Board of Directors.
He shall have, subject to the control of the Board of Directors, general charge
of the business and affairs of the Corporation. He may employ and discharge
employees and agents of the Corporation, except such as shall be appointed by
the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President of the Corporation shall
--------------
have such powers and perform such duties as the Board of Directors or the
President of the Corporation may from time to time prescribe.
Section 9. Treasurer. The Treasurer of the Corporation shall
---------
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed in
the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust company
or member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
(c) cause all moneys and other valuables of the Corporation to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the
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seal to all stock certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or the President of the Corporation.
Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under the Maryland General Corporation
Law, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Corporation to indemnify such person
must be based upon the reasonable determination by special legal counsel in a
written opinion or the vote of a majority of a quorum of the directors who are
neither "interested persons," as defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the proceeding ("non-party independent directors"),
after review of the facts, that such officer or director is not guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the Maryland General Corporation Law without a preliminary
determination as to his or her ultimate entitlement to indemnification (except
as set forth below); provided, however, that the person seeking indemnification
shall provide to the Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met and a written undertaking to repay any such
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advance, if it should ultimately be determined that the standard of conduct has
not been met, and provided further that at least one of the following additional
conditions is met: (a) the person seeking indemnification shall provide a
security in form and amount acceptable to the Corporation for his undertaking;
(b) the Corporation is insured against losses arising by reason of the advance;
(c) a majority of a quorum of non-party independent directors, or independent
legal counsel in a written opinion, shall determine, based on a review of facts
readily available to the Corporation at the time the advance is proposed to be
made, that there is reason to believe that the person seeking indemnification
will ultimately be found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law, from liability arising from his activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. The Corporation shall not issue stock
------------------
certificates.
Section 2. Books of Account and Record of Stockholders. There shall be
-------------------------------------------
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland General Corporation Law, a record containing the number
of shares of stock issued during a specified period not to exceed twelve months
and the consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
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without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the Maryland General Corporation Law.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
-------------------------------------------------------
Board may fix, in advance, a date not more than ninety days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-Laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its principal
office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any
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other emblem or device approved by the Board of Directors, the name of the
Corporation, the year of its incorporation and the words "Corporate Seal" and
"Maryland." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall be as determined by the Board of Directors from time to time.
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors may from time to
time determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safe keeping of such banks or other companies as the Board of
Directors may from time to time determine. Every arrangement entered into with
any bank or other company for the safe keeping of the securities and investments
of the Corporation shall contain provisions complying with the Investment
Company Act.
ARTICLE XI
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer of the
Corporation or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
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ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and, if
required by the provisions of the Investment Company Act, ratified by the
stockholders.
ARTICLE XIII
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be available at
the annual meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days after the end
of the fiscal year), be placed on file at the Corporation's principal office.
Each such report shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such
report shall also show the Corporation's income and expenses for the period from
the end of the Corporation's preceding fiscal year to the close of the annual or
quarterly period covered by the report and any other information required by the
Investment Company Act, and shall set forth such other matters as the Board or
such firm of independent public accountants shall determine.
ARTICLE XIV
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
Board of Directors. The stockholders shall have no power to make, amend, alter
or repeal By-Laws.
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