SEMI-ANNUAL REPORT
JUNE 30, 2000
Mercury
QA Small Cap
Fund
OF MERCURY
QA EQUITY SERIES, INC.
MERCURY QA SMALL CAP FUND
INVESTMENTS AS OF JUNE 30, 2000
Percent of
Ten Largest Holdings Net Assets
Mercury Interactive Corp. 2.3%
Lattice Semiconductor Corporation 1.5
International Rectifier Corp. 1.5
Alpharma, Inc. (Class A) 1.2
Dallas Semiconductor Corporation 1.2
Jones Pharmaceuticals, Inc. 1.2
Coherent, Inc. 1.0
Radian Group Inc. 1.0
Patterson Dental Company 1.0
Barr Laboratories, Inc. 1.0
Percent of
Ten Largest Industries Net Assets
Electronic Components 8.9%
Medical Services 7.6
Computer Software 7.1
Banking 4.8
Financial Services 4.7
Pharmaceuticals 4.5
Building 3.9
Transportation 3.6
Retail 3.4
Computers 3.4
June 30, 2000 2 Mercury QA Small Cap Fund
DEAR SHAREHOLDER
We are pleased to provide you with the first semi-annual report for
Mercury QA Small Cap Fund. The Fund seeks to provide long-term
growth of capital by investing primarily in equity securities of
small-capitalization companies in the United States that Fund
management believes are undervalued or have good prospects for
earnings growth. Since inception (June 2, 2000) through June 30,
2000, the Fund's Class I, Class A, Class B and Class C Shares had
total returns of +0.20%, +0.10%, +0.10% and +0.10%, respectively,
less than the return of the unmanaged S&P Small Cap 600 Index of
+5.91% for the period May 31, 2000 to June 30, 2000. (Investment
results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be
found on pages 5 and 6 of this report to shareholders.)
Market Environment
The US economy appears to be slowing down. As a result, significant
increases in inflation and interest rates may not happen, which
usually is good news for financial assets. On the other hand, slower
economic growth probably means slower profit growth, a prospect that
may weigh on the markets over the summer.
Despite the decline of technology share prices during April and May,
large cap growth stocks have a positive year-to-date return through
June. Furthermore, continuing a trend that we have seen for much of
the 1990s, growth stocks outpaced value stocks for the first half of
the year. Large cap growth stocks returned +2.6% over the first half
of the year, as measured by the unmanaged S&P 500/Barra Growth
Index, while large cap value stocks fell -4.1%, as measured by the
S&P 500/Barra Value Index.
Reversing a pattern we also saw for the better part of the past
decade, small cap stocks have outperformed large cap stocks so far
in 2000. Small cap stocks and mid cap stocks continue to look very
attractive compared to large cap stocks on almost every valuation
measure, including price/earnings (22.0 versus 29.8), price/book
(2.4 versus 5.0), and price/free cash flow (18.3 versus 32.3).
Investment Outlook
In the coming months, we believe investors will focus less on
economic issues such as the strength of the economy and interest
rate increases, and more on the implications of the looming
presidential election. Federal budget policy, social security
funding options and trade policy are likely to shape investor
interest in the outcome of the election. Overall, we believe the
earnings outlook and valuation levels are attractive in the current
environment.
Our favorite industries currently are drugs and semiconductors, as
both could enjoy enormous demand for their products for many years
to come. Demographics, specifically the aging of the baby boomers,
can provide drug companies with a huge customer base in which to
sell their goods. With the prospect that every durable good could
contain a few semiconductors, the potential demand looks strong.
June 30, 2000 3 Mercury QA Small Cap Fund
In Conclusion
We thank you for your investment in Mercury QA Small Cap Fund, and
we look forward to serving your investment needs in the months and
years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Philip Green)
Philip Green
Senior Vice President and
Portfolio Manager
August 10, 2000
June 30, 2000 4 Mercury QA Small Cap Fund
FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
The Fund offers four classes of shares, each with its own sales
charge and expense structure, allowing you to invest in the way that
best suits your needs.
CLASS I SHARES incur a maximum initial sales charge of 5.25% and
bear no ongoing distribution and account maintenance fees. Class I
Shares are available only to eligible investors.
CLASS A SHARES incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
CLASS B SHARES are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first two years, decreasing to
3% for each of the next two years and decreasing 1% each year
thereafter to 0% after the sixth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class A Shares after approximately 8 years.
CLASS C SHARES are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares may be
subject to a 1% contingent deferred sales charge if redeemed within
one year after purchase.
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net
asset value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders. The Fund's Investment Adviser voluntarily waived a
portion of its management fee. Without such waiver, the Fund's
performance would have been lower.
RECENT PERFORMANCE RESULTS*
Since Inception
As of June 30, 2000 Total Return
Class I +0.20%
Class A +0.10
Class B +0.10
Class C +0.10
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in the Fund's net asset
values for the period shown, and assume reinvestment of all
dividends and capital gains at net asset value on the ex-dividend
date. The Fund commenced operations on 6/2/00.
June 30, 2000 5 Mercury QA Small Cap Fund
FUND PERFORMANCE DATA (CONCLUDED)
AGGREGATE TOTAL RETURN
% Return % Return
Without Sales With Sales
Class I Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 +0.20% -5.06%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without Sales With Sales
Class A Shares* Charge Charge**
Inception (6/2/00)
through 6/30/00 +0.10% -5.16%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without With
Class B Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 +0.10% -3.90%
*Maximum contingent deferred sales charge
is 4% and is reduced to 0% after 6 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
Inception (6/2/00)
through 6/30/00 +0.10% -0.90%
*Maximum contingent deferred sales charge
is 1% and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
June 30, 2000 6 Mercury QA Small Cap Fund
SCHEDULE OF INVESTMENTS
<TABLE>
MERCURY QA SMALL CAP FUND
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
United States
Advertising 600 True North Communications Inc. $ 26,400 0.6%
Aerospace & Defense 200 ++Alliant Techsystems Inc. 13,488 0.3
Agriculture 600 Delta and Pine Land Company 15,037 0.4
Airlines 500 ++Atlantic Coast Airlines Holdings, Inc. 15,875 0.4
500 SkyWest, Inc. 18,531 0.4
------------ ------
34,406 0.8
Apparel 1,200 ++Nautica Enterprises, Inc. 12,825 0.3
Auto & Truck 900 Circle International Group, Inc. 22,612 0.5
1,300 ++Gentex Corporation 32,662 0.8
------------ ------
55,274 1.3
Automotive & 1,400 ++Tower Automotive, Inc. 17,500 0.4
Equipment
Banking 900 Chittenden Corporation 21,994 0.5
700 Commerce Bancorp, Inc. 32,200 0.8
1,500 Community First Bankshares, Inc. 24,469 0.6
1,300 Cullen/Frost Bankers, Inc. 34,206 0.8
1,200 Hudson United Bancorp 26,925 0.7
600 Investors Financial Services 23,812 0.6
800 ++Silicon Valley Bancshares 34,100 0.8
------------ ------
197,706 4.8
Batteries/Battery 400 C&D Technologies, Inc. 22,600 0.5
Systems
Beverages 200 ++Canadaigu Brands, Inc. (Class A) 10,088 0.2
Building 1,600 D.R. Horton, Inc. 21,700 0.5
600 ++Dycom Industries, Inc. 27,600 0.7
800 Elcor Corporation 18,400 0.4
300 ++Insituform Technologies, Inc. (Class A) 8,137 0.2
1,100 ++International Rectifier Corp. 61,600 1.5
400 ++NVR, Inc. 22,800 0.6
------------ ------
160,237 3.9
Casinos 200 ++Anchor Gaming 9,588 0.2
Chemicals 600 Cambrex Corporation 27,000 0.7
900 ++McWhorter Technologies, Inc. 17,494 0.4
700 OM Group, Inc. 30,800 0.7
------------ ------
75,294 1.8
June 30, 2000 7 Mercury QA Small Cap Fund
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
UNITED STATES (continued)
Commercial Services 200 ++StarTek, Inc. $ 10,075 0.2%
Communications 900 ++Digital Microwave Corporation 34,312 0.8
Computer Services 400 FactSet Research Systems Inc. 11,300 0.3
600 ++Systems & Computer Technology
Corporation 12,000 0.3
------------ ------
23,300 0.6
Computer Software 700 ++Dendrite International, Inc. 23,319 0.6
600 ++FileNET Corporation 11,025 0.3
300 ++Great Plains Software, Inc. 5,887 0.1
400 ++HNC Software Inc. 24,700 0.6
1,000 ++Mercury Interactive Corp. 96,750 2.3
900 ++National Instruments Corporation 39,262 0.9
900 ++Pinnacle Systems, Inc. 20,236 0.5
800 ++Progress Software Corporation 14,350 0.3
400 ++Project Software & Development, Inc. 7,200 0.2
500 ++RSA Security Inc. 34,625 0.8
500 ++Verity, Inc. 19,000 0.5
------------ ------
296,354 7.1
Computer Technology 400 ++Apex Inc. 17,500 0.4
500 ++Cognex Corporation 25,875 0.6
800 ++eLoyalty Corporation 10,200 0.3
300 ++RadiSys Corporation 17,025 0.4
------------ ------
70,600 1.7
Computers 800 ++Hutchinson Technology Incorporated 11,400 0.3
600 Jack Henry & Associates, Inc. 30,075 0.7
500 ++Mercury Computer Systems, Inc. 16,156 0.4
400 ++Micros Systems, Inc. 7,425 0.2
700 National Computer Systems, Inc. 34,475 0.8
500 ++Xircom, Inc. 23,750 0.6
400 ++Zebra Technologies Corporation
(Class A) 17,725 0.4
------------ ------
141,006 3.4
Consumer-- 700 ++Fossil, Inc. 13,606 0.3
Products & Services 1,300 ++NBTY Inc. 8,287 0.2
400 ++Salton, Inc. 14,750 0.4
------------ ------
36,643 0.9
</TABLE>
June 30, 2000 8 Mercury QA Small Cap Fund
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
UNITED STATES (continued)
Data Processing 700 ++American Management Systems,
Incorporated $ 22,980 0.5%
300 ++ChoicePoint Inc. 13,350 0.3
500 ++Hyperion Solutions Corporation 16,219 0.4
500 ++Remedy Corporation 27,875 0.7
------------ ------
80,424 1.9
Distribution 500 ++Insight Enterprises, Inc. 29,656 0.7
600 ++SCP Pool Corporation 14,100 0.4
800 ++United Stationers, Inc. 25,900 0.6
------------ ------
69,656 1.7
Electronic 1,000 ++Alliance Semiconductor Corporation 24,563 0.6
Components 500 ++American Xtal Technology, Inc. 21,625 0.5
500 ++Artesyn Technologies, Inc. 13,906 0.3
400 ++C-COR.net Corp. 10,800 0.3
1,100 ++C-Cube Microsystems Inc. 21,588 0.5
300 CTS Corporation 13,500 0.3
300 ++Electro Scientific Industries, Inc. 13,209 0.3
500 Helix Technology Corporation 19,500 0.5
1,100 ++Kemet Corp. 27,569 0.7
600 ++Kent Electronics Corporation 17,887 0.4
900 ++Lattice Semiconductor Corporation 62,212 1.5
800 Methode Electronics 30,900 0.7
600 ++Photronics, Inc. 17,025 0.4
200 ++Plexus Corporation 22,600 0.5
1,600 ++S3 Incorporated 23,600 0.6
200 Technitrol, Inc. 19,375 0.5
200 ++Three-Five Systems, Inc. 11,800 0.3
------------ ------
371,659 8.9
Energy 400 ++Barrett Resources Corporation 12,175 0.3
200 ++Stone Energy Corporation 11,950 0.3
------------ ------
24,125 0.6
Environmental 800 ++Tetra Tech, Inc. 18,300 0.4
Fertilizers 300 ++The Scotts Company (Class A) 10,950 0.3
</TABLE>
June 30, 2000 9 Mercury QA Small Cap Fund
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
UNITED STATES (continued)
Financial Services 1,500 ++AmeriCredit Corp. $ 25,500 0.6%
600 ++The BISYS Group, Inc. 36,900 0.9
400 Dain Rauscher Corporation 26,400 0.6
1,200 ++Interim Services 21,300 0.5
1,000 National Data Corporation 23,000 0.6
400 ++National Discount Brokers Group, Inc. 12,750 0.3
600 ++The Pioneer Group, Inc. 25,425 0.6
600 SEI Investments Company 23,888 0.6
------------ ------
195,163 4.7
Foods/Food 400 ++Hain Celestial Group, Inc. 14,675 0.3
Processing 400 ++Smithfield Foods, Inc. 11,225 0.3
------------ ------
25,900 0.6
Footwear 400 ++The Timberland Company (Class A) 28,325 0.7
Forest Products 700 Pope & Talbot, Inc. 11,200 0.3
Health Care-- 900 ++Advance Paradigm, Inc. 18,450 0.4
Cost Containment 2,200 Hooper Holmes, Inc. 17,600 0.4
700 ++MedQuist Inc. 31,345 0.8
1,300 ++Orthodontic Centers of America, Inc. 29,412 0.7
2,500 ++US Oncology, Inc. 12,500 0.3
------------ ------
109,307 2.6
Home Furnishings 900 Ethan Allen Interiors Inc. 21,600 0.5
Human Resources 600 ++On Assignment, Inc. 18,300 0.4
Insurance 600 Arthur J. Gallagher & Co. 25,200 0.6
500 E.W. Blanch Holdings, Inc. 10,156 0.3
1,500 Enhance Financial Services Group Inc. 21,562 0.5
800 Radian Group Inc. 41,400 1.0
------------ ------
98,318 2.4
Laser Systems & 500 ++Coherent, Inc. 41,937 1.0
Components
Machine Tools & 800 Applied Power Inc. (Class A) 26,800 0.6
Machinery 400 ++Electroglas, Inc. 8,600 0.2
400 ++Kulicke and Soffa Industries 23,750 0.6
------------ ------
59,150 1.4
Marketing & 200 ++Catalina Marketing Corporation 20,400 0.5
Advertising 900 ++Snyder Communications, Inc. 21,375 0.5
------------ ------
41,775 1.0
</TABLE>
June 30, 2000 10 Mercury QA Small Cap Fund
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
United States (continued)
Medical Services 800 Alpharma, Inc. (Class A) $ 49,800 1.2%
900 ++Barr Laboratories, Inc. 40,331 1.0
800 ++Patterson Dental Company 40,800 1.0
500 ++Priority Healthcare Corporation (Class B) 37,156 0.9
200 ++Protein Design Labs, Inc. 32,991 0.8
1,200 ++Renal Care Group, Inc. 29,344 0.7
600 ++Summit Technology, Inc. 11,325 0.3
600 ++Universal Health Services, Inc.
(Class B) 39,300 0.9
400 ++Varian Medical Systems, Inc. 15,650 0.4
500 ++Wesley Jessen VisionCare, Inc. 18,781 0.4
------------ ------
315,478 7.6
Merchandising 400 ++Michael's Stores 18,325 0.5
Mining 200 ++Atwood Oceanics, Inc. 8,875 0.2
700 ++Stillwater Mining Company 19,513 0.5
------------ ------
28,388 0.7
Natural Gas-- 1,200 Energen Corporation 26,175 0.6
Pipelines 400 Piedmont Natural Gas Company, Inc. 10,625 0.3
630 ++Southern Union Company 9,962 0.2
600 ++Trimble Navigation Limited 29,288 0.7
------------ ------
76,050 1.8
Oil & Gas Producers 600 Cross Timbers Oil Company 13,275 0.3
500 ++Newfield Exploration Company 19,562 0.5
800 Vintage Petroleum, Inc. 18,050 0.4
------------ ------
50,887 1.2
Oil--Related 1,800 ++Friede Goldman Halter, Inc. 16,087 0.4
Oil Field & 1,400 ++Pride International, Inc. 34,650 0.8
Equipment 700 ++Veritas DGC Inc. 18,200 0.5
------------ ------
52,850 1.3
Oil Field Services 500 ++Cal Dive International, Inc. 27,094 0.7
Pharmaceuticals 1,700 ++Dura Pharmaceuticals, Inc. 24,437 0.6
300 ++IDEC Pharmaceuticals Corporation 35,194 0.8
1,200 Jones Pharmaceuticals, Inc. 47,850 1.2
600 ++Medicis Pharmaceutical (Class A) 34,200 0.8
800 ++Noven Pharmaceuticals, Inc. 24,050 0.6
200 ++Vertex Pharmaceuticals Incorporated 21,075 0.5
----------- ------
186,806 4.5
</TABLE>
June 30, 2000 11 Mercury QA Small Cap Fund
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
United States (continued)
Property & Casualty 1,900 Fidelity National Financial, Inc. $ 34,794 0.8%
Insurance 1,200 The First American Financial
Corporation 17,175 0.4
------------ ------
51,969 1.2
Restaurants 300 Applebee's International, Inc. 9,094 0.2
300 ++The Cheesecake Factory Incorporated 8,250 0.2
------------ ------
17,344 0.4
Retail 600 ++99 Cents Only Stores 23,925 0.6
600 ++AnnTaylor Stores Corporation 19,875 0.5
500 ++Linens 'n Things, Inc. 13,562 0.3
700 ++The Men's Warehouse, Inc. 15,619 0.4
1,000 ++Pacific Sunwear of California, Inc. 18,750 0.4
1,200 Pier 1 Imports, Inc. 11,700 0.3
600 ++Whole Foods Market, Inc. 24,788 0.6
400 ++Zale Corporation 14,600 0.3
------------ ------
142,819 3.4
Savings & Loan 1,500 Washington Federal, Inc. 27,375 0.7
Associations
Semiconductors 700 ++Actel Corp. 31,938 0.8
1,200 Dallas Semiconductor Corporation 48,900 1.2
1,200 ++ESS Technology, Inc. 17,400 0.4
1,400 ++General Semiconductor, Inc. 20,650 0.5
------------ ------
118,888 2.9
Steel 400 ++The Shaw Group Inc. 18,850 0.5
1,100 ++Steel Dynamics, Inc. 9,969 0.2
------------ ------
28,819 0.7
Technology 700 ++Alpha Industries, Inc. 30,844 0.7
400 ++Anixter International Inc. 10,600 0.3
500 ++Aspen Technology, Inc. 19,250 0.5
200 ++Black Box Corporation 15,834 0.4
525 ++Peregrine Systems, Inc. 18,211 0.4
600 ++Phoenix Technologies Ltd. 9,788 0.2
280 ++Sanmina Corporation 23,940 0.6
------------ ------
128,467 3.1
</TABLE>
June 30, 2000 12 Mercury QA Small Cap Fund
<TABLE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<CAPTION>
In US Dollars
Shares Percent of
Industry Held Investments Value Net Assets
<S> <C> <S> <C> <C>
UNITED STATES (concluded)
Telecommunications 600 ++Aspect Communications Corporation $ 23,588 0.6%
800 ++InterVoice, Inc. 5,250 0.1
200 ++Plantronics, Inc. 23,100 0.6
600 ++The Profit Recovery Group
International, Inc. 9,975 0.2
1,700 ++TALK.com, Inc. 9,881 0.2
------------ ------
71,794 1.7
Telecommunications & 500 ++Adaptive Broadband Corporation 18,375 0.5
Equipment 100 ++Proxim, Inc. 9,897 0.2
------------ ------
28,272 0.7
Toys 800 ++JAKKS Pacific, Inc. 11,800 0.3
Transportation 800 ++American Freightways Corporation 11,600 0.3
700 ++EGL, Inc. 21,525 0.5
500 Expeditors International of
Washington, Inc. 23,750 0.6
400 ++Landstar System, Inc. 23,825 0.6
600 ++SEACOR SMIT Inc. 23,213 0.5
1,000 USFreightways Corporation 24,563 0.6
1,400 ++Yellow Corporation 20,563 0.5
------------ ------
149,039 3.6
Utilities--Electric 1,400 UniSource Energy Corporation 21,000 0.5
Utilities--Gas 1,300 Atmos Energy Corporation 22,750 0.6
1,200 Northwest Natural Gas Company 26,850 0.6
1,200 UGI Corporation 24,600 0.6
------------ ------
74,200 1.8
Utilities--Water 700 United Water Resources Inc. 24,413 0.6
Total Investments
(Cost--$4,146,433) 4,156,986 99.9
Other Assets Less Liabilities 3,239 0.1
------------ ------
Net Assets $ 4,160,225 100.0%
============ ======
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 13 Mercury QA Small Cap Fund
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 2000
MERCURY QA SMALL CAP FUND
<S> <C> <C>
Assets:
Investments, at value (identified cost--$4,146,433) $ 4,156,986
Cash 5,615
Receivables:
Investment adviser $ 6,862
Capital shares sold 1,990
Dividends 997 9,849
------------ ------------
Total assets 4,172,450
------------
Liabilities:
Payable to distributor 161
Accrued expenses 12,064
------------
Total liabilities 12,225
------------
Net Assets:
Net assets $ 4,160,225
============
Net Assets Consist of:
Class IShares of Common Stock, $.0001 par value,
125,000,000 shares authorized $ 38
Class AShares of Common Stock, $.0001 par value,
125,000,000 shares authorized 1
Class BShares of Common Stock, $.0001 par value,
125,000,000 shares authorized 2
Class CShares of Common Stock, $.0001 par value,
125,000,000 shares authorized 1
Paid-in capital in excess of par 4,153,375
Accumulated investment loss--net (3,745)
Unrealized appreciation on investments--net 10,553
------------
Net assets $ 4,160,225
============
Net Asset Value:
Class I--Based on net assets of $3,829,212 and
382,326 shares outstanding $ 10.02
============
Class A--Based on net assets of $62,132 and
6,204 shares outstanding $ 10.01
============
Class B--Based on net assets of $157,694 and
15,753 shares outstanding $ 10.01
============
Class C--Based on net assets of $111,187 and
11,108 shares outstanding $ 10.01
============
See Notes to Financial Statements.
</TABLE>
June 30, 2000 14 Mercury QA Small Cap Fund
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period June 2, 2000++ to June 30, 2000
MERCURY QA SMALL CAP FUND
<S> <C> <C>
Investment Income:
Dividends $ 1,376
Interest and discount earned 243
------------
Total income 1,619
============
Expenses:
Registration fees $ 7,932
Investment advisory fees 1,734
Professional fees 1,375
Accounting services 1,251
Administration fees 1,104
Organizational expenses 780
Printing and shareholder reports 412
Custodian fees 173
Account maintenance and distribution fees--Class C 76
Account maintenance and distribution fees--Class B 73
Pricing fees 69
Transfer agent fees--Class I 37
Directors' fees and expenses 32
Account maintenance fees--Class A 12
Transfer agent fees--Class B 1
Transfer agent fees--Class A 1
Transfer agent fees--Class C 1
------------
Total expenses before reimbursement 15,063
Reimbursement of expenses (9,699)
------------
Total expenses after reimbursement 5,364
------------
Investment loss--net (3,745)
------------
Unrealized Gain on Investments--Net:
Unrealized appreciation on investments--net 10,553
------------
Net Increase in Net Assets Resulting from Operations $ 6,808
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 15 Mercury QA Small Cap Fund
<TABLE>
STATEMENT OF CHANGES
IN NET ASSETS
<CAPTION>
MERCURY QA SMALL CAP FUND
For the Period
June 2, 2000++
to June 30,
Increase (Decrease)in Net Assets: 2000
<S> <C> <C>
Operations:
Investment loss--net $ (3,745)
Unrealized appreciation on investments--net 10,553
------------
Net increase in net assets resulting from operations 6,808
------------
Capital Share Transactions:
Net increase in net assets derived from capital share transactions 4,053,417
------------
Net Assets:
Total increase in net assets 4,060,225
Beginning of period 100,000
------------
End of period $ 4,160,225
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 16 Mercury QA Small Cap Fund
FINANCIAL HIGHLIGHTS
<TABLE>
MERCURY QA SMALL CAP FUND
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Period June 2, 2000++
to June 30, 2000
Increase (Decrease) in Net Asset Value: Class I Class A Class B Class C
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
-----------------------------------------------------
Investment loss--net (.01) (.01) (.01) (.01)
Unrealized gain on investments--net .03 .02 .02 .02
-----------------------------------------------------
Total from investment operations .02 .01 .01 .01
-----------------------------------------------------
Net asset value, end of period $ 10.02 $ 10.01 $ 10.01 $ 10.01
=====================================================
Total Investment Return:**
Based on net asset value per share .20%+++ .10%+++ .10%+++ .10%+++
=====================================================
Ratios to Average Net Assets:
Expenses, net of reimbursement 1.65%* 1.90%* 2.65%* 2.65%*
=====================================================
Expenses 4.73%* 4.98%* 5.73%* 5.73%*
=====================================================
Investment loss--net (1.15%)* (1.20%)* (1.87%)* (1.99%)*
=====================================================
Supplemental Data:
Net assets, end of period (in thousands) $ 3,829 $ 62 $ 158 $ 111
=====================================================
Portfolio turnover .00% .00% .00% .00%
=====================================================
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
June 30, 2000 17 Mercury QA Small Cap Fund
NOTES TO FINANCIAL STATEMENTS
MERCURY QA SMALL CAP FUND
1 Significant Accounting Policies:
Mercury QA Small Cap Fund (the "Fund") is part of the Mercury QA
Equity Series, Inc. (the "Corporation"). The Fund is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund's financial statements are
prepared in accordance with accounting principles generally accepted
in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal,
recurring nature. Prior to commencement of operations on June 2,
2000, the Fund had no operations other than those relating to
organizational matters and the issuance of 10,000 capital shares of
the Fund on February 25, 2000 to Mercury Advisors ("Mercury"), a
division of Fund Asset Management, L.P. ("FAM"), for $100,000. The
Fund offers four classes of shares. Class I and Class A Shares are
sold with a front-end sales charge. Class B and Class C Shares may
be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class A, Class B and
Class C Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures (except
that Class B Shares have certain voting rights with respect to Class
A distribution expenditures). The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities that are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time
of valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities that are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at
the last sale price in the case of exchange-traded options. In the
case of options traded in the over-the-counter market, valuation is
the last asked price (options written) or the last bid price
(options purchased). Short-term securities are valued at amortized
cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value.
Securities and assets for which market value quotations are not
available are valued at their fair value as determined in good faith
by or under the direction of the Corporation's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
June 30, 2000 18 Mercury QA Small Cap Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
June 30, 2000 19 Mercury QA Small Cap Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income is
recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
2 Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Mercury. The general partner of Mercury is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
As compensation for its services to the Fund, Mercury receives
monthly compensation at the annual rate of .55% of the average daily
net assets of the Fund. For the period June 2, 2000 to June 30,
2000, Mercury earned fees of $1,734, all of which were voluntarily
waived. Mercury also reimbursed the Fund for additional expenses of
$7,965.
The Fund has also entered into an Administration Agreement with
Mercury. The Fund pays a monthly fee at an annual rate of .35% of
the Fund's average daily net assets for the performance of
administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
June 30, 2000 20 Mercury QA Small Cap Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Account
Maintenance Fee Distribution Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML &
Co., also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class A, Class B and Class C shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period June 2, 2000 to June 30, 2000, FAMD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class A Shares as follows:
FAMD MLPF&S
Class A -- $1,264
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., acts as the Company's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of Mercury, FAM, PSI, FDS, FAMD, and/or ML & Co.
3 Investments:
Purchases of investments, excluding short-term securities, for the
period June 2, 2000 to June 30, 2000 were $4,146,433.
Net unrealized gains as of June 30, 2000 were as follows:
Unrealized
Gains
Long-term investments $ 10,553
------------
Total $ 10,553
============
June 30, 2000 21 Mercury QA Small Cap Fund
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
As of June 30, 2000, net unrealized appreciation for Federal income
tax purposes aggregated $10,553, of which $265,810 related to
appreciated securities and $255,257 related to depreciated
securities. The aggregate cost of investments at June 30, 2000 for
Federal income tax purposes was $4,146,433.
4 Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $4,053,417 for the period June 2, 2000 to June 30, 2000.
Transactions in capital shares for each class were as follows:
Class I Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 391,626 $ 3,915,896
Shares redeemed (11,800) (116,000)
------------------------------
Net increase 379,826 $ 3,799,896
==============================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
Class A Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 3,704 $ 37,040
------------------------------
Net increase 3,704 $ 37,040
==============================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
Class B Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 13,253 $ 130,934
------------------------------
Net increase 13,253 $ 130,934
==============================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
Class C Shares for the Period June 2, 2000++ Dollar
to June 30, 2000 Shares Amount
Shares sold 8,608 $ 85,547
------------------------------
Net increase 8,608 $ 85,547
==============================
++Prior to June 2, 2000 (commencement of operations), the Fund
issued 2,500 shares to Mercury for $25,000.
June 30, 2000 22 Mercury QA Small Cap Fund
OFFICERS AND DIRECTORS
Terry K. Glenn, Director and President
M. Colyer Crum, Director
Laurie Simon Hodrick, Director
Jack B. Sunderland, Director
Stephen B. Swensrud, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Arthur Zeikel, Director
Robert C. Doll, Jr., Senior Vice President
Philip Green, Senior Vice President
Sidney Hoots, Senior Vice President
Dean D'Onofrio, Senior Vice President
Frank Salerno, Senior Vice President
Donald C. Burke, Vice President and
Treasurer
Allan J. Oster, Secretary
Custodian
The Chase Manhattan Bank
4 Chase MetroTech, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(888) 763-2260
June 30, 2000 23 Mercury QA Small Cap Fund
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Mercury QA Small Cap Fund of
Mercury QA Equity Series, Inc.
Box 9011
Princeton, NJ
08543-9011
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