SEMI-ANNUAL REPORT
JUNE 30, 2000
[GRAPHIC OMITTED]
Mercury
QA Large
Cap Growth
Fund OF MERCURY
QA EQUITY SERIES, INC.
<PAGE>
PORTFOLIO INFORMATION
GEOGRAPHIC ASSET MIX
A pie chart illustrating the following percentages
(As a Percentage of Net Assets as of June 30, 2000.)
United States--96.5%
Canada--4.1%
Netherlands--0.1%
WORLDWIDE INVESTMENTS AS OF JUNE 30, 2000
Ten Largest Percent of
Holdings Net Assets
-------------------------------------------
Intel Corporation 8.3%
-------------------------------------------
General Electric Company 7.3
-------------------------------------------
Microsoft Corporation 7.3
-------------------------------------------
Cisco Systems, Inc. 6.4
-------------------------------------------
Pfizer Inc. 5.9
-------------------------------------------
Wal-Mart Stores, Inc. 4.5
-------------------------------------------
Oracle Corporation 4.3
-------------------------------------------
Nortel Networks Corporation 4.1
-------------------------------------------
Lucent Technologies Inc. 4.0
-------------------------------------------
Merck & Co., Inc. 3.9
-------------------------------------------
Ten Largest Percent of
Industries Net Assets
-------------------------------------------
Pharmaceuticals 14.9%
-------------------------------------------
Electronics 12.4
-------------------------------------------
Communications Equipment 11.6
-------------------------------------------
Computer Services/Software 10.3
-------------------------------------------
Retail 9.6
-------------------------------------------
Electrical Equipment 8.3
-------------------------------------------
Software 8.3
-------------------------------------------
Computers & Peripherals 4.5
-------------------------------------------
Telecommunications 4.0
-------------------------------------------
Communications 2.6
-------------------------------------------
June 30, 2000 (2) Mercury QA Large Cap Growth Fund
<PAGE>
DEAR SHAREHOLDER
We are pleased to provide you with the first semi-annual report for Mercury QA
Large Cap Growth Fund. The Fund seeks to provide long-term growth of capital by
investing primarily in equity securities of large-capitalization companies in
the United States that Fund management believes 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 +3.30%, +3.30%,
+3.20% and +3.20%, respectively, slightly better than the return of the
unmanaged S&P 500/Barra Growth Index of +3.13% over the same period. (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 would arguably be 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 unmanaged 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 to us 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 earnings growth and
valuation levels remain reasonably attractive.
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, increasingly have provided 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 Large Cap Growth Fund
<PAGE>
In Conclusion
We thank you for your investment in Mercury QA Large Cap Growth Fund, and we
look forward to serving your investment needs in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn /s/ Philip Green
Terry K. Glenn Philip Green
President and Director Senior Vice President and
Portfolio Manager
August 7, 2000
June 30, 2000 (4) Mercury QA Large Cap Growth Fund
<PAGE>
FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
The Fund offers four classes of shares, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
CLASS I SHARES incur a maximum initial sales charge of 5.25% and bear no ongoing
distribution and account maintenance fees. Class I shares are available only to
eligible investors.
CLASS A SHARES incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
CLASS B SHARES are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first two years, decreasing to 3% for each of the next
two years and decreasing 1% each year thereafter to 0% after the sixth year. In
addition, Class B shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. These shares automatically convert to Class A
shares after approximately 8 years.
CLASS C SHARES are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C shares may be subject to a 1%
contingent deferred sales charge if redeemed within one year after purchase.
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Recent Performance Results" and "Aggregate
Total Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders. The Fund's
Investment Adviser voluntarily waived a portion of its management fee. Without
such waiver, the Fund's performance would have been lower.
June 30, 2000 (5) Mercury QA Large Cap Growth Fund
<PAGE>
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 +3.30% -2.12%
-----------------------------------------------
*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 +3.20% -0.80%
-----------------------------------------------
*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 Sales With Sales
Class A Shares* Charge Charge**
-----------------------------------------------
Inception (6/2/00)
through 6/30/00 +3.30% -2.12%
-----------------------------------------------
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
-----------------------------------------------
Inception (6/2/00)
through 6/30/00 +3.20% +2.20%
-----------------------------------------------
*Maximum contingent deferred sales charge is 1%
and is reduced to 0% after 1 year.
**Assuming payment of applicable contingent
deferred sales charge.
RECENT PERFORMANCE RESULTS*
Since Inception
As of June 30, 2000 Total Return
--------------------------------------------------------------------------------
Class I +3.30%
--------------------------------------------------------------------------------
Class A +3.30
--------------------------------------------------------------------------------
Class B +3.20
--------------------------------------------------------------------------------
Class C +3.20
--------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in the Fund's net asset values for the period shown, and
assume reinvestment of all dividends and capital gains at net asset value
on the ex-dividend date. The Fund commenced operations on 6/2/00.
June 30, 2000 (6) Mercury QA Large Cap Growth Fund
<PAGE>
SCHEDULE OF INVESTMENTS
MERCURY QA LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
In US Dollars
---------------------
Shares Percent of
Industries Held Common Stocks Value Net Assets
--------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
CANADA
============================================================================================
Communications 3,600 Nortel Networks Corporation $ 245,700 4.1%
Equipment
--------------------------------------------------------------------------------------------
Total Common Stocks in Canada
(Cost--$216,297) 245,700 4.1
--------------------------------------------------------------------------------------------
NETHERLANDS
============================================================================================
Household Products 100 Unilever NV (NY Registered Shares) 4,300 0.1
--------------------------------------------------------------------------------------------
Total Common Stocks in the
Netherlands (Cost--$4,983) 4,300 0.1
--------------------------------------------------------------------------------------------
UNITED STATES
============================================================================================
Advertising 200 The Interpublic Group of
Companies, Inc. 8,600 0.1
100 Young & Rubicam Inc. 5,719 0.1
---------------------
14,319 0.2
--------------------------------------------------------------------------------------------
Air Transport 200 Omnicom Group Inc. 17,813 0.3
--------------------------------------------------------------------------------------------
Application 300 + Citrix Systems, Inc. 5,681 0.1
Development 100 + Sapient Corporation 10,694 0.2
Software 300 + Siebel Systems, Inc. 49,069 0.8
---------------------
65,444 1.1
--------------------------------------------------------------------------------------------
Automotive 200 Harley-Davidson, Inc. 7,700 0.1
--------------------------------------------------------------------------------------------
Beverages 400 Anheuser-Busch Companies, Inc. 29,875 0.5
--------------------------------------------------------------------------------------------
Commercial Services 100 Equifax Inc. 2,625 0.1
300 SYSCO Corporation 12,638 0.2
---------------------
15,263 0.3
--------------------------------------------------------------------------------------------
Communications 1,100 + QUALCOMM Incorporated 66,000 1.1
2,000 SBC Communications Inc. 86,500 1.5
---------------------
152,500 2.6
--------------------------------------------------------------------------------------------
Communications 6,000 + Cisco Systems, Inc. 381,375 6.4
Equipment 900 + Tellabs, Inc. 61,594 1.1
---------------------
442,969 7.5
--------------------------------------------------------------------------------------------
</TABLE>
June 30, 2000 (7) Mercury QA Large Cap Growth Fund
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
In US Dollars
---------------------
Shares Percent of
Industries Held Common Stocks Value Net Assets
--------------------------------------------------------------------------------------------
<S> <C> <S> <C> <C>
UNITED STATES (continued)
============================================================================================
Computer 1,200 + EMC Corporation $ 92,325 1.6%
Services/Software 1,200 International Business Machines
Corporation 131,475 2.2
3,000 + Oracle Corporation 252,188 4.3
1,500 + Parametric Technology Corporation 16,500 0.3
1,400 Paychex, Inc. 58,800 1.0
500 + VERITAS Software Corporation 56,508 0.9
---------------------
607,796 10.3
--------------------------------------------------------------------------------------------
Computers & 1,700 + Dell Computer Corporation 83,831 1.4
Peripherals 900 + Network Appliance, Inc. 72,450 1.2
200 RadioShack Corporation 9,475 0.2
1,100 + Sun Microsystems, Inc. 100,031 1.7
---------------------
265,787 4.5
--------------------------------------------------------------------------------------------
Consumer--Goods 1,000 The Gillette Company 34,937 0.6
--------------------------------------------------------------------------------------------
Diversified Companies 200 Corning Incorporated 53,975 0.9
--------------------------------------------------------------------------------------------
Electrical Equipment 8,200 General Electric Company 434,600 7.3
900 Linear Technology Corporation 57,544 1.0
---------------------
492,144 8.3
--------------------------------------------------------------------------------------------
Electronic Components 800 + Maxim Integrated Products, Inc. 54,350 0.9
--------------------------------------------------------------------------------------------
Electronics 400 + Agilent Technologies, Inc. 29,500 0.5
3,700 Intel Corporation 494,644 8.3
2,200 Texas Instruments Incorporated 151,112 2.6
700 + Xilinx, Inc. 57,794 1.0
---------------------
733,050 12.4
--------------------------------------------------------------------------------------------
Financial Services 1,100 The Charles Schwab Corporation 36,988 0.6
100 Dow Jones & Company, Inc. 7,325 0.1
800 MBNA Corporation 21,700 0.4
200 SLM Holding Corporation 7,487 0.1
---------------------
73,500 1.2
--------------------------------------------------------------------------------------------
Foods 100 Sara Lee Corporation 1,931 0.0
--------------------------------------------------------------------------------------------
Healthcare 300 IMS Health Incorporated 5,400 0.1
--------------------------------------------------------------------------------------------
Hotels & Motels 100 Hilton Hotels Corporation 937 0.0
--------------------------------------------------------------------------------------------
Household Products 500 The Procter & Gamble Company 28,625 0.5
--------------------------------------------------------------------------------------------
Information Processing 600 Automatic Data Processing, Inc. 32,137 0.5
--------------------------------------------------------------------------------------------
Insurance 200 Providian Financial Corporation 18,000 0.3
--------------------------------------------------------------------------------------------
Internet 600 + Yahoo! Inc. 74,325 1.3
--------------------------------------------------------------------------------------------
Manufacturing 1,600 Tyco International Ltd. 75,800 1.3
--------------------------------------------------------------------------------------------
Medical Supplies 400 Medtronic, Inc. 19,925 0.3
--------------------------------------------------------------------------------------------
Medical Technology 500 Johnson & Johnson 50,937 0.9
--------------------------------------------------------------------------------------------
</TABLE>
June 30, 2000 (8) Mercury QA Large Cap Growth Fund
<PAGE>
SCHEDULE OF INVESTMENTS (CONCLUDED)
<TABLE>
<CAPTION>
In US Dollars
---------------------
Shares Percent of
Industries Held Common Stocks Value Net Assets
--------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
UNITED STATES (concluded)
============================================================================================
Multimedia 500 Time Warner Inc. $ 38,000 0.6%
--------------------------------------------------------------------------------------------
Office--Related 200 Pitney Bowes Inc. 8,000 0.1
--------------------------------------------------------------------------------------------
Pharmaceuticals 800 + Amgen Inc. 56,200 1.0
200 + Biogen, Inc. 12,900 0.2
1,000 Eli Lilly and Company 99,875 1.7
3,000 Merck & Co., Inc. 229,875 3.9
7,300 Pfizer Inc. 350,400 5.9
2,600 Schering-Plough Corporation 131,300 2.2
---------------------
880,550 14.9
--------------------------------------------------------------------------------------------
Publishing 100 The Dun & Bradstreet Corporation 2,862 0.1
--------------------------------------------------------------------------------------------
Restaurants 100 + Tricon Global Restaurants, Inc. 2,825 0.1
--------------------------------------------------------------------------------------------
Retail 1,400 + Bed Bath & Beyond Inc. 50,750 0.8
200 + Best Buy Co., Inc. 12,650 0.2
800 The Gap, Inc. 25,000 0.4
3,100 The Home Depot, Inc. 154,806 2.6
300 + Kohl's Corporation 16,688 0.3
700 + The Kroger Co. 15,444 0.3
4,600 Wal-Mart Stores, Inc. 265,075 4.5
900 Walgreen Co. 28,969 0.5
---------------------
569,382 9.6
--------------------------------------------------------------------------------------------
Semiconductors 200 + Applied Materials, Inc. 18,125 0.3
--------------------------------------------------------------------------------------------
Software 200 Adobe Systems Incorporated 25,975 0.4
1,000 + Compuware Corporation 10,375 0.2
5,400 + Microsoft Corporation 432,000 7.3
1,400 + PeopleSoft, Inc. 23,450 0.4
---------------------
491,800 8.3
--------------------------------------------------------------------------------------------
Telecommunications 4,000 Lucent Technologies Inc. 237,000 4.0
--------------------------------------------------------------------------------------------
Wireless 800 + Nextel Communications, Inc. (Class A) 48,950 0.8
Communication-- 800 + Sprint Corp. (PCS Group) 47,600 0.8
Domestic Paging & ---------------------
Cellular 96,550 1.6
--------------------------------------------------------------------------------------------
Total Common Stocks in the
United States (Cost--$5,576,594) 5,714,533 96.5
--------------------------------------------------------------------------------------------
Total Investments
(Cost--$5,797,874) 5,964,533 100.7
Liabilities in Excess of Other Assets (44,208) (0.7)
---------------------
Net Assets $ 5,920,325 100.0%
=====================
--------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
See Notes to Financial Statements.
June 30, 2000 (9) Mercury QA Large Cap Growth Fund
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of June 30, 2000
----------------------------------------------------------------------------------------------
MERCURY QA LARGE CAP GROWTH FUND
==============================================================================================
<S> <C> <C>
Assets:
Investments, at value (identified cost--$5,797,874) $ 5,964,533
Receivables:
Securities sold $ 90,982
Investment advisor 10,327
Dividends 457 101,766
----------- -----------
Total assets 6,066,299
-----------
----------------------------------------------------------------------------------------------
Liabilities:
Payables:
Custodian bank 128,796
Distributor 271 129,067
-----------
Accrued expenses 16,907
-----------
Total liabilities 145,974
-----------
----------------------------------------------------------------------------------------------
Net Assets:
Net assets $ 5,920,325
===========
----------------------------------------------------------------------------------------------
Net Assets Consist of:
Class I Shares of Common Stock, $.0001 par value, 125,000,000
shares authorized $ 53
Class A Shares of Common Stock, $.0001 par value, 125,000,000
shares authorized 1
Class B Shares of Common Stock, $.0001 par value, 125,000,000
shares authorized 1
Class C Shares of Common Stock, $.0001 par value, 125,000,000
shares authorized 2
Paid-in capital in excess of par 5,734,430
Accumulated investment loss--net (5,973)
Undistributed realized capital gains on investments--net 25,152
Unrealized appreciation on investments--net 166,659
-----------
Net assets $ 5,920,325
===========
----------------------------------------------------------------------------------------------
Net Asset Value:
Class I--Based on net assets of $5,494,433 and 531,842 shares
outstanding $ 10.33
===========
Class A--Based on net assets of $25,827 and 2,500 shares
outstanding $ 10.33
===========
Class B--Based on net assets of $143,653 and 13,914 shares
outstanding $ 10.32
===========
Class C--Based on net assets of $256,412 and 24,835 shares
outstanding $ 10.32
===========
----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
June 30, 2000 (10) Mercury QA Large Cap Growth Fund
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period June 2, 2000+ to June 30, 2000
----------------------------------------------------------------------------------------------
MERCURY QA LARGE CAP GROWTH FUND
==============================================================================================
<S> <C> <C>
Investment Income:
Dividends (net of $10 foreign withholding tax) $ 586
Interest and discount earned 292
----------
Total income 878
----------
----------------------------------------------------------------------------------------------
Expenses:
Registration fees $ 7,932
Organizational expenses 3,948
Accounting services 2,214
Investment advisory fees 1,755
Administration fees 1,535
Professional fees 1,375
Printing and shareholder reports 687
Custodian fees 346
Pricing fees 206
Account maintenance and distribution fees--Class C 184
Directors' fees and expenses 161
Account maintenance and distribution fees--Class B 82
Transfer agent fees--Class I 35
Account maintenance fees--Class A 5
Transfer agent fees--Class C 2
Transfer agent fees--Class B 1
----------
Total expenses before reimbursement 20,468
Reimbursement of expenses (13,617)
----------
Total expenses after reimbursement 6,851
----------
Investment loss--net (5,973)
----------
----------------------------------------------------------------------------------------------
Realized & Unrealized Gain on Investments--Net:
Realized gain from investments--net 25,152
Unrealized appreciation on investments--net 166,659
----------
Net Increase in Net Assets Resulting from Operations $ 185,838
==========
----------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
June 30, 2000 (11) Mercury QA Large Cap Growth Fund
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Period June 2, 2000+ to June 30, 2000
--------------------------------------------------------------------------------
MERCURY QA LARGE CAP GROWTH FUND
================================================================================
Increase (Decrease) in Net Assets:
--------------------------------------------------------------------------------
Operations:
Investment loss--net $ (5,973)
Realized gain on investments--net 25,152
Unrealized appreciation on investments--net 166,659
-----------
Net increase in net assets resulting from operations 185,838
-----------
--------------------------------------------------------------------------------
Capital Share Transactions:
Net increase in net assets derived from capital share transactions 5,634,487
-----------
--------------------------------------------------------------------------------
Net Assets:
Total increase in net assets 5,820,325
Beginning of period 100,000
-----------
End of period $ 5,920,325
===========
--------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
June 30, 2000 (12) Mercury QA Large Cap Growth Fund
<PAGE>
FINANCIAL HIGHLIGHTS
MERCURY QA LARGE CAP GROWTH FUND
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
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) (.02)
Realized and unrealized gain on
investments--net .34 .34 .33 .34
------------------------------------------------
Total from investment operations .33 .33 .32 .32
------------------------------------------------
Net asset value, end of period $10.33 $ 10.33 $ 10.32 $ 10.32
================================================
---------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share 3.30%++ 3.30%++ 3.20%++ 3.20%++
================================================
---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement 1.50%* 1.75%* 2.50%* 2.50%*
================================================
Expenses 4.60%* 4.85%* 5.60%* 5.60%*
================================================
Investment loss--net (1.31%)* (1.34%)* (2.20%)* (2.15%)*
================================================
---------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $5,494 $ 26 $ 144 $ 256
================================================
Portfolio turnover 1.65% 1.65% 1.65% 1.65%
================================================
---------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
June 30, 2000 (13) Mercury QA Large Cap Growth Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MERCURY QA LARGE CAP GROWTH FUND
(1) Significant Accounting Policies:
Mercury QA Large Cap Growth 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.
June 30, 2000 (14) Mercury QA Large Cap Growth Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(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.
(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.
o 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.
o 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.
o 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.
o 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
June 30, 2000 (15) Mercury QA Large Cap Growth Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
(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.
(h) Custodian Bank--The Fund recorded an amount payable to the Custodian
Bank, reflecting an overnight overdraft, which resulted from management
estimates of available cash.
(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 .40% of the average daily net assets of
the Fund. For the period June 2, 2000 to June 30, 2000, Mercury earned
fees of $1,755, all of which was voluntarily waived. Mercury also
reimbursed the Fund for additional expenses of $11,862.
June 30, 2000 (16) Mercury QA Large Cap Growth Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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:
Account Distribution
Maintenance Fee 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 I Shares as follows:
FAMD MLPF&S
--------------------------------------------------------------------------
Class I $388 $3,850
--------------------------------------------------------------------------
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML &
Co., acts as the Fund'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 and sales of investments, excluding short-term securities, for
the period June 2, 2000 to June 30, 2000 were $5,863,704 and $90,982,
respectively.
June 30, 2000 (17) Mercury QA Large Cap Growth Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
Net realized gains for the period June 2, 2000 to June 30, 2000, and net
unrealized gains as of June 30, 2000 were as follows:
Realized Unrealized
Gains Gains
--------------------------------------------------------------------------
Long-term investments $ 25,152 $166,659
------------------------------
Total $ 25,152 $166,659
==============================
--------------------------------------------------------------------------
As of June 30, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $166,659, of which $321,354 related to appreciated
securities and $154,695 related to depreciated securities. The aggregate
cost of investments at June 30, 2000 for Federal income tax purposes was
$5,797,874.
(4) Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$5,634,487 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+
to June 30, 2000 Shares Dollar Amount
-------------------------------------------------------------------------
Shares sold 571,122 $ 5,708,762
Shares redeemed (41,780) (411,395)
------------------------
Net increase 529,342 $ 5,297,367
========================
-------------------------------------------------------------------------
+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+
to June 30, 2000 Shares Dollar Amount
-------------------------------------------------------------------------
Shares sold -- --
------------------------
Net increase -- --
========================
-------------------------------------------------------------------------
+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+
to June 30, 2000 Shares Dollar Amount
-------------------------------------------------------------------------
Shares sold 11,414 $ 113,882
------------------------
Net increase 11,414 $ 113,882
========================
-------------------------------------------------------------------------
+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+
to June 30, 2000 Shares Dollar Amount
-------------------------------------------------------------------------
Shares sold 22,335 $ 223,238
------------------------
Net increase 22,335 $ 223,238
========================
-------------------------------------------------------------------------
+Prior to June 2, 2000 (commencement of operations), the Fund issued 2,500
shares to Mercury for $25,000.
June 30, 2000 (18) Mercury QA Large Cap Growth Fund
<PAGE>
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 (19) Mercury QA Large Cap Growth Fund
<PAGE>
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 Large Cap Growth Fund of
Mercury QA Equity Series, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLE LOGO] Printed on post-consumer recycled paper MERCQAGR--6/00
