<PAGE> 1
Mercury HW Mid-Cap Value Fund
[ARTWORK]
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.
PROSPECTUS - January 1, 2001
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Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[GLOBE ICON]
FUND FACTS
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About the Mercury HW Mid-Cap Value Fund..................... 2
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 5
[MAGNIFYING GLASS ICON]
ABOUT THE DETAILS
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How the Fund Invests........................................ 7
Investment Risks............................................ 7
Statement of Additional Information......................... 9
[CHECKMARK ICON]
ACCOUNT CHOICES
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Pricing of Shares........................................... 10
How to Buy, Sell, Transfer and Exchange Shares.............. 16
How Shares are Priced....................................... 20
Fee-Based Programs.......................................... 20
Dividends and Taxes......................................... 21
[MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
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Management of the Fund...................................... 23
Financial Highlights........................................ 24
[TELEPHONE ICON]
TO LEARN MORE
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>
MERCURY HW MID-CAP VALUE FUND
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[GLOBE ICON] Fund Facts
IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.
COMMON STOCKS -- securities representing shares of ownership of a corporation.
PRICE-TO-EARNINGS RATIO -- price of a stock divided by its earnings per share.
YIELD -- percentage rate of return paid on a stock in dividends and share
repurchases.
PRICE-TO-BOOK VALUE RATIO -- price of a stock divided by its book value per
share.
ABOUT THE MERCURY HW MID-CAP VALUE FUND
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek current income and long-term growth
of income, accompanied by growth of capital.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in COMMON STOCKS of U.S. companies with market
capitalizations between $1 billion and $15 billion. Some of these securities may
be purchased in initial public offerings ("IPOs").
In investing the Fund's assets, Mercury Advisors (the "Investment Adviser")
follows a value style. This means that the Investment Adviser buys stocks that
it believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:
- low PRICE-TO-EARNINGS RATIO relative to the market
- high YIELD relative to the market
- low PRICE-TO-BOOK VALUE RATIO relative to the market
- financial strength
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of Fund shares, may go down. These changes may occur because a particular
stock or stock market in which the Fund invests is rising or falling. Also, Fund
management may select securities which underperform the stock market or other
funds with similar investment objectives and investment strategies. If the value
of the Fund's investments goes down, you may lose money. We cannot guarantee
that the Fund will achieve its investment objective.
The Fund's value discipline sometimes prevents or limits investments in stocks
that are in well-known indexes, like the Russell Midcap Index. Also, the return
of the Fund will not necessarily be similar to the return of the Russell Midcap
Index.
2 MERCURY HW MID-CAP VALUE FUND
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[GLOBE ICON] Fund Facts
Securities of mid cap companies 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 securities of mid cap companies
requires a long-term view. Securities purchased in IPOs may not be available in
sufficient quantity to affect the Fund's performance, and may produce losses.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
See "Investment Risks" for more information about the risks associated with the
Fund.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
- Are seeking long-term growth of capital and can withstand the
share price volatility of equity investing.
- Are seeking to diversify a portfolio of equity securities to
include stocks with market capitalizations between $1 billion and
$15 billion.
- Want a professionally managed and diversified portfolio.
- Are willing to accept the risk that the value of your investment
may decline in order to seek current income and long-term growth
of income, accompanied by growth of capital.
- Are prepared to receive taxable dividends.
MERCURY HW MID-CAP VALUE FUND 3
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[GLOBE ICON] Fund Facts
RISK/RETURN BAR CHART
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The bar chart and table below provide some indication of the risks of investing
in the Fund by showing changes in the year to year performance of the Class I
shares of the Fund and by showing how the Fund's average annual total returns
for 1 year and for the life of the Class compare with those of a broad measure
of market performance. Class I shares now are sold subject to sales charges,
which are not reflected in the bar chart. If sales charges were reflected, the
returns would be less. How the Fund has performed in the past is not necessarily
an indication of how the Fund will perform in the future.
<TABLE>
<S> <C>
1997 32.44%
1998 -10.26%
1999 16.87%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
26.36% (quarter ended June 30, 1999) and the lowest return for a quarter was
-17.56% (quarter ended September 30, 1998). The year-to-date return as of
September 30, 2000 was 27.21%.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR INCEPTION
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<S> <C> <C>
CLASS I*+ 10.73% 9.58%(1)
RUSSELL MIDCAP INDEX 18.23% 18.86%(2)
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</TABLE>
The Russell Midcap Index is an unmanaged index that measures the performance of
the 800 smallest companies in the Russell 1000 Index, which represents
approximately 26% of the total market capitalization of the Russell 1000 Index.
* Sales charges went into effect on October 6, 2000, but are reflected in the
table.
+ As of October 6, 2000, Investor Class shares were redesignated Class I shares.
(1) Since January 2, 1997.
(2) Since January 1, 1997.
4 MERCURY HW MID-CAP VALUE FUND
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[GLOBE ICON] Fund Facts
UNDERSTANDING EXPENSES
Fund investors pay various expenses, either directly or indirectly. Listed below
are some of the main types of expenses, which the Fund may charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEES -- fees paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial consultants and other financial
intermediaries, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate selected
securities dealers or other financial intermediaries for account maintenance
activities.
FEES AND EXPENSES
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The 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,
selected securities dealer or other financial intermediary can help you with
this decision.
THIS TABLE SHOWS THE DIFFERENT FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD THE DIFFERENT CLASSES OF SHARES OF THE FUND. FUTURE EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED BELOW.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT)(A): CLASS I* CLASS A CLASS B(B) CLASS C
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<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 5.25%(c) 5.25%(c) None None
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Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) None(d) 4.00%(c) 1.00%(c)
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Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM THE FUND'S TOTAL ASSETS):
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MANAGEMENT FEES(e) 0.75% 0.75% 0.75% 0.75%
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DISTRIBUTION AND/OR SERVICE (12B-1) FEES(F) None 0.25% 1.00% 1.00%
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Other Expenses (including transfer agency
fees) 1.17% 1.17% 1.17% 1.17%
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TOTAL ANNUAL FUND OPERATING EXPENSES 1.92% 2.17% 2.92% 2.92%
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Fee Waiver and/or Expense Reimbursement(e) 0.77% 0.77% 0.77% 0.77%
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NET ANNUAL FUND OPERATING EXPENSES 1.15% 1.40% 2.15% 2.15%
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</TABLE>
<TABLE>
<S> <C>
* As of October 6, 2000, Investor Class shares were
redesignated Class I shares.
(a) Certain securities dealers or other financial intermediaries
may charge a fee to process a purchase or sale of shares.
See "How to Buy, Sell, Transfer and Exchange Shares."
(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) The Investment Adviser has contractually agreed to waive
management fees and/or reimburse expenses through June 30,
2001, as shown in the table.
(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 Fund materials. If you hold
Class B or C shares over 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.
</TABLE>
MERCURY HW MID-CAP VALUE FUND 5
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[GLOBE ICON] Fund Facts
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the 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 that particular class and that the Fund's
operating expenses remain the same except for the expense reimbursement in
effect for the first year. This assumption is not meant to indicate you will
receive a 5% annual rate of return. Your annual return may be more or less than
the 5% used in these examples. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
Expenses if you did redeem your shares:
<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
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<S> <C> <C> <C> <C>
ONE YEAR $ 636 $ 660 $ 618 $ 318
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THREE YEARS $ 1,026 $ 1,098 $ 1,131 $ 831
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FIVE YEARS $ 1,440 $ 1,562 $ 1,670 $ 1,470
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TEN YEARS $ 2,591 $ 2,840 $ 3,010* $ 3,188
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</TABLE>
Expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
CLASS I CLASS A CLASS B CLASS C
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<S> <C> <C> <C> <C>
ONE YEAR $ 636 $ 660 $ 218 $ 218
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THREE YEARS $ 1,026 $ 1,098 $ 831 $ 831
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FIVE YEARS $ 1,440 $ 1,562 $ 1,470 $ 1,470
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TEN YEARS $ 2,591 $ 2,840 $ 3,010* $ 3,188
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</TABLE>
* Assumes conversion to Class A shares approximately eight years after purchase.
See note (b) to the Fees and Expenses table on page 5.
6 MERCURY HW MID-CAP VALUE FUND
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[MAGNIFYING GLASS ICON] About the Details
ABOUT THE PORTFOLIO MANAGERS -- Jim Miles began co-managing the Fund in May 1995
when he joined the Investment Adviser. Before joining the Investment Adviser,
Mr. Miles was with BT Securities Corporation (an affiliate of Bankers Trust New
York Corporation) as vice president in the BT Securities Finance Group from 1988
to 1995.
Stan Majcher has been a portfolio manager of the Fund since January 1999. Mr.
Majcher joined the Investment Adviser in August 1996 as a domestic equity
analyst. From 1994 to 1996, he was an investment banking analyst at Merrill
Lynch & Co. Inc.
ABOUT THE INVESTMENT ADVISER -- Mercury Advisors manages the Fund.
HOW THE FUND INVESTS
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The Fund's investment objective is to provide current income and long-term
growth of income, accompanied by growth of capital.
The Fund invests at least 65% of its total assets in stocks of mid cap U.S.
companies. A "mid cap company" is one with a market capitalization of between $1
billion and $15 billion at the time of investment. Some of these securities may
be purchased in initial public offerings.
In addition to these principal investments, the Fund can invest up to 20% of its
total assets in foreign securities.
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds, money market mutual funds and
other money market instruments.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund temporarily can invest up to 100% of its assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. The Fund may not achieve its objective
using this type of investing.
INVESTMENT RISKS
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This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.
The Fund's principal risks are listed below:
MARKET AND SELECTION RISK
Market risk is the risk that the market will go down in value, including the
possibility that the market will go down sharply and unpredictably. Selection
risk is the risk that the investments that Fund management selects will
underperform the market or other funds with similar investment objectives and
investment strategies.
MERCURY HW MID-CAP VALUE FUND 7
<PAGE> 9
[MAGNIFYING GLASS ICON] About the Details
MID CAP COMPANIES
The Fund invests in the securities of mid cap companies. Investment in mid cap
companies involves more risk than investing in larger, more established
companies. Mid cap companies may have limited product lines or markets. They may
be less financially secure than larger, more established companies. They may
depend on a small number of key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Fund's investment in a mid
cap company may lose substantial value.
INITIAL PUBLIC OFFERINGS
Securities purchased in initial public offerings may produce gains that
positively affect Fund performance during any given period, but such securities
may not be available during other periods or, even if they are available, may
not be available in sufficient quantity to have a meaningful impact on Fund
performance. They may also, of course, produce losses.
The Fund also may be subject to the following risks:
FOREIGN MARKET RISK
The Fund may invest up to 20% of its total assets in securities of companies
located in foreign countries, including American Depositary Receipts. American
Depositary Receipts are receipts typically issued by an American bank or trust
company that show evidence of underlying securities issued by a foreign
corporation. Foreign investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money.
- These holdings may be adversely affected by foreign political and
economic developments and U.S. and foreign laws relating to
foreign investments.
- International trade barriers or economic sanctions against certain
foreign countries may adversely affect these holdings.
PORTFOLIO TURNOVER
At times the Fund may purchase securities for short-term profits, which may
result in a high portfolio turnover rate. A high portfolio turnover rate
involves certain tax consequences and correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne by the
Fund and may adversely affect performance.
8 MERCURY HW MID-CAP VALUE FUND
<PAGE> 10
[MAGNIFYING GLASS ICON] About the Details
CONVERTIBLE SECURITIES
Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.
DEBT SECURITIES
Debt securities, such as bonds, involve credit risk, which is the risk that the
borrower will not make timely payments of principal and interest. The degree of
credit risk depends on the issuer's financial condition and on the terms of the
bonds. These securities are also subject to interest rate risk, which is the
risk that the value of the security may fall when interest rates rise. In
general, the market price of debt securities with longer maturities will go up
or down more in response to changes in interest rates than shorter-term
securities.
DERIVATIVES
The Fund also may invest in options. Derivatives like options may allow the Fund
to increase or decrease its level of risk exposure more quickly and efficiently
than transactions in other types of instruments. Derivatives, however, are more
volatile and involve significant risks, including:
- LEVERAGE RISK -- Leverage risk is 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.
- LIQUIDITY RISK -- Liquidity risk is 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.
STATEMENT OF ADDITIONAL INFORMATION
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If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERCURY HW MID-CAP VALUE FUND 9
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[CHECKMARK ICON] Account Choices
PRICING OF SHARES
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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.
Each share class represents an ownership interest in the same investment
portfolio. When you choose your class of shares, you should consider the size of
your investment and how long you plan to hold your shares. Your financial
consultant or other financial intermediary can help you determine which share
class is best suited to your personal financial goals.
The Fund's shares are distributed by FAM Distributors, Inc. (the "Distributor").
For example, if you select Class I or A shares, you generally pay the
Distributor a sales charge at the time of purchase. If you buy Class A shares,
you also pay out of Fund assets an ongoing account maintenance fee of 0.25%. You
may be eligible for a sales charge reduction or waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the 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.
Certain financial institutions may charge you additional fees in connection with
transactions in Fund shares. The Investment Adviser, the Distributor or their
affiliates may make payments out of their own resources to securities dealers
and other financial intermediaries for providing services intended to result in
the sale of Fund shares or for shareholder servicing activities.
10 MERCURY HW MID-CAP VALUE FUND
<PAGE> 12
[CHECKMARK ICON] Account Choices
To better understand the pricing of each class of the Fund's shares, we have
summarized the information below:
<TABLE>
<CAPTION>
CLASS I* CLASS A CLASS B
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<S> <C> <C> <C>
Availability LIMITED TO CERTAIN GENERALLY AVAILABLE GENERALLY AVAILABLE
INVESTORS INCLUDING: THROUGH SELECTED THROUGH SELECTED
- Current Class I SECURITIES DEALERS AND SECURITIES DEALERS AND
beneficial shareholders. OTHER FINANCIAL OTHER FINANCIAL
- Certain retirement INTERMEDIARIES. INTERMEDIARIES.
plans.
- Participants in
certain programs
sponsored by
affiliates.
- Certain investors
participating in
transaction fee
programs.
- Certain employees and
affiliates of selected
securities dealers and
other financial
intermediaries.
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Initial Sales Charge? YES. PAYABLE AT TIME OF YES. PAYABLE AT TIME OF NO. ENTIRE PURCHASE
PURCHASE. LOWER SALES PURCHASE. LOWER SALES PRICE IS INVESTED IN
CHARGES AVAILABLE FOR CHARGES AVAILABLE FOR SHARES OF THE FUND.
LARGER INVESTMENTS. LARGER INVESTMENTS.
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Deferred Sales NO. (MAY BE CHARGED FOR NO. (MAY BE CHARGED FOR YES. PAYABLE IF YOU
Charge? PURCHASES OVER $1 PURCHASES OVER $1 REDEEM WITHIN SIX YEARS
MILLION THAT ARE MILLION THAT ARE OF PURCHASE.
REDEEMED WITHIN ONE REDEEMED WITHIN ONE
YEAR.) YEAR.)
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Account Maintenance NO. 0.25% ACCOUNT 0.25% ACCOUNT
and Distribution MAINTENANCE FEE NO MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE. DISTRIBUTION FEE.
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Conversion to Class A NO. NO. YES, AUTOMATICALLY AFTER
shares? APPROXIMATELY EIGHT
YEARS.
---------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
<S> <C>
Availability GENERALLY AVAILABLE
THROUGH SELECTED
SECURITIES DEALERS AND
OTHER FINANCIAL
INTERMEDIARIES.
------------------------------------------------------------------------
Initial Sales Charge? NO. ENTIRE PURCHASE
PRICE IS INVESTED IN
SHARES OF THE FUND.
-------------------------------------------------------------------------------------------------
Deferred Sales YES. PAYABLE IF YOU
Charge? REDEEM WITHIN ONE YEAR
OF PURCHASE.
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Account Maintenance 0.25% ACCOUNT
and Distribution MAINTENANCE FEE 0.75%
Fees? DISTRIBUTION FEE.
---------------------------------------------------------------------------------------------------------------
Conversion to Class A NO.
shares?
---------------------------------------------------------------------------------------------------------------
</TABLE>
* As of October 6, 2000, Investor Class shares were redesignated Class I shares.
MERCURY HW MID-CAP VALUE FUND 11
<PAGE> 13
[CHECKMARK ICON] Account Choices
RIGHT OF ACCUMULATION -- permits you to pay the sales charge applicable to the
cost or value (whichever is higher) of all shares you own in the Mercury mutual
funds.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Mercury mutual funds that you agree to buy within a
13 month period. Certain restrictions apply.
CLASS I* AND A SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class I or A shares, you will pay a sales charge at the time of
purchase as shown in the following table. Securities dealers' compensation will
be as shown in the last column.
<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
AS A % OF YOUR AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT** OFFERING PRICE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
LESS THAN $25,000 5.25% 5.54% 5.00%
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$25,000 BUT LESS THAN
$50,000 4.75% 4.99% 4.50%
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$50,000 BUT LESS THAN
$100,000 4.00% 4.17% 3.75%
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$100,000 BUT LESS THAN
$250,000 3.00% 3.09% 2.75%
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$250,000 BUT LESS THAN
$1,000,000 2.00% 2.04% 1.80%
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$1,000,000 AND OVER*** 0.00% 0.00% 0.00%
---------------------------------------------------------------------------------------
</TABLE>
*As of October 6, 2000, Investor Class shares were redesignated Class I
shares.
**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. In that case, the Investment Adviser compensates the
selling dealer or other financial intermediary from its own resources. If you
redeem your shares within one year after purchase, you may be charged a
deferred sales charge. This charge is 1.00% 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.
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 the Investment Adviser or its
affiliates
- Certain employer-sponsored retirement or savings plans
- Certain investors, including directors or trustees of mutual funds
sponsored by the Investment Adviser or its affiliates, employees
12 MERCURY HW MID-CAP VALUE FUND
<PAGE> 14
[CHECKMARK ICON] Account Choices
of the Investment Adviser and its affiliates and employees of
selected securities dealers
- Certain programs of the Investment Adviser or its affiliates
- Certain programs of selected securities dealers and other
financial intermediaries that have an agreement with the
Distributor or its affiliates
- Shareholders who beneficially owned Investor Class shares before
October 6, 2000
Only certain investors are eligible to buy Class I shares, including former
Investor Class beneficial shareholders of the Fund, existing Class I beneficial
shareholders of the Fund, certain retirement plans, participants in certain
programs sponsored by the Investment Adviser or its affiliates and certain
investors participating in transaction fee programs. Your financial consultant,
selected securities dealer or other financial intermediary 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 a 0.25% account maintenance fee,
while Class I shares are not.
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, selected securities dealer, other financial intermediary or the
Fund's Transfer Agent at 1-800-236-4479.
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 the Fund has adopted under Rule 12b-1 of the Investment Company Act of
1940. 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. The Distributor uses the money that it
receives from the deferred sales charges and the distribution fees to cover the
costs of marketing, advertising and compensating the financial
MERCURY HW MID-CAP VALUE FUND 13
<PAGE> 15
[CHECKMARK ICON] Account Choices
consultant, selected securities dealer or other financial intermediary who
assists you in purchasing Fund shares.
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 THEREAFTER 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
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Mercury funds have identical deferred sales charge schedules. If you
exchange your shares for shares of another Mercury fund, the higher charge
will apply, if any would apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old
- Redemption by certain eligible 401(a) and 401(k) plans and certain
retirement plan rollovers
- Redemption in connection with participation in certain fee-based
programs managed by the Investment Adviser or its affiliates
- Redemption in connection with participation in certain fee-based
programs managed by selected securities dealers or other financial
intermediaries that have agreements with the Distributor or its
affiliates
- Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year after death or
disability or, if later, reasonably promptly following completion
of probate, or in connection with involuntary termination of an
account in which Fund shares are held
14 MERCURY HW MID-CAP VALUE FUND
<PAGE> 16
[CHECKMARK ICON] Account Choices
- Withdrawal through the Systematic Withdrawal Plan of up to 10% per
year of your Class B 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 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 longer conversion schedule, the other fund's conversion schedule
will apply. If you exchange your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both 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 when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
MERCURY HW MID-CAP VALUE FUND 15
<PAGE> 17
[CHECKMARK ICON] Account Choices
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------
The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through your financial consultant, selected securities dealer,
broker, investment adviser, service provider or other financial intermediary.
You may also buy shares through the Transfer Agent. To learn more about buying
shares through the Transfer Agent, call 1-800-236-4479. Because the selection of
a mutual fund involves many considerations, your financial consultant, selected
securities dealer or other financial intermediary may help you with this
decision. The Fund does not issue share certificates.
Because of the high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will then
have 60 days to make an additional investment to bring the value of your account
to at least $500 before the Fund takes any action. This involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act
accounts.
16 MERCURY HW MID-CAP VALUE FUND
<PAGE> 18
[CHECKMARK ICON] Account Choices
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUY SHARES First, select the share class Refer to the pricing of shares table on page 11. Be sure to
appropriate for you read this prospectus carefully.
-------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for
your investment all accounts except:
- $500 for certain fee-based programs
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
-------------------------------------------------------------------------------------------------
Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. Purchase orders
other financial intermediary placed prior to the close of regular trading on the New York
submit your purchase order Stock Exchange (generally, 4:00 p.m. Eastern time) are
priced at the net asset value determined that day. Certain
financial intermediaries, however, may require submission of
orders prior to that time.
Purchase orders placed after that time are priced at the net
asset value determined on the next business day. The Fund
may reject any order to buy shares and may suspend the sale
of shares at any time. Certain financial intermediaries may
charge a fee to process a purchase. For example, Merrill
Lynch, Pierce, Fenner & Smith Incorporated currently charges
a $5.35 processing fee. The fees charged by other financial
intermediaries may be higher or lower.
-------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-236-4479 and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
------------------------------------------------------------------------------------------------------------------------
ADD TO YOUR Purchase additional shares The minimum investment for additional purchases is generally
INVESTMENT $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 are automatically reinvested without a sales
through the automatic dividend charge.
reinvestment plan
-------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan your selected securities dealer or other financial
intermediary. The current minimum for such automatic
reinvestments is $100. The minimum may be waived or revised
under certain circumstances.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERCURY HW MID-CAP VALUE FUND 17
<PAGE> 19
[CHECKMARK ICON] Account Choices
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSFER SHARES TO Transfer to a participating You may transfer your Fund shares to another selected
ANOTHER SECURITIES securities dealer or other securities dealer or other financial intermediary if
DEALER OR OTHER financial intermediary authorized dealer agreements are in place between the
FINANCIAL Distributor and the transferring intermediary and the
INTERMEDIARY Distributor and the receiving intermediary. Certain
shareholder services may not be available for all
transferred shares. You may only purchase additional shares
of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving
intermediary.
-------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either: - Transfer your shares to an account with
securities dealer or other the Transfer Agent; or - Sell your shares, paying any
financial intermediary applicable deferred sales charge.
------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES Have your financial consultant, The price of your shares is based on the next calculation of
selected securities dealer or net asset value after your order is placed. For your
other financial intermediary redemption request to be priced at the net asset value on
submit your sales order the day of your request, you must submit your request to
your selected securities dealer or other financial
intermediary prior to that day's close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries, however, may
require submission of orders prior to that time. Redemption
requests placed after that time are priced at the net asset
value at the close of regular trading on the next business
day.
Certain financial intermediaries may charge a fee to process
a sale of shares. For example, Merrill Lynch, Pierce, Fenner
& Smith Incorporated currently charges a $5.35 processing
fee. No processing fee is charged if you redeem the shares
directly through the Transfer Agent. The fees charged by
other financial intermediaries may be higher or lower.
The Fund may reject an order to sell shares under certain
circumstances.
-------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to
the Transfer Agent at the address on the inside back cover
of this prospectus. All shareholders on the account must
sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances.
You can obtain a signature guarantee from a bank, securities
dealer, securities broker, credit union, savings
association, national securities exchange or registered
securities association. A notary public seal will not be
acceptable. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. If you make a redemption request before
the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by
telephone request if the amount being sold is less than
$50,000 and if certain other conditions are met. Contact the
Transfer Agent at 1-800-236-4479 for details.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
18 MERCURY HW MID-CAP VALUE FUND
<PAGE> 20
[CHECKMARK ICON] Account Choices
<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELL SHARES Participate in the Fund's You can choose to receive systematic payments from your Fund
SYSTEMATICALLY Systematic Withdrawal Plan account either by check or through direct deposit to your
bank account on a monthly or quarterly basis. You can
generally arrange through your selected securities dealer or
other financial intermediary for systematic sales of shares
of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method, you must have dividends
automatically reinvested.
For Class B and C shares, your total annual withdrawals
cannot be more than 10% per year of the value of your shares
at the time your plan is established. The deferred sales
charge is waived for systematic redemptions. Ask your
financial intermediary for details.
------------------------------------------------------------------------------------------------------------------------
EXCHANGE YOUR Select the fund into which you You can exchange your shares of the Fund for shares of other
SHARES want to exchange. Be sure to Mercury mutual funds or for shares of the Summit Cash
read that fund's prospectus Reserves Fund. You must have held the shares used in the
exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another Mercury fund. If you own
Class I shares and wish to exchange into a fund in which you
have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares. If you own
Class I or Class A shares and wish to exchange into Summit,
you will exchange into Class A shares of Summit. Class B or
Class C shares can be exchanged for Class B shares of
Summit.
Some of the Mercury mutual funds may impose a different
initial or deferred sales charge schedule. If you exchange
Class I or A shares for shares of a fund with a higher
initial sales charge than you originally paid, you may be
charged the difference at the time of exchange. If you
exchange Class B or Class C shares for shares of a fund with
a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or 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.
To exercise the exchange privilege, contact your financial
consultant, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-236-4479.
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>
MERCURY HW MID-CAP VALUE FUND 19
<PAGE> 21
[CHECKMARK ICON] Account Choices
NET ASSET VALUE -- the market value in U.S. dollars of the Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
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. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of regular trading on the Exchange based on
prices at the time of closing. Regular trading on 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. If
market quotations are not available, the Fund may use fair value.
The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value next
computed by the Fund after such acceptance. If the payment for a purchase order
is not made by a designated later time, the order will be canceled and the
financial intermediary could be held liable for any losses.
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. 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 the Investment
Adviser or an affiliate of the Investment Adviser, or in certain transaction fee
programs sponsored by selected securities dealers or other financial
intermediaries that have an agreement with the Distributor, you may be able to
buy Class I shares at net asset value, including by exchanges 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.
20 MERCURY HW MID-CAP VALUE FUND
<PAGE> 22
[CHECKMARK ICON] Account Choices
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 the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the Fund's shares or into the Summit fund. 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, selected securities dealer or other financial intermediary.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
The Fund will distribute any net investment income and any net realized long-
term or short-term capital gains at least annually. The 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 the Fund at
net asset value without a sales charge or may be taken in cash. If your account
is with a selected securities dealer or other financial intermediary that has an
agreement with the Fund, contact your dealer or intermediary 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. The Fund anticipates that
the majority of its dividends, if any, will consist of ordinary income. Capital
gains, if any, may be taxable to you at different rates, depending, in part, on
how long the Fund has held the assets sold.
You may be subject to Federal income tax on dividends from the Fund whether you
receive them in cash or additional shares. If you redeem Fund shares or exchange
them for shares of another fund, you generally will be treated as having sold
your shares and any gain on the transaction may be subject to Federal income
tax. Capital gains are generally taxed at different rates than ordinary income
dividends. In addition, dividends from the Fund may be subject to state and
local income taxes.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax treaties between certain countries
and the U.S. may reduce or eliminate such taxes.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
MERCURY HW MID-CAP VALUE FUND 21
<PAGE> 23
[CHECKMARK ICON] Account Choices
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, the Fund must withhold 31% of your dividends and redemption proceeds if
you have not provided a taxpayer identification number or social security number
or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal income
tax law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.
22 MERCURY HW MID-CAP VALUE FUND
<PAGE> 24
[MANAGEMENT TEAM ICON] The Management Team
MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
Mercury Advisors, the Fund's Investment Adviser, manages the Fund's investments
under the overall supervision of the Board of Trustees. The Investment Adviser
has the responsibility for making all investment decisions for the Fund. For the
fiscal year ended June 30, 2000, the Fund paid an affiliate of the Investment
Adviser a management fee at the annual rate of 0.75% of the average daily net
assets of the Fund.
The Investment Adviser was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
The Investment Adviser and its affiliates had approximately $571 billion in
investment company and other portfolio assets under management as of September
30, 2000.
Although not required to do so, the Investment Adviser has agreed to make
reimbursements so that the regular annual operating expenses of the Fund will be
limited as shown in the table on page 5. The Investment Adviser has agreed to
these expense limits through June 2001, and will thereafter give shareholders at
least 30 days' notice if this reimbursement policy will change.
The Investment Adviser is allowed to allocate brokerage based on sales of shares
of funds managed by the Investment Adviser.
The Fund is a series of Mercury HW Funds, formerly known as Hotchkis and Wiley
Funds. The Fund was formerly called the Mid-Cap Fund.
MERCURY HW MID-CAP VALUE FUND 23
<PAGE> 25
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since its inception. Only Class I shares were offered
during these periods. Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned on an investment in the Fund (assuming reinvestment
of all dividends and distributions). These financial highlights were audited by
PricewaterhouseCoopers LLP. The accountants' report and the Fund's financial
statements are included in the Fund's annual report, which is available upon
request. Further performance information is contained in the annual report.
<TABLE>
<CAPTION>
CLASS I(1)
-----------------------------------------
FOR THE YEAR ENDED JUNE 30,
INCREASE (DECREASE) IN -----------------------------------------
NET ASSET VALUE: 2000 1999 1998 1997(2)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
-------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.03 $12.92 $11.65 $10.00
-------------------------------------------------------------------------------------------------------
Investment income -- net 0.18 0.16 0.13 0.07
-------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net 0.97 0.46 1.60 1.64
-------------------------------------------------------------------------------------------------------
Total from investment operations 1.15 0.62 1.73 1.71
-------------------------------------------------------------------------------------------------------
Less dividends and distributions
Investment income -- net (0.14) -- (0.14) (0.06)
Realized gain on investments -- net (0.29) (1.51) (0.32) --
-------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.43) (1.51) (0.46) (0.06)
-------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.75 $12.03 $12.92 $11.65
-------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------
Based on net asset value per share 10.41% 7.66% 15.00% 17.15%(++)
-------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement 1.15% 1.05% 1.00% 1.00%(+)
-------------------------------------------------------------------------------------------------------
Expenses 1.92% 2.02% 2.72% 8.26%(+)
-------------------------------------------------------------------------------------------------------
Investment income -- net 2.12% 1.43% 1.20% 1.87%(+)
-------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------
Net assets, end of year (in millions) $10.26 $6.87 $7.54 $1.99
-------------------------------------------------------------------------------------------------------
Portfolio turnover 179% 113% 71% 23%(++)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) As of October 6, 2000, Investor Class shares were redesignated Class I
shares. No sales loads were charged prior to this time.
(2) The Fund commenced operations on January 2, 1997.
* Total investment return excludes the effects of sales charges.
(+) Annualized.
(++) Not annualized.
24 MERCURY HW MID-CAP VALUE FUND
<PAGE> 26
<TABLE>
<S> <C>
FUND
Mercury HW Mid-Cap Value Fund
of Mercury HW Funds
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(800-236-4479)
INVESTMENT ADVISER
Administrative Offices:
Mercury Advisors
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 41621
Jacksonville, Florida 32232-1621
(800-236-4479)
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 E. Wisconsin Ave., Suite 1500
Milwaukee, Wisconsin 53202
DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661
COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610-4795
</TABLE>
<PAGE> 27
To Learn More
SHAREHOLDER REPORTS
Additional information about the Fund's investments will be available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report you will find a discussion of the relevant market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year. You may obtain these reports at no cost by calling
1-800-236-4479.
The Fund will send you one copy of each shareholder report and certain other
mailings regardless of the number of Fund accounts you have. To receive separate
shareholder reports for each account, call your financial consultant or other
financial intermediary or 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, other financial intermediary, or the Transfer Agent at
1-800-236-4479.
STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing or calling the Fund
at Financial Data Services, Inc., P.O. Box 41621, Jacksonville, Florida
32232-1621 or by calling 1-800-236-4479.
Contact your financial consultant, other financial intermediary, or the Fund at
the telephone number or address indicated on the inside back cover of this
prospectus if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by electronic request at the following e-mail address: [email protected], or by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION IN THIS PROSPECTUS.
Investment Company Act File #811-4182.
CODE #MHW-P-1050-0101
(C) Mercury Advisors
[MERCURY FUNDS LOGO]
<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
MERCURY HW MID-CAP VALUE FUND
725 South Figueroa Street, Suite 4000, Los Angeles, California 90017 - Phone No.
(800) 236-4479
------------------------
Mercury HW Mid-Cap Value Fund (the "Fund") is a fund of the Mercury HW
Funds (the "Trust"). The Trust is a diversified, open-end, management investment
company which is organized as a Massachusetts business trust. The investment
objective of the Fund is to seek to provide current income and long-term growth
of income, accompanied by growth of capital. The Fund seeks to achieve its
investment objective by investing primarily in stocks of U.S. companies with
market capitalizations of between $1 billion and $15 billion. No assurance can
be given that the investment objective of the Fund will be realized. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies."
The Fund offers four classes of shares, each with a different combination
of sales charges, ongoing fees and other features. These alternatives permit 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. See
"Purchase of Shares."
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Fund dated January 1, 2001 (the
"Prospectus"), which has been filed with the Securities and Exchange Commission
(the "Commission") and can be obtained, without charge, by calling the Fund at
1-800-236-4479 or your financial consultant or other financial intermediary, or
by writing to the Fund at Financial Data Services, Inc., P.O. Box 41621,
Jacksonville, Florida 32232-1621. The Prospectus is incorporated by reference
into this Statement of Additional Information, and this Statement of Additional
Information is incorporated by reference into the Prospectus. The Fund's audited
financial statements are incorporated in this Statement of Additional
Information by reference to its annual report for the fiscal year ended June 30,
2000. You may request copies of the annual report at no charge by calling
1-800-236-4479 between 8:30 a.m. and 5:30 p.m. (Eastern time) on any business
day.
------------------------
MERCURY ADVISORS -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is January 1, 2001
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... 3
Investment Objective and Policies........................... 3
Investment Restrictions................................... 3
Repurchase Agreements..................................... 4
Bonds..................................................... 4
U.S. Government Securities................................ 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Derivative Instruments.................................... 6
Foreign Securities........................................ 7
Foreign Investment Risks.................................. 7
Swap Agreements........................................... 8
Illiquid Securities....................................... 8
Borrowing................................................. 9
When-Issued Securities.................................... 10
Real Estate Investment Trusts............................. 10
Shares of Other Investment Companies...................... 10
Limited Partnerships...................................... 10
Short Sales Against-the-Box............................... 10
Corporate Loans........................................... 10
Temporary Defensive Position.............................. 11
Management of the Fund...................................... 11
Advisory Arrangements..................................... 13
Accounting and Administrative Services.................... 14
Code of Ethics............................................ 14
Purchase of Shares.......................................... 15
Initial Sales Charge Alternatives -- Class I and Class A
Shares.................................................. 16
Reduced Initial Sales Charges............................. 17
Deferred Sales Charge Alternatives -- Class B and Class C
Shares.................................................. 18
Distribution Plans........................................ 20
Limitations on the Payment of Deferred Sales Charges...... 22
Redemption of Shares........................................ 22
Redemption................................................ 22
Repurchase................................................ 23
Reinstatement Privilege -- Class I and Class A Shares..... 24
Pricing of Shares........................................... 24
Determination of Net Asset Value.......................... 24
Computation of Offering Price Per Share................... 25
Portfolio Transactions and Brokerage........................ 26
Transactions in Portfolio Securities...................... 26
Shareholder Services........................................ 27
Investment Account........................................ 27
Exchange Privilege........................................ 28
Fee-Based Programs........................................ 30
Retirement Plans.......................................... 30
Automatic Investment Plans................................ 30
Automatic Dividend Reinvestment Plan...................... 30
Systematic Withdrawal Plans............................... 31
Dividends and Tax Status.................................... 31
Performance Data............................................ 33
General Information......................................... 34
Description of Shares..................................... 34
Issuance of Fund Shares for Securities.................... 35
Redemption in Kind........................................ 35
Independent Auditors...................................... 35
Custodian................................................. 36
Transfer Agent............................................ 36
Legal Counsel............................................. 36
Reports to Shareholders................................... 36
Shareholder Inquiries..................................... 36
Additional Information.................................... 36
Principal Holders......................................... 36
</TABLE>
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<PAGE> 30
TRUST HISTORY
The Trust was organized on August 22, 1984 as a Massachusetts business
trust. Before October 7, 1994, the Trust was called "Olympic Trust," and before
October 6, 2000, the Trust was called "Hotchkis and Wiley Funds." The Trust is a
diversified, open-end, management investment company currently consisting of ten
separate funds. Prior to October 6, 2000, the Fund was called the Mid-Cap Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide current income and
long-term growth of income, accompanied by growth of capital. Reference is made
to the discussion under "How the Fund Invests" and "Investment Risks" in the
Prospectus for information with respect to the Fund's investment objective and
policies.
Mercury Advisors (the "Investment Adviser"), the Fund's investment adviser,
is responsible for the management of the Fund's portfolio.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of
the Fund's outstanding voting securities means the vote of the holders of the
lesser of (1) 67% of the shares of the Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (2)
more than 50% of the outstanding shares.
Except as noted, the Fund may not:
1. Purchase any security, other than obligations of the U.S. government,
its agencies, or instrumentalities ("U.S. government securities"), if
as a result: (i) with respect to 75% of its total assets, more than 5%
of the Fund's total assets (determined at the time of investment) would
then be invested in securities of a single issuer; or (ii) more than
25% of the Fund's total assets (determined at the time of investment)
would be invested in one or more issuers having their principal
business activities in a single industry.
2. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions),
provided that the deposit or payment by the Fund of initial or
maintenance margin in connection with futures or options is not
considered the purchase of a security on margin.
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short (short sale
against-the-box), and unless not more than 25% of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
one time.
4. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; the Fund will not purchase any
additional portfolio securities while such borrowings are outstanding.
5. Purchase any security (other than U.S. government securities) if as a
result, with respect to 75% of the Fund's total assets, the Fund would
then hold more than 10% of the outstanding voting securities of an
issuer.
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<PAGE> 31
6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities
which are secured by real estate and securities of companies which
invest or deal in real estate.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Participate on a joint or joint and several basis in any trading
account in securities.
10. Make loans, except through repurchase agreements.
11. Purchase or sell foreign currencies.
Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the 1940 Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the 1940 Act. See "Portfolio Transactions and Brokerage."
Without such an exemptive order the Fund is prohibited from engaging in
portfolio transactions with Merrill Lynch or any of its affiliates acting as
principal.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement where the seller agrees to
repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is more than
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the repurchase agreement. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of those instruments declines, the Fund will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
In such circumstances, the Fund could experience a delay or be prevented from
disposing of the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.
BONDS
The term "bond" or "bonds" as used in the Prospectus and this Statement of
Additional Information is intended to include all manner of fixed-income
securities, debt securities and other debt obligations unless specifically
defined or the context requires otherwise.
U.S. GOVERNMENT SECURITIES
U.S. government agencies or instrumentalities which issue or guarantee
securities include the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Tennessee Valley Authority, Inter-American Development Bank, Asian Development
Bank, Student Loan Marketing Association and the International Bank for
Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the
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<PAGE> 32
United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment. The Fund will
invest in securities of such instrumentality only when the Investment Adviser is
satisfied that the credit risk with respect to any instrumentality is
acceptable.
The Fund may invest in component parts of U.S. Treasury notes or bonds,
namely, either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.
CORPORATE DEBT SECURITIES
The Fund's investments in U.S. dollar corporate debt securities of domestic
or foreign issuers are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are in the
Investment Adviser's opinion comparable in quality to corporate debt securities
in which the Fund may invest. The rate of return or return of principal on some
debt obligations may be linked or indexed to the level of exchange rates between
the U.S. dollar and a foreign currency or currencies.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities of domestic or foreign
issuers rated investment grade (any of the four highest grades) by a major
rating agency or, if unrated, of comparable quality in the Investment Adviser's
opinion. The Fund also may invest up to 5% of its total assets in convertible
securities rated below investment grade, but not below B, or, if unrated, of
comparable quality in the Investment Adviser's opinion. A convertible security
is a fixed-income security (a bond or preferred stock) which may be converted at
a stated price within a specified period of time into a certain quantity of
common stock or other equity securities of the same or a different issuer.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
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<PAGE> 33
DERIVATIVE INSTRUMENTS
To the extent consistent with its investment objective and policies and the
investment restrictions listed in this Statement of Additional Information, the
Fund may purchase and write call and put options on securities and securities
indexes and enter into forward contracts. The Fund also may enter into swap
agreements with respect to interest rates and securities indexes. The Fund may
use these techniques to hedge against changes in interest rates or securities
prices or as part of its overall investment strategies. The Fund will mark as
segregated cash, U.S. government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its obligations
under forward contracts, swap agreements and options to avoid leveraging of the
Fund.
Options on Securities and on Securities Indexes. The Fund may purchase put
options on securities to protect holdings in an underlying or related security
against a substantial decline in market value. The Fund may purchase call
options on securities to protect against substantial increases in prices of
securities the Fund intends to purchase pending its ability to invest in such
securities in an orderly manner. The Fund may sell put or call options it has
previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold. The Fund
may write a call or put option only if the option is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series.
The purchase and writing of options involve certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Fund may be
unable to close out a position.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however,
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<PAGE> 34
such losses may be mitigated by changes in the value of the Fund's securities
during the period the option was outstanding.
FOREIGN SECURITIES
The Fund may invest in American Depositary Receipts ("ADRs") or other
securities convertible into securities of issuers based in foreign countries or
other foreign securities that can be purchased and sold in U.S. dollars. ADRs
are receipts, usually issued by a U.S. bank or trust company, evidencing
ownership of the underlying securities. Generally, ADRs are issued in registered
form, denominated in U.S. dollars, and are designed for use in the U.S.
securities markets.
FOREIGN INVESTMENT RISKS
Foreign Market Risk. The Fund may invest a portion of its assets in foreign
securities. Foreign security investment involves special risks not present in
U.S. investments that can increase the chances that the Fund will lose money.
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 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 otherwise adversely affect the Fund's
operations. Other foreign market risks include 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.
EMU. 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 of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are now
listed, traded, declaring dividends and making other payments only in euros.
No assurance can be given 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 could 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
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 at any time by an
initial
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<PAGE> 35
participant could cause disruption of the financial markets as securities
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 the Fund's investments in
Europe generally or in specific countries participating in EMU.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate companies less than the U.S. government does.
Some countries may not have laws to protect investors the way that the United
States securities laws do. 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 disclosure or detail as U.S. accounting
standards, it may be harder for the Fund's portfolio managers to completely and
accurately determine a company's financial condition.
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.
SWAP AGREEMENTS
The Fund may enter into interest rate and index swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded
the desired return. Swap agreements are two party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the dollar amount invested at a particular interest
rate or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. The Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Fund's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Fund) and any
accrued but unpaid net amounts owed to a swap counter-party will be covered by
marking as segregated cash, U.S. government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, to avoid any
potential leveraging of the Fund's portfolio. The Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Investment Adviser's ability to
correctly predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counter-party. Restrictions imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), may limit the Fund's
ability to use swap agreements. The swaps market is a relatively new market and
is largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect the Fund's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable
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<PAGE> 36
and repurchase agreements that have a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Also market
quotations are less readily available. The judgment of the Investment Adviser
may at times play a greater role in valuing these securities than in the case of
unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Investment Adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
Investment Adviser; and (2) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.
BORROWING
The Fund may borrow for temporary or emergency purposes in amounts not
exceeding 10% of the Fund's total assets. This borrowing may be unsecured. The
1940 Act requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. Borrowing subjects the Fund to interest costs which may
or may not be recovered by appreciation of the securities purchased, and can
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. This is the speculative factor known as
leverage.
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<PAGE> 37
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. The price that the Fund is obligated to pay on the settlement
date may be different from the market value on that date. While securities may
be sold prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in determining the Fund's net asset
value. The Fund will also mark as segregated with its custodian cash, U.S.
government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its obligations for when-issued
securities.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or
REITs. Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. REITs offer investors greater
liquidity and diversification than direct ownership of properties, as well as
greater income potential than an investment in common stocks. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.
SHARES OF OTHER INVESTMENT COMPANIES
The Fund can invest in securities of other investment companies except to
the extent prohibited by law. Like all equity investments, these investments may
go down in value. They also may not perform in correlation with the Fund's
principal strategies. The Fund will pay additional fees through its investments
in other investment companies.
LIMITED PARTNERSHIPS
The Fund can invest in limited partnership interests.
SHORT SALES AGAINST-THE-BOX
The Fund can borrow and sell "short" securities when it also owns an equal
amount of those securities (or their equivalent). No more than 25% of the Fund's
total assets can be held as collateral for short sales at any one time.
CORPORATE LOANS
The Fund can invest in corporate loans. Commercial banks and other
financial institutions make corporate loans to companies that need capital to
grow or restructure. Borrowers generally pay interest on corporate loans at
rates that change in response to changes in market interest rates such as the
London Interbank Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a
result, the value of corporate loan investments is generally less responsive to
shifts in market interest rates. Because the trading market for corporate loans
is less developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's agent
arranges the corporate loans, holds collateral and accepts payments of principal
and interest. If the agent developed financial problems, the Fund may not
recover its investment, or there might be a delay in the Fund's recovery. By
investing in a corporate loan, the Fund becomes a member of the syndicate.
10
<PAGE> 38
TEMPORARY DEFENSIVE POSITION
When adverse market or economic conditions indicate to the Investment
Adviser that a temporary defensive strategy is appropriate, the Fund may invest
all or part of its assets in short-term investment grade debt obligations of the
U.S. government, its agencies and instrumentalities, money market mutual funds,
bank certificates of deposit, bankers' acceptances, high quality commercial
paper, demand notes and repurchase agreements.
MANAGEMENT OF THE FUND
The Trustees oversee the actions of the Fund's Investment Adviser and other
service providers and decide upon matters of general policy. The Trustees also
review the actions of the Trust's officers, who conduct and supervise the daily
business operations of the Trust. The Trustees (* denotes "interested" Trustee
as defined in the 1940 Act, due to the relationship with the Investment Adviser)
and officers of the Trust are:
MICHAEL BAXTER* (37) -- Trustee -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Managing Director of the Investment Adviser (since
1996); Co-Head of the Investment Adviser (1999 - 2000); Partner of the
Investment Adviser (1994 - 1996); Portfolio Manager of the Investment Adviser
(since 1990).
ROBERT L. BURCH III (66) -- Trustee -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments) (since 1984); Chairman,
Jonathan Mfg. Corp. (slide manufacturing) (since 1977).
JOHN A. G. GAVIN (69) -- Trustee -- 2100 Century Park West, Los Angeles, CA
90067. Partner and Managing Director, Hicks, Muse, Tate & Furst (Latin America)
(private equity investment firm) (since 1994); Chairman, Gamma Holdings
(investment holding company) (since 1968); U.S. Ambassador to Mexico
(1981 - 1986); Director, Apex Mortgage Capital, Inc., International Wire Corp.
and Krause's Furniture, Inc.
JOE GRILLS (65) -- Trustee -- P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute (affiliation changed in June 2000 to the Association of Financial
Professionals) ("CIEBA") (since 1986); Member of CIEBA's Executive Committee
(since 1988) and its Chairman (1991 - 1992); Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds (1986 - 1993); Member of the Investment Advisory
Committees of the State of New York Common Retirement Fund and the Howard Hughes
Medical Institute (since 1997); Director, Duke Management Company (since 1992)
and Vice Chairman (since 1998); Director, Kimco Realty Corporation (since 1997);
Director, LaSalle Street Fund (since 1995); Member of the Investment Advisory
Committee of the Virginia Retirement System (since 1998); Director, Montpelier
Foundation (since 1998); Member of the Investment Committee of the Woodberry
Forest School (since 2000); Member of the Investment Committee of the National
Trust for Historic Preservation (since 2000); Trustee or Director of 24
registered investment companies (consisting of 56 portfolios) for which the
Investment Adviser or an advisory affiliate is the adviser.
NIGEL HURST-BROWN* (49) -- Trustee -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Managing Director of the Investment Adviser
(since 1998); Co-Head of the Investment Adviser (1999 - 2000); Director of
Mercury Asset Management Group Plc. (since 1990).
MADELEINE A. KLEINER (49) -- Trustee -- 1900 Avenue of the Stars, Suite
1700, Los Angeles, CA 90067. Former Senior Executive Vice President, Chief
Administrative Officer and General Counsel, H.F. Ahmanson & Company and Home
Savings of America, FSB (banking company) (1995 - 1998); Partner, Gibson, Dunn &
Crutcher (law firm) (1983 - 1995).
RICHARD R. WEST (62) -- Trustee -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University Leonard N. Stern School of Business Administration; Director, Vornado
Realty Trust, Inc. and Vornado Operating (real estate holding company);
Director, Bowne & Co., Inc. (financial printers); Director, Alexander's, Inc.
(real estate
11
<PAGE> 39
company); Trustee or Director of 67 registered investment companies (consisting
of 72 portfolios) for which the Investment Adviser or an advisory affiliate is
the adviser.
NANCY D. CELICK (49) -- President -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. First Vice President of the Investment Adviser
(since 2000); Chief Administrative Officer of the Investment Adviser
(1998 - 2000); Chief Financial Officer of the Investment Adviser (1993 - 1998);
Chief Financial Officer of Kennedy-Wilson, Inc. (auction marketing services)
(1992 - 1993); Chief Financial Officer of First National Corporation (bank
holding company) (1984 - 1992).
DONALD C. BURKE (40) -- Vice President and Treasurer -- P.O. Box 9011,
Princeton, NJ 08543-9011. Senior Vice President and Treasurer of the Investment
Adviser (since 1999); Senior Vice President and Treasurer of Princeton Services,
Inc. (since 1999); Vice President of FAM Distributors, Inc. (since 1999); First
Vice President of the Investment Adviser (1990 - 1997).
ANNA MARIE S. LOPEZ (33) -- Assistant Treasurer and Assistant
Secretary -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400.
Compliance Officer of the Investment Adviser (since 1997); Manager, Price
Waterhouse (1991 - 1997).
TURNER SWAN (39) -- Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Director (Legal Advisory) of the Investment Adviser
(since 2000); Attorney with the Investment Adviser (1997 - 2000); Attorney,
Sheppard, Mullin, Richter & Hampton LLP (1995 - 1997); Attorney, Trout Trading
Management Company Ltd. (1993 - 1995).
GRACIE FERMELIA (39) -- Vice President and Assistant Secretary -- 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Director of the
Investment Adviser (since 2000); Vice President of the Investment Adviser
(1994 - 2000); Senior Manager, Price Waterhouse (1985 - 1994).
The Trust does not pay salaries to any of its officers or fees to any of
its Trustees affiliated with the Investment Adviser. The following table sets
forth the aggregate compensation paid to the Trustees during the Trust's fiscal
year ended June 30, 2000 and the aggregate compensation paid to the Trustees for
service on the Trust's Board and that of any other fund for which the Investment
Adviser serves as investment adviser or which has an investment adviser that is
an affiliated person of the Investment Adviser ("Fund Complex") for the year
ended December 31, 1999.
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter.................................... $ -0- $ -0-
Robert L. Burch III............................... $27,859 $ 34,000
John A. G. Gavin.................................. $27,859 $ 25,000
Joe Grills........................................ $27,859 $232,333
Nigel Hurst-Brown................................. $ -0- $ -0-
Robert B. Hutchinson**............................ $12,000 $ 34,000
Madeleine A. Kleiner.............................. $27,859 $ 18,000
Merle T. Welshans**............................... $12,000 $ 34,000
Richard R. West................................... $27,859 $422,225
</TABLE>
---------------
* Each Trustee also serves as a Trustee of Mercury HW Variable Trust, Fund
Asset Management Master Trust and Merrill Lynch Investment Managers Funds,
Inc. Messrs. Grills and West also serve on the boards of other investment
companies advised by the Investment Adviser or its advisory affiliates.
** Messrs. Hutchinson and Welshans retired on November 12, 1999.
The Trustees may be eligible for reduced sales charges on purchases of
Class I shares. See "Purchase of Shares -- Reduced Initial Sales
Charges -- Purchase Privileges of Certain Persons."
For information as to ownership of shares, see "General
Information -- Principal Holders."
12
<PAGE> 40
ADVISORY ARRANGEMENTS
Investment Advisory Services and Fee. The Trust on behalf of the Fund has
entered into an investment advisory agreement (the "Advisory Agreement") with
the Investment Adviser as investment adviser. Subject to the supervision of the
Trustees, the Investment Adviser is responsible for the actual management of the
Fund and continuously reviews the Fund's 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 office space, facilities, equipment and necessary
personnel for management of the Fund. The Investment Adviser receives for its
services to the Fund a monthly fee at an annual rate of 0.75% of the Fund's
average daily net assets. For purposes of this calculation, average daily net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each day during the month.
Prior to October 6, 2000, the Trust on behalf of the Fund was party to an
investment advisory agreement under which it paid Merrill Lynch Investment
Managers, L.P., an affiliate of the Investment Adviser, a fee at the annual rate
of 0.75% of its average daily net assets. For the fiscal years ended June 30,
2000, 1999 and 1998, as a result of its agreement to limit Fund expenses,
Merrill Lynch Investment Managers, L.P. waived its advisory fee in the amounts
of $54,806, $46,081 and $40,200, respectively, and reimbursed the Fund in the
amounts of $1,326, $13,497 and $52,325, respectively.
Securities held by the Fund 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 Fund 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.
Payment of Fund Expenses. The Advisory Agreement obligates the Investment
Adviser to provide investment advisory services and to pay, or cause an
affiliate to pay, for maintaining its staff and personnel and to provide office
space, facilities and necessary personnel for the Fund. The Investment Adviser
is also obligated to pay, or cause an affiliate to pay, the fees of all officers
and Trustees who are affiliated persons of the Investment Adviser. The Fund
pays, or causes to be paid, all other expenses incurred in the operation of the
Fund (except to the extent paid by FAM Distributors, Inc. (the "Distributor")),
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, shareholder reports, copies of the Registration
Statement, charges of the custodian, any sub-custodian and the transfer agent,
expenses of portfolio transactions, expenses of redemption of shares, Commission
fees, expenses of registering the shares under Federal, state or non-U.S. laws,
fees and actual out-of-pocket expenses of non-interested 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 Fund.
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are Merrill Lynch & Co., Inc. ("ML & Co."), a
financial services holding company and the ultimate parent of Merrill Lynch, and
Princeton Services, Inc. ML & Co. and Princeton Services, Inc. are "controlling
persons" of the Investment Adviser as defined under the 1940 Act because of
their ownership of its voting securities and their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below, the
Advisory Agreement will remain in effect from year to year if approved annually
(a) by the Board of Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees of the Trust who are
not parties to the Advisory Agreement or interested persons (as defined in the
1940 Act) of any such party. The Advisory Agreement is not assignable and will
automatically terminate in the event of its assignment. In
13
<PAGE> 41
addition, such contract may be terminated by the vote of a majority of the
outstanding voting securities of the Fund or by the Investment Adviser without
penalty on 60 days' written notice to the other party.
ACCOUNTING AND ADMINISTRATIVE SERVICES
The Trust has entered into an Administrative Services Agreement with State
Street Bank and Trust Company ("State Street") acting as service provider. The
Administrative Services Agreement obligates State Street to provide certain
accounting and administrative services to the Trust. The Trust pays State Street
for such services.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee
ranging from $11.00 to $23.00 per account (depending on the level of services
required) and certain other fees relating to special processing of sub-transfer
agency relationships. The Transfer Agent is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses. For purposes of the
Transfer Agency Agreement, the term "account" includes a shareholder account
maintained directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system.
Distribution Expenses. The Fund has entered into a distribution agreement
with the Distributor in connection with the continuous offering of shares of the
Fund (the "Distribution Agreement"). The Distribution Agreement obligates the
Distributor to pay certain expenses in connection with the offering of the
shares of the Fund. 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.
CODE OF ETHICS
The Board of Trustees of the Trust has approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Trust, the Investment Adviser and the
Distributor (the "Code of Ethics"). The Code of Ethics significantly restricts
the personal investing activities of all employees of the Investment Adviser and
the Distributor and, as described below, imposes additional, more onerous,
restrictions on fund investment personnel.
The Code of Ethics requires that all employees of the Investment Adviser
and the Distributor pre-clear any personal securities investments (with limited
exceptions, such as mutual funds, high-quality short-term securities and direct
obligations of the U.S. government). The pre-clearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser and the Distributor
include a ban on acquiring any securities in a "hot" initial public offering. In
addition, investment personnel are prohibited from profiting on short-term
trading in securities. 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 Code of Ethics provides for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within seven calendar days before or after trading by the Fund in the same or an
equivalent security.
14
<PAGE> 42
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.
The 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 the 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. The contingent deferred sales charges
("CDSCs"), distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class A shares, are imposed directly against those classes and not
against all assets of the Fund, and, accordingly, such charges do not affect the
net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
are calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs in relation to a particular class are borne exclusively by that
class. 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 Distribution Plan for Class A shares). Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege."
FAM Distributors, Inc., an affiliate of the Investment Adviser and of
Merrill Lynch, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 (mailing address: P.O. Box 9081, Princeton, New Jersey 08543-9081), acts
as Distributor for the Fund.
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class I and Class A shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share plus any sales charge applicable to the
class of shares selected by the investor. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by selected securities dealers or other financial intermediaries prior
to the close of regular trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m., Eastern time) which includes orders received after the
determination of net asset value on the previous day, the applicable offering
price will be based on the net asset value on the day the order is placed with
the Distributor, provided that the orders are received by the Distributor prior
to 30 minutes after the close of regular trading on the NYSE on that day. If the
purchase orders are not received prior to 30 minutes after the close of regular
trading on the NYSE on that day, such orders shall be deemed received on the
next business day. Selected securities dealers or other financial intermediaries
have the responsibility of submitting purchase orders to the Fund not later than
30 minutes after the close of regular trading on the NYSE in order to purchase
shares at that day's offering price.
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Fund or the Distributor for any
reason, including to prevent the "market-timing" of the Fund. Neither the
Distributor nor the selected securities dealers or other financial
intermediaries are permitted to withhold placing orders to benefit themselves by
a price change. Certain selected securities dealers or other financial
intermediaries may charge a processing fee to confirm a sale of shares. For
example, the fee currently charged by Merrill Lynch is $5.35. Purchases made
directly through the Transfer Agent are not subject to the processing fee.
15
<PAGE> 43
INITIAL SALES CHARGE ALTERNATIVES -- CLASS I AND CLASS A SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class A shares or, if an eligible investor, Class I shares.
Investors choosing the initial sales charge alternative who are eligible to
purchase Class I shares should purchase Class I shares rather than Class A
shares, because there is an account maintenance fee imposed on Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class I and Class A
shares of the 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, 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 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the 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.
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
who own Class I shares of the Fund in a shareholder account are entitled to
purchase additional Class I shares of the Fund in that account. Investors who
beneficially owned Investor Class shares of the Fund before October 6, 2000 in a
shareholder account are entitled to purchase additional Class I shares of the
Fund in that account at net asset value. 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 the Investment
Adviser 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
programs sponsored by the Investment Adviser or its affiliates, and investors
with accounts with financial intermediaries who participate in transaction fee
programs and invest at least $250,000 for their customers in the Fund. Class I
shares are available at net asset value to corporate warranty insurance reserve
fund programs and U.S. branches of foreign banking institutions, provided that
the participant has $3 million or more initially invested in affiliate-advised
investment companies. 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 investment companies advised by the Investment Adviser or its
affiliates, including the Fund, and to employees of certain selected securities
dealers or other financial intermediaries. Class I shares may also be offered at
net asset value to certain accounts over which the Investment Adviser or an
affiliate exercises investment discretion. Investors qualifying for
significantly reduced initial sales charges may find the initial sales charge
alternative particularly attractive, because similar sales charge reductions are
not available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class I or Class A shares,
because over time the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the initial sales charges, and, in
the case of Class A shares, the account maintenance fee. Although some investors
who previously purchased Class I shares may no longer be eligible to purchase
Class I shares of other affiliate-advised funds, those previously purchased
Class I shares, together with Class A, Class B and Class C share holdings, will
count toward a right of accumulation which may qualify the investor for a
reduced initial sales charge on new initial sales charge purchases. In addition,
the ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares. The
16
<PAGE> 44
ongoing Class A account maintenance fees will cause Class A shares to have a
higher expense ratio, pay lower dividends and have a lower total return than
Class I shares.
The Distributor may reallow discounts to selected securities dealers or
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such selected
securities dealers or other financial intermediaries. Since selected securities
dealers or other financial intermediaries selling Class I and Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act.
REDUCED INITIAL SALES CHARGES
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
to obtain such investments.
Reinvested Dividends. No initial sales charges are imposed upon Class I and
Class A shares issued as a result of the automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges apply through a right of
accumulation under which eligible investors are permitted to purchase shares of
the 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 selected securities dealer or other financial
intermediary, 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 apply to purchases aggregating
$25,000 or more of Class I or Class A shares of the 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 Fund's Transfer
Agent. The Letter of Intent is not available to employee benefit plans for which
affiliates of the Investment Adviser 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 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 5.0% 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 5.0% 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, a series of Financial Institutions Series Trust ("Summit"),
17
<PAGE> 45
into the Fund that creates a sales charge will count toward completing a new or
existing Letter of Intent from the Fund.
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 eight 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 securities dealer or
other financial intermediary.
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.
Purchase Privileges of Certain Persons. Trustees of the Trust and of other
investment companies advised by the Investment Adviser or its affiliates,
directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes the
Investment Adviser, Merrill Lynch Investment Managers, L.P., Merrill Lynch
Investment Managers International Limited and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.), employees of certain
selected securities 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. The Fund realizes economies of scale and reduction of sales-
related expenses by virtue of the familiarity of these persons with the Fund.
Employees and Trustees wishing to purchase shares of the Fund must satisfy the
Fund's suitability standards.
Class I and Class A shares are also offered at net asset value to
participants in certain investment programs including certain purchases in
connection with certain programs sponsored by the Investment Adviser or its
affiliates and certain transaction fee programs.
Acquisition of Certain Investment Companies. Class A shares may be offered
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.
A waived sales charge on a purchase of Class I shares will apply to current
beneficial shareholders who were also beneficial shareholders of the Fund as of
the opening of business of the Fund on October 6, 2000.
DEFERRED SALES CHARGE ALTERNATIVES -- 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.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class A shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
18
<PAGE> 46
Class B shares that are redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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 CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over six years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
six-year period. 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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0-1....................................... 4.0%
1-2....................................... 4.0%
2-3....................................... 3.0%
3-4....................................... 3.0%
4-5....................................... 2.0%
5-6....................................... 1.0%
6 and thereafter.......................... None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.0% (the
applicable rate in the third year after purchase).
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 individual retirement
account ("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 Fund 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: (a)
redemptions by certain eligible 401(a) and 401(k) plans and certain retirement
plan rollovers; (b) redemptions in connection with participation in certain
fee-based programs of the Investment Adviser or its affiliates; (c) redemptions
in connection with participation in certain fee-based programs of selected
securities dealers and other financial intermediaries that have agreements with
the Investment Adviser or Distributor; or (d) withdrawals through
19
<PAGE> 47
the Systematic Withdrawal Plan of up to 10% per year of your account value at
the time the plan is established. See "Shareholder Services -- Fee-Based
Programs" and "-- Systematic Withdrawal Plans."
Conversion of Class B Shares to Class A Shares. After approximately eight
years (the "Conversion Period"), Class B shares of the Fund will be converted
automatically into Class A shares of the Fund. Class A shares are subject to an
ongoing account maintenance fee of 0.25% of the average daily net assets of the
Fund but are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class A shares will occur at
least once each month (on the "Conversion Date") on the basis of the relative
net asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class A shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class A shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to Class
A shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class A shares
of the Fund.
The Conversion Period may be modified for investors that participate in
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. 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. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no Class C CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no Class C CDSC will be assessed
on shares derived from reinvestment of dividends. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends and then of shares held longest during the one-year
period. 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. The Class C CDSC
may be waived in connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Systematic Withdrawal Plans.
See "Shareholder Services -- Systematic Withdrawal Plans."
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
dealers and other financial intermediaries (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 dealer's
own funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. See "Distribution
Plans" below. Imposition of the CDSC and the distribution fee on Class B and
Class C shares is limited by the National Association of Securities Dealers,
Inc. (the "NASD") asset-based sales charge rule. See "Limitations on the Payment
of Deferred Sales Charges" below.
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 1940
Act (each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
20
<PAGE> 48
The Distribution Plans for each of the Class A, Class B and Class C shares
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and selected
securities dealers or other financial intermediaries (pursuant to
sub-agreements) in connection with account maintenance activities with respect
to Class A, Class B and Class C shares. Each of those classes has exclusive
voting rights with respect to the Distribution Plan adopted with respect to such
class pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote on any material changes to expenses
charged under the Class A Distribution Plan).
The Distribution Plans for each of the Class B and Class C shares provide
that the 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
securities dealers or other financial intermediaries (pursuant to
sub-agreements) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
securities dealers and other financial intermediaries 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 securities dealers and other financial intermediaries without the
assessment of an initial sales charge and at the same time permit the
Distributor to compensate securities dealers and other financial intermediaries
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 the 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 Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the 1940 Act. In their consideration of each Distribution Plan, the
Trustees must consider all factors they deem relevant, including information as
to the benefits of each Distribution Plan to the Fund and the related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
a reasonable likelihood that such Distribution Plan will benefit the Fund and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the non-interested
Trustees or by the vote of the holders of a majority of the outstanding related
class of voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of Trustees, including a majority of the non-interested
Trustees 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 the Fund preserve copies of its Distribution Plans 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.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans 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 each
Distribution Plan may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information will be 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 intermediary compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing
21
<PAGE> 49
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 intermediary
compensation.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the 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 the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the 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.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or
during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists, as defined by the
Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.
The value of shares of the Fund at the time of redemption may be more or
less than the shareholder's cost, depending in part on the market value of the
securities held by the Fund at such time.
The Trust has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates and a
syndicate of banks that is intended to provide the Fund with a temporary source
of cash to be used to meet redemption requests from Fund shareholders in
extraordinary or emergency circumstances.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so by tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., P.O. Box 41621, Jacksonville, Florida 32232-1621. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Redemption
requests should not be sent to the Fund. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the Transfer Agent's
register. The signature(s) on the redemption request may require a guarantee by
an "eligible guarantor institution" as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures are not
sufficient. In general, signature guarantees are waived on redemptions of less
than $50,000 as long as the following
22
<PAGE> 50
requirements are met: (i) all requests require the signature(s) of all persons
in whose name(s) shares are recorded on the Transfer Agent's register; (ii) all
checks must be mailed to the address of record on the Transfer Agent's register
and (iii) the address must not have changed within 30 days. Certain rules may
apply regarding certain account types such as but not limited to UGMA/UTMA
accounts, Joint Tenancies with Rights of Survivorship, contra broker
transactions and institutional accounts. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority.
A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the Transfer
Agent at 1-800-236-4479. The request must be made by the shareholder of record
and be for an amount less than $50,000. Before telephone requests will be
honored, signature approval from all shareholders of record on the account must
be obtained. The shares being redeemed must have been held for at least 15 days.
Telephone redemption requests will not be honored in the following situations:
the accountholder is deceased, the proceeds are to be sent to someone other than
the shareholder of record, funds are to be wired to the client's bank account, a
systematic withdrawal plan is in effect, the request is by an individual other
than the accountholder of record, the account is held by joint tenants who are
divorced, the address has changed within the last 30 days or share certificates
have been issued on the account.
Since this account feature involves a risk of loss from unauthorized or
fraudulent transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be refused if the
caller is unable to provide: the account number, the name and address registered
on the account and the social security number registered on the account. The
Fund or the Transfer Agent may temporarily suspend telephone transactions at any
time.
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 the Fund may be requested to redeem shares for which it has not
yet received good payment (e.g., cash, Federal funds or certified check drawn on
a U.S. bank). The Fund may delay or cause to be delayed the mailing of a
redemption check until such time as good payment (e.g., cash, Federal funds or
certified check drawn on a U.S. bank) has been collected for the purchase of
such Fund shares, which usually will not exceed 10 days. In the event that a
shareholder account held directly with the Transfer Agent contains a fractional
share balance, such fractional share balance will be automatically redeemed by
the Fund.
REPURCHASE
The Fund also will repurchase its shares through a shareholder's listed
selected securities dealer or other financial intermediary. The Fund normally
will accept orders to repurchase shares by wire or telephone from dealers for
their customers at the net asset value next computed after the order is placed.
Shares will be priced at the net asset value calculated on the day the request
is received, provided that the request for repurchase is submitted to the
selected securities dealer or other financial intermediary prior to the close of
regular trading on the NYSE (generally, regular trading on the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
selected securities dealer or other financial intermediary not later than 30
minutes after the close of regular trading on the NYSE on the same day.
Selected securities dealers and other financial intermediaries have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of regular trading on the NYSE in order to obtain
that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Certain selected securities dealers and other
financial intermediaries 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 selected securities dealers may be higher or lower. Repurchases
made through the Transfer Agent, on accounts held at the Transfer Agent, are not
subject to the processing fee. The Fund
23
<PAGE> 51
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 the Fund,
however, may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS I AND CLASS A SHARES
Shareholders of the 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 the Fund, as the case may be, at the 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.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "Account Choices -- How Shares are Priced" in the
Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of the close of regular trading on the NYSE
on each day the NYSE is open for trading based on prices at the time of the
close of regular trading. Regular trading on the NYSE generally closes at 4:00
p.m., Eastern time. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value of the Fund is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The per share net asset value of Class A, Class B and Class C shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to Class A shares. Moreover, the per share net asset
value of the Class B and Class C shares of the Fund generally will be lower than
the per share net asset value of Class A shares of the Fund, reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes of the
Fund will tend to converge (although not necessarily meet) immediately after the
payment of dividends which will differ by approximately the amount of the
expense accrual differentials between the classes.
Portfolio securities, including ADRs, 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 regular trading 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 Board of Trustees as the primary market. Long positions in securities traded
in the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. 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. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and
24
<PAGE> 52
most representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last ask price. Options purchased by the Fund are valued
at their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. 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 valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
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 regular trading on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times.
Each investor in the Fund may add to or reduce its investment in the Fund
on each day the NYSE is open for trading. The value of each investor's interest
in the Fund will be determined as of the close of regular trading on the NYSE by
multiplying the net asset value of the Fund by the percentage, effective for
that day, that represents that investor's share of the aggregate interests in
the Fund. The close of regular trading on the NYSE is generally 4:00 p.m.,
Eastern time. Any additions or withdrawals to be effected on that day will then
be effected. The investor's percentage of the aggregate beneficial interests in
the Fund 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 Fund as of
the time of determination on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Fund effected on such day, and (ii) the denominator of which is the aggregate
net asset value of the Fund as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Fund by all investors in the Fund. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Fund after the close of regular trading on the NYSE on the next
determination of net asset value of the Fund.
COMPUTATION OF OFFERING PRICE PER SHARE
No Class A, Class B and Class C shares were outstanding as of June 30,
2000. An illustration of the computation of the offering price for Class I
shares of the Fund based on the net asset value of the Fund's shares on June 30,
2000 is as follows:
<TABLE>
CLASS I
-----------
<S> <C>
Net Assets.................................................. $10,255,751
===========
Number of Shares Outstanding................................ 804,134
===========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 12.75
Sales Charge (for Class I Shares; 5.25% of Offering Price;
(5.54% of net amount invested))*.......................... 0.71
-----------
Offering Price.............................................. $ 13.46
===========
</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 "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares" herein.
25
<PAGE> 53
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Trustees, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, the Investment Adviser seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm and the
firm's risk in positioning a block of securities. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest spread or commission available. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Trustees, the Investment Adviser may consider sales of Fund shares as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund; however, whether or not a particular broker or dealer sells shares
of the Fund neither qualifies nor disqualifies such broker or dealer to execute
transactions for the Fund.
Subject to obtaining the best net results, brokers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement and the expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the Fund will benefit
from supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting the same
transactions. Certain supplemental research services may primarily benefit one
or more other investment companies or other accounts for which the Investment
Adviser exercises investment discretion. Conversely, the Fund may be the primary
beneficiary of the supplemental research services received as a result of
portfolio transactions effected for such other accounts or investment companies.
Foreign equity securities may be held by the Fund in the form of ADRs or
other securities convertible into foreign equity securities. ADRs may be listed
on stock exchanges, or traded in over-the-counter markets in the United States.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates. The Fund's ability and decisions to purchase or
sell portfolio securities of foreign issuers may be affected by laws or
regulations relating to the convertibility and repatriation of assets. Because
the shares of the Fund are redeemable on a daily basis in U.S. dollars, the Fund
intends to manage the portfolio so as to give reasonable assurance that it will
be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, it is not believed that these
considerations will have significant effect on the Fund's portfolio strategies.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the 1940 Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities unless
a permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with the
dealers acting as principal for their own accounts, the Fund will not deal with
affiliated persons, including Merrill Lynch and its affiliates, in connection
with such transactions. However, an affiliated person of the Fund may serve as
its broker in OTC transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch or an affiliate is a member or in a
private placement in which Merrill Lynch or an affiliate serves as placement
agent except
26
<PAGE> 54
pursuant to procedures approved by the Board of Trustees that either comply with
rules adopted by the Commission or with interpretations of the Commission staff.
See "Investment Objective and Policies -- Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch or its affiliates acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund. Securities may be held by, or be appropriate
investments for, the Fund as well as other funds or investment advisory clients
of the Investment Adviser or its affiliates.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AGGREGATE BROKERAGE COMMISSIONS PAID
JUNE 30, COMMISSIONS PAID TO MERRILL LYNCH
----------------- ------------------- ----------------
<S> <C> <C>
2000 $39,899 $-0-
1999 $27,997 $-0-
1998 $11,847 $-0-
</TABLE>
The Board of Trustees has considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund to the
Investment Adviser. After considering all factors deemed relevant, the Board of
Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or its affiliates
when one or more clients of the Investment Adviser or its affiliates are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate acts as investment adviser,
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
its affiliates 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each such
service and copies of the various plans or how to change options with respect
thereto, can be obtained from the Fund by calling the telephone number on the
cover page hereof, or from the Distributor or your selected securities dealer or
other financial intermediary. Certain of these services are available only to
U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The statements
also will show any other activity in the account since the preceding statement.
Shareholders also will receive separate
27
<PAGE> 55
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent. The Fund
does not issue share certificates.
Shareholders considering transferring their Class I or Class A shares from
a selected securities dealer or other financial intermediary 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 the 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 securities dealer or other financial intermediary 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.
Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer, and all future trading of these assets must be
coordinated by the new firm.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from a selected securities dealer or
other financial intermediary 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 the 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 securities dealer or
other financial intermediary for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other Mercury mutual funds and Summit, which is a Merrill
Lynch-sponsored money market fund specifically designated to be available for
exchange by holders of Class I, Class A, Class B and Class C shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege and any shares used in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class I and Class A Shares. Under the Fund's pricing system,
Class I shareholders may exchange Class I shares of the Fund for Class I shares
of a second Mercury mutual fund if they already hold Class I shares of the
second fund or are otherwise eligible to buy Class I shares of the second fund.
If the Class I shareholder wants to exchange Class I shares for shares of a
second Mercury mutual fund, but does not hold Class I shares of the second fund
in his or her account at the time of 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 the second Mercury mutual fund.
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
28
<PAGE> 56
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. For purposes of the exchange privilege, Class I and Class A
shares acquired through dividend reinvestment 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 the 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.
Exchanges of Class B and Class C Shares. In addition, the funds with Class
B or Class C shares outstanding ("outstanding Class B or Class C shares") offer
to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of another Mercury mutual fund or for Class B shares of Summit
("new Class B or Class C shares") 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 the Fund
exercising the exchange privilege will continue to be subject to the 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 the Fund acquired through use of the exchange privilege will
be subject to the 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 was
made. For purposes of computing the CDSC that may be payable on a disposition of
the new Class B or Class C shares, the holding period for the outstanding Class
B shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
another Mercury fund ("new Mercury Fund") after having held the 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" on 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.
Exchanges for Shares of a Money Market Fund. Class I and Class A shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class I or Class A shares of affiliate-advised
Funds; Class B shares of Summit have an exchange privilege back into Class B or
Class C shares of affiliate-advised Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC
and toward satisfaction of any Conversion Period with respect to Class B shares.
Class B shares of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain fee-based programs for which
alternative exchange arrangements may exist. Please see your financial
intermediary for further information.
Prior to October 12, 1998, exchanges from other affiliate-advised Funds
into a money market fund were directed to certain affiliate-advised money market
funds other than Summit. Shareholders who exchanged affiliate-advised Fund
shares for such other money market funds and subsequently wish to exchange those
money market fund shares for shares of the Fund will be subject to the CDSC
schedule applicable to such Fund shares, if any. The holding period for those
money market fund shares will not count toward satisfaction of the holding
period requirement for reduction of the CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period. However, the holding period for Class B or Class C shares of the Fund
received in exchange for such money market fund shares will be aggregated with
the holding period for the fund shares originally exchanged for such money
market fund shares for purposes of reducing the CDSC or satisfying the
Conversion Period.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her financial consultant, who will advise the
relevant Fund of the exchange. Shareholders of the 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 selected
securities dealers or other financial intermediaries. The Fund reserves 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 Fund
29
<PAGE> 57
reserves 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. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor. The Fund may refuse to permit exchanges to
prevent shareholders from market-timing the Fund.
FEE-BASED PROGRAMS
Certain fee-based programs sponsored by affiliates of the Investment
Adviser, 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 a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based on
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
certain specific Programs (including charges and limitations on transferability
applicable to shares that may be held in such Programs) is available in each
such Program's client agreement and from the Transfer Agent at 1-800-236-4479.
RETIREMENT PLANS
The minimum initial purchase to establish a retirement plan is $100.
Dividends received in retirement plans are exempt from Federal taxation until
distributed from the plans. Different tax rules apply to Roth IRA plans and
educational savings plans. Investors considering participation in any retirement
or education savings plan should review specific tax laws relating thereto and
should consult their attorneys or tax advisers with respect to the establishment
and maintenance of any such plan.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class I shares (if he or she is an eligible Class I investor) or
Class A, Class B or Class C shares at the applicable public offering price.
These purchases may be made either through the 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 the Fund on a periodic basis through your selected securities dealer
or other financial intermediary. The current minimum for such automatic
additional investments is $100. This minimum may be waived or revised under
certain circumstances.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Shareholders may, at any time, by written notification to their selected
securities dealer or other financial intermediary if their account is maintained
with a selected securities dealer or other financial intermediary, or by written
notification or by telephone (1-800-236-4479) to the Transfer Agent, if their
account is maintained with the Transfer Agent, elect to have subsequent
dividends of ordinary income and/or capital gains paid with respect to shares of
the Fund in cash, rather than reinvested in shares of the Fund (provided that,
in the event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares).
Commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected. The Fund is not responsible for any failure
of delivery to the shareholder's address of record and no
30
<PAGE> 58
interest will accrue on amounts represented by uncashed dividend checks. Cash
payments can also be directly deposited to the shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
shares of the 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. Redemptions will be made at net asset value as
of the close of regular trading on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined after the close of regular trading on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends on
all shares in the Investment Account are reinvested automatically in Fund
shares. A shareholder's systematic withdrawal plan may be terminated at any
time, without a charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
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 "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares."
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.
Withdrawal payments should not be considered dividends. 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.
The 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.
DIVIDENDS AND TAX STATUS
The Fund has qualified as, and intends to remain qualified as, a regulated
investment company under Subchapter M of the Code. Qualification as a regulated
investment company exempts the Fund (but not its shareholders) from paying
Federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains (i.e., the excess of net long-term
capital gains over net long-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long the shareholders have
held their shares in the Fund. Thus, failure by the Fund to qualify as a
regulated investment company would result in all of its income being subject to
Federal income tax at corporate rates.
31
<PAGE> 59
Qualification as a regulated investment company requires, among other
things, that (1) at least 90% of the Fund's annual gross income, without offset
for losses from the sale or other disposition of securities, be derived from
payments with respect to securities loans, interest, dividends and gains from
the sale or other disposition of stock or securities or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies; and (2) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
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 or the securities of other
regulated investment companies). In addition, in order not to be subject to
Federal taxation, the Fund must distribute to its shareholders at least 90% of
its investment company taxable income earned in each year.
It is the Fund's intention to distribute substantially all of its net
investment income, if any, annually. All net realized capital gains, if any, are
distributed to the Fund's shareholders at least annually. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class I and Class A shares as a result of the account maintenance
and distribution fees applicable to the Class B and Class C shares. Similarly,
the per share dividends on Class A shares will be lower than the per share
dividends on Class I shares as a result of the account maintenance fees
applicable with respect to the Class A shares. See "Pricing of
Shares -- Determination of Net Asset Value." Shares are issued and outstanding
as of the settlement date of a purchase order to the settlement date of a
redemption order.
The Fund is required to pay a non-deductible 4% excise tax to the extent it
does not distribute to its shareholders during any calendar year at least 98% of
its ordinary income for that calendar year, 98% of the excess of its capital
gains over its capital losses for the one-year period ending October 31 in such
calendar year, and all undistributed ordinary income and capital gains for the
preceding respective one-year period. The Fund intends to meet these
distribution requirements to avoid excise tax liability. The Fund also intends
to continue distributing to shareholders all of the excess of net long-term
capital gain over net short-term capital loss on sales of securities. If the net
asset value of shares of the Fund should, by reason of a distribution of
realized capital gains, be reduced below a shareholder's cost, such distribution
would to that extent be a return of capital to that shareholder even though
taxable to the shareholder, and a sale of shares by a shareholder at net asset
value at that time would result in a capital loss for Federal income tax
purposes.
In determining the extent to which the Fund's dividends may be eligible for
the 70% dividends-received deduction by corporate shareholders, interest income,
capital gain net income, gain or loss from Section 1256 contracts, dividend
income from foreign corporations and income from certain other sources will not
constitute qualified dividends. Corporate shareholders should consult their tax
advisers regarding other requirements applicable to the dividends-received
deduction. Individual shareholders are not eligible for the dividends-received
deduction.
Upon sale or exchange of shares of the Fund, a shareholder will realize
short-term or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund's shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
received in connection with the reinvestment of a dividend paid by the Fund
constitute a replacement of shares.
The foregoing is a general and abbreviated summary of the Federal income
tax consequences of an investment in the Fund, and is based on the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by
32
<PAGE> 60
legislative or administrative action, and any such change may be prospective or
retroactive. Ordinary income and capital gains dividends may also be subject to
state and local taxes. Investors are urged to consult their attorneys or tax
advisers regarding specific questions as to Federal, foreign, state or local
taxes.
PERFORMANCE DATA
From time to time the 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 figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class I, Class A, Class
B and Class C shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class I and Class A
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period as in the case of Class B and
Class C shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that account
maintenance and the distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
.
The 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 with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, 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. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Average annual total returns for the periods ended June 30, 2000 are as
follows:
<TABLE>
<CAPTION>
ONE SINCE
YEAR INCEPTION
----- ---------
<S> <C> <C> <C>
Class I*....................................... 10.41% 14.40% (Since 1/2/97)
</TABLE>
---------------
* There were no sales charges during this period. Sales charges went into effect
on October 6, 2000.
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 the
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.
In advertising and sales literature, the Fund may compare its performance
to that of various broad market indexes, including without limitation the
Russell Midcap Index, Russell Midcap Value Index, Standard & Poor's 500
Composite Stock Price Index and other published indexes. When comparing its
performance to a
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<PAGE> 61
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, the Fund may refer in advertising or sales literature to
(i) mutual fund performance ratings, rankings and comparisons (including
risk-adjusted ratings, rankings and comparisons), (ii) other comparisons of
mutual fund data including assets, expenses, fees and other data, and (iii)
other discussions reported in Barron's, Business Week, CDA Investment
Technology, Inc., Financial World, Forbes Magazine, Fortune Magazine, Lipper
Inc., Money Magazine, U.S. News & World Report, The Wall Street Journal and
other industry publications. The Fund may also make reference to awards that may
be given to the Investment Adviser. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
The Fund may provide information designed to help investors understand how
the Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political, or
other conditions, descriptive information on general principles of investing
such as asset allocation, diversification and risk tolerance, discussion of the
Fund's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Fund's performance or portfolio composition to
that of other funds or types of investments, indexes relevant to the comparison
being made, or to a hypothetical or model portfolio. The Fund may also quote
various measures of volatility and benchmark correlation in advertising and
other materials, and may compare these measures to those of other funds or types
of investments.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust permits the Trustees to establish and designate
separate portfolios or funds of the Trust holding the assets of the Trust, the
beneficial interests in each of which are represented by a separate series of
shares. The Trustees are permitted to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the particular fund. Each share represents
an interest in a fund proportionately equal to the interest of each other share
except that the Class A, B and C shares are subject to distribution and account
maintenance fees payable under the Plans of Distribution. Upon a fund's
liquidation, all shareholders would share pro rata in the net assets of the fund
available for distribution to shareholders. If they deem it advisable and in the
best interest of shareholders, the Board of Trustees may create additional
classes of shares. The Board of Trustees has created ten funds and ten series of
shares, and may create additional funds and series in the future, which have
separate assets and liabilities.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she 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 or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.
Ten shareholders holding the lesser of $25,000 worth or one percent of the
Trust's shares may advise the Trustees in writing that they wish to communicate
with other shareholders for the purpose of requesting a meeting to remove a
Trustee. The Trustees will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all other shareholders.
The Trust or the Fund may be terminated if approved by the vote of a
majority of the Trustees or by the approval of the holders of a majority of the
Trust's (or the Fund's) outstanding shares, as defined in the 1940 Act. If not
so terminated, the Trust will continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to
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<PAGE> 62
have been effectively acted upon unless approved by the holders of a "majority"
(as defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Declaration of Trust contains an express disclaimer of shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.
Common expenses incurred by the Trust are allocated among the funds based
upon: (1) relative net assets; (2) as incurred on a specific identification
basis; or (3) evenly among the funds, depending on the nature of the
expenditure.
Except for (1) changes which do not adversely affect the rights of Trust
shareholders, (2) a change in the name of the Trust, or a fund or series or
class thereof, (3) authorization of a new fund or series or class, (4) changes
to supply any omission or correct any ambiguous or defective provision, or (5)
changes required by any Federal, state or similar regulatory authority or
required by the Code to eliminate or reduce any Federal, state or local taxes
which may be payable by the Fund or its shareholders, no amendment may be made
to the Declaration of Trust without the affirmative vote of the holders of at
least 67% of the Trust's outstanding shares at a meeting at which more than 50%
of its outstanding shares are present in person or represented by proxy. The
holders of shares have no preemptive or conversion rights. Shares when issued
pursuant to the Prospectus are fully paid and non-assessable, except as set
forth above.
ISSUANCE OF FUND SHARES FOR SECURITIES
Investors may purchase Fund shares for consideration consisting of
securities rather than cash when, in the judgment of the Investment Adviser, the
securities: (a) meet the investment objective and policies of the Fund, (b) are
liquid and not subject to restrictions on resale, and (c) have a value that is
readily ascertainable via listing on or trading in a recognized United States or
international exchange or market.
REDEMPTION IN KIND
If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
in cash, the Fund may pay the redemption price in part by a distribution in kind
of readily marketable securities from the portfolio of the Fund, in lieu of
cash. The Trust has elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which the Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or one percent of the net asset value of the Fund during
any 90 day period for any one shareholder. Should redemptions by any shareholder
exceed such limitation the Fund will have the option of redeeming the excess in
cash or in kind. If shares are redeemed in kind, the redeeming shareholder would
incur brokerage costs in converting the assets into cash.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, 100 E. Wisconsin Avenue, Milwaukee, Wisconsin
53202, has been selected as the independent auditors of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
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<PAGE> 63
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109-3661, acts as custodian of the Fund's assets (the "Custodian"). The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's 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 the
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing 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
Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610,
is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's 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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.
PRINCIPAL HOLDERS
As of October 30, 2000, the following shareholders owned of record, and to
the knowledge of the Fund, beneficially more than 5% of the outstanding shares
of the Fund:
MLSIP, PO Box 30532, New Brunswick, NJ 08989 -- 23.71% of Class I
shares.
MLRAP, PO Box 30532, New Brunswick, NJ 08989 -- 9.05% of Class I shares.
Elizabeth B. Janeway Foundation, PO Box 60078, Los Angeles, CA
90060-0078 -- 5.20% of Class I shares.
As of October 30, 2000, the following shareholders owned of record, but not
beneficially, more than 5% of the outstanding shares of the Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 24.27% of Class I shares.
National Financial Service Corp., One Financial Center, 5th Floor, 200
Liberty Street, New York, NY 10281-1003 -- 5.24% of Class I shares.
As of October 30, 2000, the Trust's officers and Trustees as a group owned
0.75% of the Fund's outstanding shares.
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Code #: MHW-SAI-1050-0101
