<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
HOTCHKIS AND WILEY FUNDS
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(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
HOTCHKIS AND WILEY FUNDS
(TOTAL RETURN BOND FUND)
(LOW DURATION FUND)
725 SOUTH FIGUEROA STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90017
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of the Shareholders of the
Total Return Bond Fund and the Low Duration Fund, each a separate fund
(collectively, the "Funds") of the Hotchkis and Wiley Funds (the "Trust"), will
be held at 8:00 A.M., Los Angeles time, on September 11, 2000, at 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017, for the following
purposes:
1. To approve the transfer of all or substantially all of each Fund's
assets to a "master" fund in a "master/feeder" structure;
2. To approve the proposed investment advisory and administration
agreements;
3. To amend each Fund's fundamental investment restriction relating to
restrictions on investing in securities of a single issuer and
securities of issuers in a single industry;
4. To amend each Fund's fundamental investment restriction relating to
investing in the voting securities of a single issuer;
5. To amend each Fund's fundamental investment restriction relating to
acting as an underwriter;
6. To amend each Fund's fundamental investment restriction relating to
making investments for the purpose of exercising control or management;
and
7. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
Only shares of beneficial interest of the Funds of record at the close of
business on July 14, 2000 are entitled to any notice of or to vote at this
Meeting or any adjournment thereof. You are cordially invited to attend the
Meeting. SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING ARE REQUESTED TO
COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE
ENVELOPE PROVIDED FOR THIS PURPOSE. IF YOU HAVE BEEN PROVIDED WITH THE
OPPORTUNITY ON YOUR PROXY CARD TO PROVIDE VOTING INSTRUCTIONS VIA TELEPHONE OR
THE INTERNET, PLEASE TAKE ADVANTAGE OF THESE PROMPT AND EFFICIENT VOTING
OPTIONS.
If you have any questions regarding the enclosed proxy material or need
assistance in voting your shares, please contact our proxy solicitor,
Shareholder Communications Corporation, at (888) 632-9737.
Turner Swan
Secretary
Dated: July 24, 2000
<PAGE> 3
HOTCHKIS AND WILEY FUNDS
725 SOUTH FIGUEROA STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90017
------------------------
PROXY STATEMENT
------------------------
This proxy statement is furnished by the Board of Trustees of the Hotchkis
and Wiley Funds (the "Trust") in connection with its solicitation of proxies for
use at a Special Meeting of Shareholders of the Total Return Bond Fund and the
Low Duration Fund, each a separate fund of the Trust (collectively, the "Funds")
to be held at 8:00 A.M., Los Angeles time, on September 11, 2000 at 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017. It is expected that
the Notice of Special Meeting, Proxy Statement and form of Proxy will first be
mailed to shareholders on or about August 1, 2000. The purposes of the Meeting
are as follows: (1) to authorize the transfer of each Fund's assets to a
"master" fund in exchange for shares of the master fund, creating a
"master/feeder" structure; (2) to approve an investment advisory and
administration agreement in anticipation of the master/feeder reorganization;
(3) to approve an amendment to the fundamental investment restriction relating
to restrictions on investing in securities of a single issuer and securities of
issuers in the same industry; (4) to approve an amendment to the fundamental
investment restriction relating to the ability to invest in the voting
securities of a single issuer; (5) to approve an amendment to the fundamental
investment restriction relating to acting as an underwriter; and (6) to approve
an amendment to the fundamental investment restriction relating to making
investments for the purpose of exercising control or management. Approval of
Proposal 1 by a Fund will require the approval of a majority of the shares of
the Fund represented at the Meeting, provided a quorum is present. A quorum is
one-third of the shares of a Fund entitled to vote. Approval of Proposals 2
through 6 by a Fund will require the affirmative vote of the lesser of (i) 67%
of the shares represented at the Meeting at which more than 50% of the Fund's
outstanding shares are represented or (ii) more than 50% of the Fund's
outstanding shares.
If the accompanying form of Proxy is executed properly and returned, shares
represented by such Proxy will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for each of the Proposals. A Proxy may be revoked at any time
prior to the time it is voted by written notice to the Secretary of the Trust,
by submission of a new and different Proxy or by voting the shares in person or
by duly appointed agent at the Meeting. If sufficient votes to approve one or
more of the proposed items are not received, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further solicitation
of proxies. Any such adjournment will require the affirmative vote of a majority
of those shares present at the Meeting or represented by proxy. When voting on a
proposed adjournment, the persons named as proxies will vote for the proposed
adjournment all the shares they are entitled to vote with respect to each item,
unless directed to disapprove the item, in which case such shares will be voted
against the proposed adjournment.
If a Proxy that is properly executed and returned accompanied by
instructions to withhold authority to vote represents a broker "non-vote" (that
is, a Proxy from a broker or nominee indicating that such person has not
received instructions from the beneficial owner or other person entitled to vote
shares on a particular matter with respect to which the broker or nominee does
not have discretionary power), the shares represented thereby will be considered
not to be present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business and will be deemed not cast with respect
to such Proposal. A properly executed and returned Proxy marked with an
abstention will be considered present at the Meeting for the purpose of
determining the existence of a quorum for the transaction of business.
Abstentions and broker "non-votes" do not constitute a vote "for" or "against"
the matter, but have the effect of a negative vote on matters which require
approval by a requisite percentage of the outstanding shares.
The close of business on July 14, 2000 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, the Trust had 123,330,423 shares of beneficial interest
outstanding, of which 12,033,984 were shares of the Total Return Bond Fund
<PAGE> 4
(8,208,158 shares of the Investor Class and 3,825,826 shares of the Distributor
Class) and 36,958,543 were shares of the Low Duration Fund (35,426,427 shares of
the Investor Class and 1,532,115 shares of the Distributor Class). Shareholders
of each Class vote together, and each share will be entitled to one vote at the
Meeting.
As of June 30, 2000, no person is beneficial owner of more than five
percent of the shares of either class of either Fund except as set forth in the
table below:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS OF THE RECORD DATE
NAME AND ADDRESS OF -----------------------------
NAME OF FUND BENEFICIAL OWNER NUMBER PERCENT OF TOTAL
------------ ------------------- ---------- ----------------
<S> <C> <C> <C>
Total Return Bond Fund -- Investor David X Marks Foundation 697,731.56 8.50%
Class 801 South Grand Avenue #10
Los Angeles, California 90017-4613
</TABLE>
As of June 30, 2000, none of the Trustees or executive officers held shares
of the Funds except as set forth in the table below:
<TABLE>
<CAPTION>
TRUSTEE/EXECUTIVE OFFICER FUND AND CLASS NUMBER OF SHARES HELD
------------------------- -------------- ---------------------
<S> <C> <C>
John A. Gavin Low Duration Fund -- Investor Class 1,050.42
Nancy D. Celick Low Duration Fund -- Investor Class 4,297.59
</TABLE>
As of June 30, 2000, the Trustees and executive officers of the Trust (as a
group) owned beneficially less than 1% of the outstanding shares of each Fund.
The expenses of preparation, printing and mailing of the enclosed forms of
proxy and accompanying Notice and Proxy Statement will be borne by the Funds in
proportion to their relative net assets. The Funds will reimburse banks, brokers
and others for their reasonable expenses in forwarding proxy solicitation
materials to the beneficial owners of the shares of the Funds. The Funds have
retained Shareholder Communications Corporation, 17 State Street, New York, New
York 10004, to aid in the solicitation of proxies, at an aggregate cost of
approximately $5,000, plus out-of-pocket expenses. Shareholder Communications
Corporation will contact shareholders by telephone, fax and mail to solicit
proxies.
THE TRUST WILL FURNISH TO SHAREHOLDERS, WITHOUT CHARGE, A COPY OF THE MOST
RECENT ANNUAL AND SEMI-ANNUAL REPORT UPON REQUEST, WITHIN THREE BUSINESS DAYS.
REQUESTS MAY BE DIRECTED TO THE TRUST'S INVESTOR INFORMATION DEPARTMENT, TOLL
FREE AT (800) 236-4479.
PROPOSAL 1
TRANSFER OF ASSETS TO MASTER FUND
At the request of the Trust's investment adviser, the Board of Trustees has
approved a proposal, subject to approval as to each Fund by that Fund's
shareholders, to transfer all or substantially all of the Fund's assets to
another entity known in the investment company industry as a "master" fund in a
"master/feeder" structure.
In a master/feeder structure, a fund (the "Feeder Fund") sells its shares
to public investors under the terms of its prospectus. Instead of investing the
money it obtains from those sales directly in securities and other investments,
however, it invests all of those assets in another fund (the "Master Fund") with
substantially the same investment objectives and policies in return for shares
in that Master Fund. The Master Fund then invests the assets in a portfolio of
securities and other investments. Because the shareholders of the Feeder Fund
own an indirect interest in the Master Fund, their investment has the same
performance as the Master Fund's portfolio. Since any number of Feeder Funds can
invest their assets in a single Master Fund, a master/feeder structure permits
greater pooling of assets than does a stand-alone fund. This ability to pool
assets may, in turn, allow the Master Fund to achieve increased economies of
scale and efficiencies in portfolio management. The master/feeder structure may
also permit greater investor access to a single Master Fund portfolio, since any
number of separate Feeder Funds with separate identities, management, fee
structures and/or distribution channels can all invest in the same Master Fund.
Like the funds of the Trust, Master Funds also can be separate portfolios of a
master trust, each with different investment objectives and policies.
2
<PAGE> 5
Each Fund proposes to convert to a Feeder Fund by contributing its assets to a
Master Fund which is a portfolio of a master trust (the "Master Trust"). The
Total Return Bond Fund will contribute its assets to the Total Return Bond
Master Portfolio of the Master Trust, and the Low Duration Fund to the Low
Duration Master Portfolio of the Master Trust in return for an interest therein.
This avoids transaction costs and, if proper procedures are followed, also
avoids the recognition of taxable gain or loss. Approval of Proposal 1 by the
shareholders of a Fund would permit the Fund to be converted to a Feeder Fund by
transferring its assets to the applicable Master Fund in exchange for shares in
that Master Fund.
The investment adviser believes that, generally, the larger the pool of
assets, the more efficiently and cost-effectively it can be managed. Because a
Master Fund pools the assets of multiple Feeder Funds, it provides an effective
means of creating larger asset pools. As discussed above, the primary motivation
for considering a master/feeder structure is to seek to achieve possible
economies of scale and efficiencies in portfolio management, while preserving
separate identities, management and distribution channels at the Feeder Fund
level. The Trustees' proposal to transfer all or substantially all of each
Fund's assets to a separate Master Fund, thus converting each Fund into a Feeder
Fund, is based upon the Trustees' determination that it would be in the best
interests of both the Fund and its shareholders.
Because investment advisory services are provided at the Master Fund level,
a Fund will no longer have an investment adviser if it converts to a Feeder
Fund. Each Master Fund will pay its investment adviser an investment advisory
fee based upon its net assets. If a Fund converts to a master/feeder fund
structure, whenever the Master Fund holds a vote of its Feeder Funds, the Fund
will either pass the vote through to its own shareholders or vote the shares of
the Master Fund held by it in the same proportion as the votes of all other
Feeder Funds. If some of the Feeder Funds are larger than a Fund, these other
Feeder Funds would have more voting power than the Fund over the operations of
the Master Fund.
REQUIRED VOTE. Approval of Proposal 1 as to a Fund requires the approval of
a majority of the shares of the Fund represented at the Meeting, provided a
quorum is present. A quorum is one-third of the shares of a Fund represented at
the Meeting.
THE TRUSTEES RECOMMEND THAT THE RESPECTIVE SHAREHOLDERS OF EACH FUND VOTE
FOR THE PROPOSAL TO TRANSFER ALL OR SUBSTANTIALLY ALL OF THE FUND'S ASSETS TO A
MASTER FUND, TO PERMIT THE REORGANIZATION OF EACH SUCH FUND INTO A MASTER/FEEDER
STRUCTURE.
PROPOSAL 2
APPROVAL OR DISAPPROVAL OF THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENTS
In anticipation of the master/feeder reorganization of each Fund described
above and in order to ensure the continuity of the investment advisory and
administrative services provided to each Fund and to each Master Fund under such
an arrangement, shareholders of each Fund are being asked to consider approval
or disapproval of the proposed agreements applicable to that Fund as described
below. Shareholders of a Fund may only vote on the proposed agreements
applicable to that Fund together and not on each proposed agreement
individually.
The aggregate annual rate of compensation payable under the current
agreements will remain the same under the proposed agreements. See "Compensation
and Expenses" below. The services to be provided to the Funds and the two Master
Funds under the proposed agreements will be identical to the services provided
to the Funds under the current agreements. See "Summary of Current Advisory
Agreements and Proposed Advisory and Administration Agreements" below.
SUMMARY OF CURRENT ADVISORY AGREEMENTS AND PROPOSED ADVISORY AND ADMINISTRATION
AGREEMENTS
Mercury Advisors (the "Adviser") is the investment adviser to each Fund.
The Adviser was formerly known as Hotchkis and Wiley, a division of Merrill
Lynch Asset Management, L.P. ("MLAM"). In connection with a global rebranding of
the Merrill Lynch asset management group, MLAM changed its name
3
<PAGE> 6
to Merrill Lynch Investment Managers, L.P. ("MLIM") as of June 30, 2000. As part
of the rebranding, Hotchkis and Wiley will no longer be a division of the
Adviser. Mercury Advisors is a "doing business as" name used by MLIM in its
capacity as investment adviser of the Funds.
Pursuant to separate investment advisory agreements between the Adviser and
the Trust on behalf of each Fund, the Adviser provides investment advisory and
administrative services to these Funds. Currently, there are no separate
contracts covering these administrative services. The current investment
advisory agreements are collectively referred to in this Proposal 2 as the
"Current Advisory Agreements." Certain information regarding the Current
Advisory Agreements is set forth below.
<TABLE>
<CAPTION>
DESCRIPTION OF BOARD
DATE CURRENT ADVISORY ACTION TAKEN WITH
AGREEMENT WAS LAST RESPECT TO CURRENT
SUBMITTED TO SHAREHOLDER ADVISORY AGREEMENT
DATE OF CURRENT VOTE AND PURPOSE OF SUCH DURING THE PRECEDING
FUND ADVISORY AGREEMENT SUBMISSION FISCAL YEAR
---- ------------------ ------------------------ --------------------
<S> <C> <C> <C>
Low Duration November 12, 1996 September 27, 1996 Continued
(change in control of
Adviser)
Total Return Bond November 12, 1996 September 27, 1996 Continued
(change in control of
Adviser)
</TABLE>
If the shareholders of a Fund approve Proposal 1, the Fund will transfer
all of its assets to a corresponding Master Fund in exchange for shares of that
Master Fund (the Total Return Bond Fund to the Total Return Bond Master
Portfolio and the Low Duration Fund to the Low Duration Master Portfolio).
Simultaneously with these transfers, both Master Funds will enter into separate
investment advisory agreements with Fund Asset Management, L.P., an affiliate of
the Adviser ("FAM") (each a "Proposed Advisory Agreement") and each Fund will
enter into a separate administration agreement with FAM (each a "Proposed
Administration Agreement"). Pursuant to the Proposed Advisory Agreements, FAM
will provide investment advisory and administrative services to both Master
Funds. Pursuant to the Proposed Administration Agreements, FAM will provide
administrative services or arrange for the provision of such services to each
Fund. The Proposed Advisory Agreements and the Proposed Administration
Agreements are collectively referred to in this Proposal 2 as the "Proposed
Agreements."
The only material differences between the Proposed Agreements and the
Current Advisory Agreements are: (i) the assets to be managed and administered
will be held by two Master Funds rather than by each Fund and (ii) instead of
the Adviser providing investment advisory and administrative services to the
Funds pursuant to investment advisory agreements, FAM, an affiliate of the
Adviser, will: (a) provide investment advisory and administrative services to
each Master Fund pursuant to separate investment advisory agreements, and (b)
provide administrative services to each Fund pursuant to separate administration
agreements. Except for Roger DeBard who will be retiring from the Adviser as of
August 18, 2000, the current portfolio managers of the Low Duration Fund and the
Total Return Bond Fund will serve as portfolio managers of the Low Duration
Master Portfolio and the Total Return Bond Master Portfolio, respectively.
THE SERVICES TO BE PROVIDED BY FAM TO THE FUNDS AND THE MASTER FUNDS UNDER
THE PROPOSED AGREEMENTS WILL BE IDENTICAL TO THE SERVICES PROVIDED BY THE
ADVISER TO THE FUNDS UNDER THE CURRENT ADVISORY AGREEMENTS. AS DESCRIBED BELOW,
THE AGGREGATE ANNUAL RATE OF COMPENSATION TO BE PAID UNDER THE PROPOSED
AGREEMENTS IS THE SAME AS THE AGGREGATE ANNUAL RATE OF COMPENSATION PAYABLE
UNDER THE CURRENT ADVISORY AGREEMENTS.
Except for FAM (instead of the Adviser) serving as the named investment
adviser to the Master Fund in which each Fund will invest all of its net assets,
the advisory and administrative personnel providing services to each Master Fund
under the master/feeder structure will remain the same as those currently
providing such services to the Funds (with the exception of Mr. DeBard who will
be retiring). FAM and the Adviser have common officers and employees and are
both owned and controlled by the same entities. FAM has advised the Trustees
that the change in the investment adviser will not result in different portfolio
management or day-to-day operations for the Master Funds in which the Funds will
invest their net assets.
4
<PAGE> 7
TERMS OF THE PROPOSED AGREEMENTS
Copies of the forms of Proposed Advisory Agreement and Proposed
Administration Agreement relating to the Low Duration Master Portfolio and the
Low Duration Fund are attached hereto as Exhibit A and Exhibit B. The Proposed
Administration Agreement for the Total Return Bond Fund is identical to that for
the Low Duration Fund; the Proposed Advisory Agreement for the Total Return Bond
Master Portfolio is identical to that for the Low Duration Master Portfolio,
with the exception of the fee payable thereunder. Set forth below is a
description of the services to be provided under those agreements along with
certain other information relating to those agreements.
Description of Services to be Provided under the Proposed Agreements. Under
the Proposed Advisory Agreements, FAM will provide investment research and
investment advice to both Master Funds. Subject to certain restrictions, FAM
will determine whether to purchase, sell or exchange portfolio securities and
will fix the relative asset allocations for each Master Fund. FAM also will
perform certain management and administrative services necessary for the
operation of the Master Funds. Under the Proposed Administration Agreements, FAM
will perform administrative services necessary for the operation of the Funds,
including (i) preparing and filing reports and other documents required by
federal, state and other applicable laws and regulations, (ii) preparing proxy
materials, and (iii) overseeing the performance of administrative and
professional services rendered to the Funds by their respective service
providers.
Duration and Termination of the Proposed Agreements. If a Fund's
shareholders approve the applicable Proposed Agreements at the Meeting, such
Proposed Agreements will commence on the date that the Fund transfers its assets
to the corresponding Master Fund. Unless earlier terminated as described below,
such Proposed Agreements will remain in effect for a period of two years from
that date and thereafter will continue in effect from year to year if approved
annually (a) by a majority of the Trustees or by a majority of the outstanding
shares of a Fund or Master Fund, as applicable, and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act")) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the applicable Master Fund or a Fund, as
applicable.
COMPENSATION AND EXPENSES
AS STATED ABOVE, THE AGGREGATE ANNUAL RATE OF COMPENSATION PAYABLE UNDER
THE CURRENT AGREEMENTS IS THE SAME AS THE AGGREGATE ANNUAL RATE OF COMPENSATION
TO BE PAID UNDER THE PROPOSED AGREEMENTS. IN THE EVENT FAM SEEKS TO INCREASE THE
AGGREGATE ANNUAL RATE OF COMPENSATION TO BE PAID UNDER THE PROPOSED AGREEMENTS
IN THE FUTURE, THE TRUSTEES OF THE MASTER FUND AND THE AFFECTED FEEDER FUNDS AND
THE SHAREHOLDERS OF THE MASTER FUND AND THE AFFECTED FEEDER FUNDS MUST APPROVE
SUCH INCREASES.
As compensation for the Adviser's investment advisory and administrative
services to the Low Duration Fund and the Total Return Bond Fund under the
Current Advisory Agreements applicable to those Funds, the Adviser receives
monthly fees at an annual rate of .46% and .55% of the average daily net assets
of those Funds, respectively.
Pursuant to the Proposed Advisory Agreements, FAM will receive monthly fees
for the provision of investment advisory and certain administrative services to
(i) the Master Fund that holds the assets of the Low Duration Fund at an annual
rate of 0.21% of average daily net assets, and (ii) the Master Fund that holds
the assets of the Total Return Bond Fund at an annual rate of 0.30% of average
daily net assets. As compensation for FAM's additional administrative services
to the Low Duration and Total Return Bond Funds under the Proposed
Administration Agreements, FAM will receive a monthly fee for such additional
administrative services at an annual rate of 0.25% of the average daily net
assets of the Low Duration and Total Return Bond Funds, respectively. The
services covered by the Proposed Advisory Agreements between FAM and each Master
Fund and the Proposed Administration Agreements between FAM and the Low Duration
Fund and the Total Return Bond Fund will be the same services covered by the
Current Advisory Agreements with the Adviser for the Low Duration Fund and the
Total Return Bond Fund.
5
<PAGE> 8
Certain information relating to the investment advisory fees payable by the
Funds under the Current Agreements and the proposed investment advisory fees and
administration fees to be paid by the Funds and the Master Funds, as applicable,
under the Proposed Agreements is set forth below.
<TABLE>
<CAPTION>
PROPOSED FEES
------------------------------------------------------------------------
TOTAL
CURRENT FEES INVESTMENT
------------------------------ ADVISORY AND
INVESTMENT AGGREGATE INVESTMENT ADMINISTRATION ADMINISTRATION
ADVISORY FEE AS AMOUNT OF ADVISORY FEE AS FEE AS A FEE AS A AGGREGATE AMOUNT
A PERCENTAGE OF INVESTMENT A PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF OF INVESTMENT
AVERAGE DAILY ADVISORY AVERAGE DAILY AVERAGE DAILY AVERAGE DAILY ADVISORY FEE AND
FUND NET ASSETS FEE# NET ASSETS NET ASSETS NET ASSETS ADMINISTRATION FEE##
---- --------------- ------------ --------------- -------------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Low Duration......... 0.46% $1,798,824 0.21% 0.25% 0.46% $1,798,824
Total Return Bond.... 0.55% $ 730,843 0.30% 0.25% 0.55% $ 730,843
</TABLE>
---------------
# For the fiscal year ended June 30, 2000. The Adviser voluntarily waived
$524,134 and $358,311 of the investment advisory fee of the Low Duration and
Total Return Bond Funds, respectively.
## Based on fiscal year ended June 30, 2000 assets under management after taking
into consideration expense waivers.
THE TRUSTEES' CONSIDERATIONS
In their consideration of the Proposed Agreements, the Trustees received
information relating to, among other things, alternatives to the present
agreements and the nature, quality and extent of the advisory and other services
to be provided to the Master Funds by FAM and the Adviser. The non-interested
Trustees also considered the quality of the personnel providing investment
advisory services to the Funds, representations made by FAM and the Adviser that
there will be no material adverse change in the services provided to the Funds
and the Master Funds after the restructuring of each Fund into a "master/feeder"
structure, the relative profitability of the present agreements to the Adviser,
and information about the services to be performed and the personnel who will
perform such services under the Proposed Agreements. The non-interested Trustees
were advised by counsel in connection with their review of the Proposed
Agreements.
PAYMENTS TO AFFILIATES OF FAM AND THE ADVISER BY THE FUNDS
Effective July 1, 2000, the Adviser began providing accounting services to
each Fund at its cost and each Fund began reimbursing the Adviser for these
accounting services. Prior to this time, these services were provided by Firstar
Mutual Fund Services, LLC, which is not affiliated with the Adviser. After
approval of the Proposed Agreements, FAM will provide or arrange for the
provision of these services to each Master Fund and to each Fund.
Effective July 10, 2000, Financial Data Services, Inc. ("FDS"), an
affiliate of FAM and the Adviser, began acting as the transfer agent for each
Fund pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, FDS is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
After the approval of the Proposed Agreements, FDS will continue to provide or
arrange for the provision of these services to each Fund.
Each Fund makes payments to certain intermediaries such as fund
"supermarket" programs for sub-transfer agency services they perform for Fund
shareholders investing through these entities. These services include account
maintenance services. Payments to affiliates of the Adviser during the fiscal
year ended June 30, 2000 for these sub-transfer agency services for the Low
Duration and Total Return Bond Funds totaled $4,344 and $38,321, respectively.
Each Fund has adopted a distribution plan for its Distributor Class shares
pursuant to Rule 12b-1 under the Investment Company Act (the "Distribution
Plan"). The Distribution Plan provides for the payment of distribution fees to
FAM Distributors, Inc. (formerly known as Princeton Funds Distributor, Inc.)
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081, to
compensate the Distributor for the
6
<PAGE> 9
performance of certain distribution services at an annual rate of 0.25% of the
average daily net assets of the Distributor Class shares. After approval of the
Proposed Agreements, the Distributor will continue to provide the distribution
and account maintenance services to the Funds. Information relating to the fees
paid to the Distributor by the Funds pursuant to the Distribution Plan is set
forth below for the fiscal year ended June 30, 2000.
<TABLE>
<CAPTION>
AMOUNT PAID TO
DISTRIBUTOR
FUND UNDER DISTRIBUTION PLAN
---- -----------------------
<S> <C>
Low Duration............................................. $15,935
Total Return Bond........................................ $46,828
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is an
affiliated person, as defined in the Investment Company Act, of FAM and the
Adviser because MLPF&S, FAM and the Adviser are under the common control of
Merrill Lynch & Co., Inc. ("ML&Co."). No brokerage commissions or mark-ups were
paid by either Fund, including commissions to MLPF&S, for the fiscal year ended
June 30, 2000.
INFORMATION RELATING TO FAM AND THE ADVISER
FAM and the Adviser are each organized as a limited partnership. The
general partner of each of FAM and the Adviser is Princeton Services, Inc.
("Princeton Services"). The limited partner of each of FAM and the Adviser is
ML&Co. Princeton Services is a wholly-owned subsidiary of Merrill Lynch Group,
Inc. ("Merrill Lynch Group"). Merrill Lynch Group is a wholly-owned subsidiary
of ML&Co. ML&Co. and Princeton Services control FAM and the Adviser through
their ownership of the voting securities of FAM and the Adviser and their power
to exercise a controlling influence over the management and policies of FAM and
the Adviser.
Jeffrey M. Peek is the President of FAM and the Adviser. Mr. Peek also
serves as President and Director of Princeton Services and Executive Vice
President of ML&Co. The address of Mr. Peek, FAM, the Adviser and Princeton
Services is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
ML&Co. and Merrill Lynch Group is 4 World Financial Center, New York, New York
10080.
The name of each officer or Trustee of the Trust who is an officer,
employee or director of FAM or the Adviser is set forth below:
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION DURING
NAME OFFICE PAST FIVE YEARS
---- ------ -----------------
<S> <C> <C>
Michael D. Baxter.............. Trustee Co-Head of the Adviser (since 1999);
Managing Director of the Adviser
(since 1996); Partner of the Adviser
(1994 - 1996).
Nancy D. Celick................ President and Chief Administrative Officer of the
Principal Executive Adviser (since 1998); Chief Financial
Officer Officer of the Adviser (1993 - 1998).
Mark D. Cone................... Vice President Vice President of the Adviser; Retail
Account Manager, Neuberger & Berman
(1991 - 1994).
Nigel Hurst-Brown.............. Trustee Co-Head of the Adviser (since 1999);
Managing Director of Merrill Lynch
Mercury Asset Management (since
1998); Director of Mercury Asset
Management Group Plc. (since 1990).
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION DURING
NAME OFFICE PAST FIVE YEARS
---- ------ -----------------
<S> <C> <C>
Donald C. Burke................ Vice President, Senior Vice President and Treasurer
Treasurer, Principal of Merrill Lynch Investment Managers,
Financial and L.P. and the Adviser (since 1999);
Accounting Officer Senior Vice President and Treasurer
of Princeton Services (since 1999);
Vice President of FAM Distributors,
Inc. (since 1999); First Vice
President of Merrill Lynch Investment
Managers, L.P. and the Adviser
(1990 - 1997).
Gracie Fermelia................ Vice President, Director of the Adviser (since 2000);
Assistant Secretary Vice President of the Adviser (since
and Assistant 1994).
Treasurer
Turner Swan.................... Secretary Attorney with the Adviser (since
1997); Attorney, Sheppard, Mullin,
Richter & Hampton LLP (1995 - 1997);
Attorney, Trout Trading Management
Company Ltd. (1993 - 1995).
</TABLE>
INFORMATION RELATING TO SIMILAR FUNDS
FAM and the Adviser are the investment advisers for other investment
companies with investment objectives that are similar to the Funds
(collectively, the "Similar Funds"). The following table provides certain
information relating to each Similar Fund for its most recently completed fiscal
period.
<TABLE>
<CAPTION>
ANNUAL RATE OF
NET ASSETS AS OF INVESTMENT ADVISORY
SIMILAR FUND MARCH 31, 2000 OR MANAGEMENT FEE ADMINISTRATION FEE
------------ ---------------- ------------------- ------------------
(000)
<S> <C> <C> <C>
Merrill Lynch Adjustable Rate Securities
Fund................................... $ 81,019 .40% N/A
Merrill Lynch Corporate Bond Fund --
Investment Grade....................... $1,217,006 .36%(a) N/A
Merrill Lynch Intermediate Government
Bond Fund.............................. $ 77,860 .40% N/A
Merrill Lynch U.S. Government Mortgage
Fund................................... $1,417,038 .47%(b) N/A
</TABLE>
---------------
(a) This Similar Fund pays a monthly fee at an annual rate of 0.50% of the
average daily net assets of the Fund not exceeding $250 million, 0.45% of
average daily net assets in excess of $250 million but not exceeding $500
million, 0.40% of average daily net assets in excess of $500 million but not
exceeding $750 million and 0.35% of average daily net assets in excess of
$750 million.
(b) This Similar Fund pays a monthly fee at an annual rate of 0.50% of the
average daily net assets of the Fund not exceeding $500 million, 0.475% of
average daily net assets in excess of $500 million but not exceeding $1
billion, 0.45% of average daily net assets in excess of $1 billion but not
exceeding $1.5 billion, 0.425% of average daily net assets in excess of $1.5
billion but not in excess of $2 billion, 0.40% of average daily net assets
in excess of $2 billion but not in excess of $2.5 billion, 0.375% of average
daily net assets in excess of $2.5 billion but not in excess of $3.5
billion, 0.35% of average daily net assets in excess of $3.5 billion but not
in excess of $5 billion, 0.325% of average daily net assets in excess of $5
billion but not in excess of $6.5 billion and 0.30% of average daily net
assets in excess of $6.5 billion.
REQUIRED VOTE. Each Fund's proposed investment advisory agreement and
administration agreement together require the approval of a "majority" of each
such Fund's outstanding voting securities. Under the Investment Company Act, a
majority of a Fund's outstanding voting securities is defined as the lesser of
(i) 67% of the outstanding shares represented at a meeting at which more than
50% of the outstanding shares
8
<PAGE> 11
are present in person or represented by proxy, or (ii) more than 50% of the
Fund's outstanding voting securities. If the Proposal is not approved with
respect to a Fund, the Fund will not invest in the Master Fund.
THE TRUSTEES RECOMMEND THAT THE RESPECTIVE SHAREHOLDERS OF EACH FUND VOTE
FOR THE PROPOSAL TO APPROVE THE PROPOSED INVESTMENT ADVISORY AND ADMINISTRATION
AGREEMENTS.
PROPOSALS 3 - 6
AMENDMENT OF INVESTMENT RESTRICTIONS
In conjunction with the proposal to transfer each Fund's assets to a Master
Fund, the Trustees also approved amendments to certain investment restrictions
which otherwise would have prohibited investing in a Master Fund. These
amendments require the prior approval of a Fund's shareholders in order to take
effect as to that Fund.
If approved by shareholders, the following investment restrictions would be
amended by adding express authority for each Fund to invest its assets in an
open-end management investment company, or a portfolio thereof, with
substantially the same investment objective(s) and policies as the Fund
(proposed additional language is in bold face, italicized type):
Except as noted, none of the Funds may:
(PROPOSAL 3)
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; PROVIDED THAT
THE [TOTAL RETURN BOND FUND/LOW DURATION FUND] MAY INVEST ALL OF ITS ASSETS IN
AN OPEN-END MANAGEMENT INVESTMENT COMPANY, OR PORTFOLIO THEREOF, WITH
SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVE(S) AND POLICIES AS THE FUND, WITHOUT
REGARD TO THE LIMITATIONS SET FORTH IN THIS PARAGRAPH.
(PROPOSAL 4)
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; PROVIDED THAT
THE [TOTAL RETURN BOND FUND/LOW DURATION FUND] MAY INVEST ALL OF ITS ASSETS IN
AN OPEN-END MANAGEMENT INVESTMENT COMPANY, OR PORTFOLIO THEREOF, WITH
SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVE(S) AND POLICIES AS THE FUND, WITHOUT
REGARD TO THE LIMITATIONS SET FORTH IN THIS PARAGRAPH.
(PROPOSAL 5)
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; PROVIDED THAT THE PURCHASE BY THE [TOTAL RETURN
BOND FUND/LOW DURATION FUND] OF SECURITIES ISSUED BY AN OPEN-END MANAGEMENT
INVESTMENT COMPANY, OR A PORTFOLIO THEREOF, WITH SUBSTANTIALLY THE SAME
INVESTMENT OBJECTIVE(S) AND POLICIES AS THE FUND SHALL NOT CONSTITUTE AN
UNDERWRITING FOR PURPOSES OF THIS PARAGRAPH.
(PROPOSAL 6)
8. Make investments for the purpose of exercising control or management;
PROVIDED THAT THE [TOTAL RETURN BOND FUND/LOW DURATION FUND] MAY INVEST ALL OF
ITS ASSETS IN AN OPEN-END MANAGEMENT INVESTMENT COMPANY, OR PORTFOLIO THEREOF,
WITH SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVE(S) AND POLICIES AS THE FUND,
WITHOUT REGARD TO THE LIMITATIONS SET FORTH IN THIS PARAGRAPH.
9
<PAGE> 12
REQUIRED VOTE. Each amended investment restriction for each Fund requires
the approval of a "majority" of each such Fund's outstanding voting securities.
Under the Investment Company Act, a majority of a Fund's outstanding voting
securities is defined as the lesser of (i) 67% of the outstanding shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy, or (ii) more than 50% of the Fund's
outstanding voting securities. If a Proposal is not approved with respect to any
Fund, the Fund will not be able to invest in a Master Fund.
THE TRUSTEES RECOMMEND THAT THE RESPECTIVE SHAREHOLDERS OF EACH FUND VOTE
FOR PROPOSALS 3 THROUGH 6.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders arise,
including any question as to an adjournment of the Meeting, the persons named in
the enclosed Proxy will vote thereon according to their best judgment in the
interest of the Trust.
SHAREHOLDER PROPOSALS
As a Massachusetts business trust, the Trust is not required to hold annual
meetings of shareholders and the Trustees currently do not intend to hold such
meetings unless shareholder action is required in accordance with the 1940 Act
or the Trust's Declaration of Trust. A shareholder proposal intended to be
presented at any meeting of shareholders of the Trust hereinafter called must be
received by the Trust a reasonable time before the Trustees' solicitation
relating thereto is made in order to be included in the Trust's proxy statement
and form of proxy relating to that meeting and presented at the meeting. The
mere submission of a proposal by a shareholder does not guarantee that such
proposal will be included in the proxy statement because certain rules under the
federal securities laws must be complied with before inclusion of the proposal
is required.
Turner Swan
Secretary
Dated: July 24, 2000
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH TO
HAVE THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
10
<PAGE> 13
EXHIBIT A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the day of , 2000, by and between
FUND ASSET MANAGEMENT MASTER TRUST, a Delaware business trust (hereinafter
referred to as the "Trust"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited
partnership (the "Investment Adviser").
WITNESSETH:
WHEREAS, the Trust intends to engage in business as an open-end,
diversified, management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Trust desires to retain the Investment Adviser to render
management and investment advisory services to the Master Portfolio of
the Trust in the manner and on the terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Master Portfolio of the Trust on
the terms and conditions hereinafter set forth; and
WHEREAS, the Master Portfolio of the Trust serves as the "master"
portfolio for one or more "feeder" funds (each, a "Fund") that invest all of
their assets in the Master Portfolio of the Trust and that have the
same investment objective and policies as the Master Portfolio of the
Trust.
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained, the Trust and the Investment Adviser hereby agree as
follows:
ARTICLE I
DUTIES OF THE INVESTMENT ADVISER
The Trust hereby employs the Investment Adviser to act as a manager and
investment adviser of the Master Portfolio of the Trust and to
furnish, or arrange for affiliates to furnish, the management and investment
advisory services described below, subject to the policies of, review by and
overall control of the Board of Trustees of the Trust, for the period and on the
terms and conditions set forth in this Agreement. The Investment Adviser hereby
accepts such employment and agrees during such period, at its own expense, to
render, or arrange for the rendering of, such services and to assume the
obligations herein set forth for the compensation provided for herein. The
Investment Adviser and its affiliates shall for all purposes herein be deemed to
be independent contractors and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust in any way or
otherwise be deemed agents of the Trust.
(a) Management Services. The Investment Adviser shall perform (or
arrange for the performance by affiliates of) the management and
administrative services necessary for the operation of the Trust including
administering shareholder accounts and handling shareholder relations for
the Trust. It is understood that the Investment Adviser or its affiliates
may enter into separate agreements with each Fund for the provision of
management and administrative services necessary for the operation of each
Fund. The Investment Adviser shall provide the Trust with office space,
facilities, equipment and necessary personnel and such other services as
the Investment Adviser, subject to review by the Board of Trustees, shall
from time to time determine to be necessary or useful to perform its
obligations under this Agreement. The Investment Adviser shall also, on
behalf of the Trust, conduct relations with custodians, depositories,
transfer agents, dividend disbursing agents, other shareholder servicing
agents, pricing
A-1
<PAGE> 14
agents, accountants, attorneys, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and such other persons in any such
other capacity deemed to be necessary or desirable. The Investment Adviser
shall generally monitor the Trust's compliance with investment policies and
restrictions as set forth in the current registration statement relating to
the Trust under the Investment Company Act (the "Registration Statement").
The Investment Adviser shall make reports to the Board of Trustees of its
performance of obligations hereunder and furnish advice and recommendations
with respect to such other aspects of the business and affairs of the Trust
as it shall determine to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide
(or arrange for the provision by affiliates of) the Trust with such
investment research, advice and supervision as the latter may from time to
time consider necessary for the proper supervision of the assets of the
Master Portfolio of the Trust, shall furnish continuously an
investment program for the Master Portfolio of the Trust and
shall determine from time to time which securities shall be purchased, sold
or exchanged and what portion of the assets of the Master
Portfolio of the Trust shall be held in the various securities in which the
Master Portfolio of the Trust invests or cash, subject always to
the restrictions set forth in the Declaration of Trust and the By-Laws of
the Trust, as amended from time to time, the provisions of the Investment
Company Act and the statements relating to the Master Portfolio
of the Trust's investment objectives, investment policies and investment
restrictions as the same are set forth in the Registration Statement. The
Investment Adviser shall make decisions for the Master Portfolio
of the Trust as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Master
Portfolio of the Trust's portfolio securities shall be exercised. Should
the Board of Trustees at any time, however, make any definite determination
as to investment policy and notify the Investment Adviser thereof in
writing, the Investment Adviser shall be bound by such determination for
the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Investment Adviser shall
take, on behalf of the Trust, all actions which it deems necessary to
implement the investment policies determined as provided above and, in
particular, to place all orders for the purchase or sale of portfolio
securities for the Trust's account with brokers or dealers selected by it,
and to that end, the Investment Adviser is authorized as the agent of the
Trust to give instructions to the Custodian of the Trust as to deliveries
of securities and payments of cash for the account of the Trust. In
connection with the selection of such brokers or dealers and the placing of
such orders with respect to assets of the Trust, the Investment Adviser is
directed at all times to seek to obtain execution and prices within the
policy guidelines determined by the Board of Trustees as set forth in the
Registration Statement. Subject to this requirement and the provisions of
the Investment Company Act, the Securities Exchange Act of 1934, as
amended, and other applicable provisions of law, the Investment Adviser may
select brokers or dealers with which it or the Trust is affiliated.
(c) Affiliated Sub-Advisers. In carrying out its responsibilities
hereunder, the Investment Adviser may employ, retain or otherwise avail
itself of the services of other persons or entities including without
limitation, affiliates of the Investment Adviser, on such terms as the
Investment Adviser shall determine to be necessary, desirable or
appropriate. However, if the Investment Adviser chooses to retain or avail
itself of the services of another person or entity to manage assets of the
Trust, such other person or entity must be (i) an affiliate of the
Investment Adviser, (ii) retained at the Investment Adviser's own cost and
expense, and (iii) retained subject to the requirements of Section 15 of
the Investment Company Act. Retention of one or more affiliated
sub-advisers, or the employment or retention of other persons or entities
to perform services, shall in no way reduce the responsibilities or
obligations of the Investment Adviser under this Agreement and the
Investment Adviser shall be responsible for all acts and omissions of such
affiliated sub-advisers, or other persons or entities, in connection with
the performance of the Investment Adviser's duties hereunder.
(d) Notice Upon Change in Partners of the Investment Adviser. The
Investment Adviser is a limited partnership and its limited partner is
Merrill Lynch & Co., Inc. and its general partner is Princeton Services,
Inc. The Investment Adviser will notify the Trust of any change in the
membership of the partnership within a reasonable time after such change.
A-2
<PAGE> 15
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) The Investment Adviser. The Investment Adviser assumes and shall pay
for maintaining the staff and personnel necessary to perform its obligations
under this Agreement, and shall at its own expense, provide the office space,
facilities, equipment and necessary personnel which it is obligated to provide
under Article I hereof, and shall pay all compensation of officers of the Trust
and all Trustees of the Trust who are affiliated persons of the Investment
Adviser.
(b) The Trust. The Trust assumes and shall pay or cause to be paid all
other expenses of the Master Portfolio of the Trust including, without
limitation: taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and Registration Statements,
charges of the custodian, any sub-custodian and transfer agent, expenses of
portfolio transactions, Securities and Exchange Commission fees, expenses of
registering the shares under Federal, state and foreign laws, fees and actual
out-of-pocket expenses of all Trustees of the Trust who are not affiliated
persons of the Investment Adviser, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest and brokerage
costs, litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Trust.
ARTICLE III
COMPENSATION OF THE INVESTMENT ADVISER
(a) Investment Advisory Fee. For the services rendered, the facilities
furnished and expenses assumed by the Investment Adviser, the Trust shall pay to
the Investment Adviser at the end of each calendar month a fee at the annual
rate of 0. of 1.0% of the average daily net assets of the Master
Portfolio of the Trust, as determined and computed in accordance with the
description of the determination of net asset value contained in the
Registration Statement of the Trust. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the last day of
a month, compensation for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the fee as set
forth above. Subject to the provisions of subsection (b) hereof, payment of the
Investment Adviser's compensation for the preceding month shall be made as
promptly as possible after completion of the computations contemplated by
subsection (b) hereof. During any period when the determination of net asset
value is suspended by the Board of Trustees, the average net asset value of a
share for the day prior to such suspension shall for this purpose be deemed to
be the net asset value each succeeding day until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
Master Portfolio of the Trust, including amounts payable to the
Investment Adviser pursuant to subsection (a) hereof, for any fiscal year ending
on a date on which this Agreement is in effect exceed the expense limitations
applicable to the Trust imposed by applicable state securities laws or
regulations thereunder, as such limitations may be raised, lowered or waived
from time to time, the Investment Adviser shall reduce its management and
investment advisory fee by the extent of such excess and, if required pursuant
to any such laws or regulations, will reimburse the Trust in the amount of such
excess; provided, however, to the extent permitted by law, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Trust. Whenever the expenses of the
Master Portfolio of the Trust exceed a pro rata portion of the applicable annual
expense limitations, the estimated amount of reimbursement under such
limitations shall be applicable as an offset against the monthly payment of the
fee due to the Investment Adviser. Should two or more such expense limitations
be applicable as at the end of the last business day of the month, that expense
limitation which results in the largest reduction in the Investment Adviser's
fee shall be applicable.
A-3
<PAGE> 16
ARTICLE IV
LIMITATION OF LIABILITY OF THE INVESTMENT ADVISER
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Master Portfolio of the Trust,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, the term "Investment Adviser" shall
include any affiliates of the Investment Adviser performing services for the
Trust contemplated hereby and directors, officers and employees of the
Investment Adviser and such affiliates.
ARTICLE V
ACTIVITIES OF THE INVESTMENT ADVISER
The services of the Investment Adviser to the Trust are not to be deemed to
be exclusive: the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that the Board of Trustees, officers, employees and shareholders of
the Trust are or may become interested in the Investment Adviser and its
affiliates, as directors, officers, employees, partners, and shareholders or
otherwise and that directors, officers, employees, partners, and shareholders of
the Investment Adviser and its affiliates are or may become similarly interested
in the Trust, and that the Investment Adviser and directors, officers,
employees, partners, and shareholders of its affiliates may become interested in
the Trust as shareholders or otherwise.
ARTICLE VI
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the date first above written
and shall remain in force for a period of two years thereafter and thereafter
continue from year to year, but only so long as such continuance is specifically
approved at least annually by (i) the Board of Trustees of the Trust, or by the
vote of a majority of the outstanding voting securities of the Master
Portfolio of the Trust, and (ii) a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Trustees or by vote of a majority of the outstanding
voting securities of the Master Portfolio of the Trust, or by the
Investment Adviser, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
ARTICLE VII
AMENDMENTS OF THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the vote of the Trustees, or by the vote of a
majority of outstanding voting securities of the Master Portfolio of
the Trust, and (ii) a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
DEFINITIONS OF CERTAIN TERMS
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the
A-4
<PAGE> 17
Investment Company Act and the rules and regulations thereunder, subject,
however, to such exemptions as may be granted by the Securities and Exchange
Commission under said Act.
ARTICLE IX
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
FUND ASSET MANAGEMENT MASTER
TRUST
By
Title:
FUND ASSET MANAGEMENT, L.P.
By
Title:
A-5
<PAGE> 18
EXHIBIT B
ADMINISTRATION AGREEMENT
AGREEMENT made as of , 2000, by and between Mercury HW Funds, a
Massachusetts business trust (the "Fund"), on behalf of its series, the Mercury
Fund (the "Series"), and FUND ASSET MANAGEMENT, L.P., a Delaware
limited partnership (the "Administrator").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Fund desires to retain the Administrator to provide management
and administrative services to the Series in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Administrator is willing to provide management and
administrative services to the Series on the terms and conditions hereafter set
forth; and
WHEREAS, the Series is one of the "feeder" funds for and invests all of its
assets in the Low Duration Master Portfolio, a series of Fund Asset Management
Master Trust, which serves as the "master" portfolio and has the same investment
objective and policies as the Series;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Administrator hereby agree as follows:
ARTICLE I
DUTIES OF THE ADMINISTRATOR
The Fund hereby employs the Administrator to act as a manager and
administrator and to furnish, or arrange for affiliates to furnish, the
management and administrative services described below, subject to review by and
the overall control of the Board of Trustees of the Fund (the "Trustees"), for
the period and on the terms and conditions set forth in this Agreement. The
Administrator hereby accepts such employment and agrees during such period, at
its own expense, to render, or arrange for the rendering of, such services and
to assume the obligations herein set forth for the compensation provided for
herein. The Administrator and its affiliates shall for all purposes herein be
deemed to be independent contractors and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed agents of the Fund.
Management Services. The Administrator shall perform (or arrange for the
performance by affiliates of) the management and administrative services
necessary for the operation of the Series including administering shareholder
accounts and handling shareholder relations. The Administrator shall provide the
Fund with office space, facilities, equipment and necessary personnel and such
other services as the Administrator, subject to review by the Trustees, shall
from time to time determine to be necessary or useful to perform its obligations
under this Agreement. The Administrator shall also, on behalf of the Fund,
conduct relations with custodians, depositories, transfer agents, dividend
disbursing agents, other shareholder servicing agents, accountants, attorneys,
underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and
such other persons in any such other capacity deemed to be necessary or
desirable. The Administrator shall make reports to the Trustees of its
performance of obligations hereunder and furnish advice and recommendations with
respect to such other aspects of the business and affairs of the Fund as it
shall determine to be desirable.
B-1
<PAGE> 19
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) The Administrator. The Administrator assumes and shall pay, or cause
its affiliate to pay, for maintaining the staff and personnel necessary to
perform its obligations under this Agreement, and shall, at its own expense,
provide the office space, facilities and necessary personnel which it is
obligated to provide under Article I hereof. The Administrator shall pay, or
cause its affiliate to pay, compensation of all officers of the Fund and all
Trustees of the Fund who are affiliated persons of the Administrator or of an
affiliate of the Administrator.
(b) The Fund. The Fund assumes and shall pay or cause to be paid all other
expenses of the Series (except for the expenses paid by the distributor of the
Series' shares (the "Distributor")), including, without limitation: taxes,
expenses for legal and auditing services, costs of printing proxies, shareholder
reports, prospectuses and statements of additional information, charges of the
custodian, any sub-custodian and transfer agent, expenses of portfolio
transactions, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal, state and
foreign laws, fees and actual out-of-pocket expenses of Trustees who are not
affiliated persons of the Administrator, or of an affiliate of the
Administrator, accounting and pricing costs (including the daily calculation of
the net asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Series. The Distributor will pay certain of the expenses of the Fund
incurred in connection with the continuous offering of shares of the Series.
ARTICLE III
COMPENSATION OF THE ADMINISTRATOR
Administrative Fees. For the services rendered, the facilities furnished
and expenses assumed by the Administrator, the Fund shall pay to the
Administrator at the end of each calendar month a fee based upon the average
daily value of the net assets of the Series, as determined and computed in
accordance with the description of the determination of net asset value
contained in the prospectus and statement of additional information of the
Series, at the annual rate of 0.25% of the average daily net assets of the
Series, commencing on the day following effectiveness hereof. If this Agreement
becomes effective subsequent to the first day of a month or shall terminate
before the last day of a month, compensation for that part of the month this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fee as set forth above. Payment of the Administrator's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated above. During any period when the
determination of net asset value is suspended by the Trustees, the net asset
value of a share as of the last business day prior to such suspension shall for
this purpose be deemed to be the net asset value at the close of each succeeding
business day until it is again determined.
ARTICLE IV
LIMITATION OF LIABILITY OF THE ADMINISTRATOR
The Administrator shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any act or omission in the management and
administration of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, the term
"Administrator" shall include any affiliates of the Administrator performing
services for the Fund contemplated hereby and partners, shareholders, directors,
officers and employees of the Administrator and such affiliates.
B-2
<PAGE> 20
ARTICLE V
ACTIVITIES OF THE ADMINISTRATOR
The services of the Administrator to the Fund are not to be deemed to be
exclusive, and the Administrator and each affiliate is free to render services
to others. It is understood that Trustees, officers, employees and shareholders
of the Fund are or may become interested in the Administrator and its
affiliates, as directors, officers, employees, partners and shareholders or
otherwise, and that the Administrator and directors, officers, employees,
partners and shareholders of the Administrator and its affiliates are or may
become similarly interested in the Fund as shareholders or otherwise.
ARTICLE VI
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the date first above written
and shall remain in force for two years thereafter and thereafter continue from
year to year, but only so long as such continuance is specifically approved at
least annually by (i) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Series, and (ii) a majority of those
Trustees who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by the vote of a majority of the outstanding voting
securities of the Series, or by the Administrator, on sixty days' written notice
to the other party. This Agreement shall automatically terminate in the event of
its assignment.
ARTICLE VII
AMENDMENTS OF THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by a majority of those Trustees who are not parties to
this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
ARTICLE VIII
DEFINITIONS OF CERTAIN TERMS
The terms "vote of majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
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<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERCURY HW FUNDS
By:
Name:
Title:
FUND ASSET MANAGEMENT, L.P.
By:
Name:
Title:
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<PAGE> 22
HOTCHKIS AND WILEY FUNDS
TOTAL RETURN BOND FUND/LOW DURATION FUND
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Nancy D. Celick and Turner Swan as
proxies, each with the power to appoint her or his substitute, and hereby
authorizes each of them to represent and to vote, as designated below, all of
the shares of beneficial interest of the listed fund held of record by the
undersigned on July 14, 2000 at the Special Meeting of Shareholders to be held
on September 11, 2000 or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" PROPOSALS 1, 2, 3, 4, 5 AND 6.
HOTCHKIS AND WILEY FUNDS
4800 DEER LAKE DRIVE EAST
JACKSONVILLE, FLORIDA 32246-6484
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have the Proxy card
below at hand.
2) Call 1-800-690-6903.
3) Enter the 12-digit control number set forth on the
Proxy card and follow the simple instructions.
TO VOTE BY INTERNET
1) Read the Proxy Statement and have the Proxy card
below at hand.
2) Go to Website www.proxyvote.com
3) Enter the 12-digit control number set forth on the
Proxy card and follow the simple instructions.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
--------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
<PAGE> 23
By signing and dating this card, you authorize the proxies to vote each
proposal as marked, or if not marked, to vote "FOR" each proposal, and to use
their discretion to vote for any other matter as may properly come before the
meeting or any adjournment thereof. If you do not intend to personally attend
the meeting, please complete and return this card at once in the enclosed
envelope.
VOTE ON PROPOSALS
1. To approve the transfer of all or substantially all of the Fund's assets to a
"master" fund in a "master/feeder" structure.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve the proposed investment advisory and administration agreements.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To approve an amendment of the Fund's restrictions on investing in securities
of a single issuer and securities of issuers in a single industry.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To approve an amendment of the Fund's restriction on investing in the voting
securities of a single issuer.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. To approve an amendment of the Fund's restriction relating to acting as an
underwriter.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
6. To approve an amendment of the Fund's restriction relating to making
investments for the purpose of exercising control or management.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
To transact such other business as may properly come before the Meeting or any
adjournment thereof.
PLEASE SIGN EXACTLY AS NAME APPEARS ABOVE. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR AS EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSONS.
----------------------------------------- -------------------------------
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Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) DATE
