As filed with the Securities and Exchange Commission on July 24, 2002
Securities Act File No. 333-
Investment Company Act File No. 811-4077
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
(Check appropriate box or boxes)
--------------------
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND
(Exact name of Registrant as Specified in Charter)
--------------------
(609) 282-2800
(Area Code and Telephone Number)
--------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
--------------------
Terry K. Glenn
Merrill Lynch U.S. Government Mortgage Fund
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
copies to:
Philip L. Kirstein, Esq. Frank P. Bruno, Esq.
Fund Asset Management, L.P. Sidley Austin Brown & Wood LLP
P.O. Box 9011 787 Seventh Avenue
Plainsboro, NJ 08543-9011 New York, New York 10019
--------------------
Approximate Date of Proposed Public Offering: As soon as practicable
after the registration statement becomes effective under the Securities Act of
1933.
It is proposed that this filing will become effective August 22,
2002 pursuant to Rule 488.
--------------------
Title of Securities to Be Registered: Shares of beneficial interest, par value
$.10 per share.
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940.
THE ASSET PROGRAM, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on October 8, 2002
To The Stockholders of
The Asset Program, Inc. holding shares of Mercury U.S. Government
Securities Fund:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Mercury U.S. Government Securities Fund ("Mercury Fund"), a
series of The Asset Program, Inc. ("Asset Program"), will be held at the
offices of Fund Asset Management, L.P., 800 Scudders Mill Road, Plainsboro,
New Jersey, on October 8, 2002 at 9:30 a.m. Eastern time, for the following
purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan") providing for the acquisition of the assets and
assumption of the liabilities of Mercury Fund by Merrill Lynch U.S. Government
Mortgage Fund ("Government Mortgage Fund") and the issuance of shares of
beneficial interest of Government Mortgage Fund to Mercury Fund for
distribution to the stockholders of Mercury Fund; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
Stockholders of Mercury Fund are not entitled to appraisal rights in
connection with the proposal.
The Board of Directors of Mercury Fund has fixed the close of business on
August 6, 2002 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Meeting and at any
adjournment(s) thereof.
A complete list of the stockholders of Mercury Fund entitled to vote at
the Meeting will be available and open to the examination of any stockholder
of Mercury Fund for any purpose germane to the Meeting during ordinary
business hours from and after September 24, 2002, at the offices of Mercury
Fund, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders of Mercury
Fund who do not expect to attend the Meeting in person are requested to
complete, date and sign the enclosed form of proxy and return it promptly in
the envelope provided for that purpose. If you have been provided with the
opportunity on your proxy card or voting instruction form to provide voting
instructions via telephone or the internet, please take advantage of these
prompt and efficient voting options. The enclosed proxy is being solicited on
behalf of the Board of Directors of Asset Program.
If you have any questions regarding the enclosed proxy materials or need
assistance in voting your shares, please contact our proxy solicitor,
Georgeson Shareholder, at 1-888-418-4448.
By Order of the Board of Directors,
BRADLEY J. LUCIDO
Assistant Secretary
The Asset Program, Inc.
Plainsboro, New Jersey
Dated: July 24, 2002
The information in this proxy statement and prospectus is not complete and may
be changed. We may not use this proxy statement and prospectus to sell
securities until the registration statement containing this proxy statement
and prospectus, which has been filed with the Securities and Exchange
Commission, is effective. This proxy statement and prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED JULY 24, 2002
PROXY STATEMENT OF THE ASSET PROGRAM, INC.
FOR USE AT A SPECIAL MEETING OF STOCKHOLDERS
To Be Held On October 8, 2002
--------------------------------
PROSPECTUS OF
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800
This Combined Proxy Statement and Prospectus ("Proxy Statement and
Prospectus") is furnished to you because you are a stockholder of Mercury U.S.
Government Securities Fund ("Mercury Fund"), a series of The Asset Program,
Inc. (the "Asset Program"), and you are being asked to consider:
(1) approval or disapproval of an Agreement and Plan of Reorganization
(the "Agreement and Plan") providing for the acquisition of the assets and
assumption of the liabilities of Mercury Fund by Merrill Lynch U.S. Government
Mortgage Fund, a Massachusetts business trust ("Government Mortgage Fund") and
the issuance of shares of beneficial interest of Government Mortgage Fund to
Mercury Fund for distribution to the stockholders of Mercury Fund; and
(2) to transact such other business as properly may come before the
meeting or any adjournment thereof.
This transaction is referred to herein as the "Reorganization." As part
of the Reorganization, Mercury Fund will be terminated as a series of Asset
Program.
The Special Meeting of Stockholders of Mercury Fund will be held on
October 8, 2002 for the purpose of obtaining stockholder approval of the
Reorganization (the "Meeting").
This Proxy Statement and Prospectus sets forth the information about
Government Mortgage Fund that a stockholder of Mercury Fund should know before
considering the transactions proposed herein and should be retained for future
reference. Mercury Fund has authorized the solicitation of proxies in
connection with the above described Reorganization solely on the basis of this
Proxy Statement and Prospectus and the accompanying documents.
The Board of Directors of Asset Program has fixed the close of business
on August 6, 2002 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of and to vote at the Meeting and at any
adjournment(s) thereof. Stockholders on the Record Date will be entitled to
one vote for each share held, with no share having cumulative voting rights.
As of the Record Date, Mercury Fund had outstanding ________________ shares of
common stock:
(continued on following page)
---------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
The date of this Proxy Statement and Prospectus is July 24, 2002.
With this Proxy Statement and Prospectus you will also be receiving the
following documents:
o Prospectus of Government Mortgage Fund, dated December 19, 2001 (the
"Government Mortgage Fund Prospectus");
o Annual Report to Stockholders of Government Mortgage Fund for the
fiscal year ended August 31, 2001; and
o Semi-Annual Report to Stockholders of Government Mortgage Fund for
the six months ended February 28, 2002.
The Government Mortgage Fund Prospectus, Government Mortgage Fund Annual
Report and Government Mortgage Fund Semi-Annual Report are incorporated by
reference into this Proxy Statement and Prospectus, which means each of these
documents is legally considered to be part of this Proxy Statement and
Prospectus.
Certain other documents containing information about Government Mortgage
Fund and Mercury Fund have been filed with the Securities and Exchange
Commission (the "Commission") and may be obtained, without charge, by writing
to Government Mortgage Fund or Mercury Fund at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, or by calling 1-800-995-6526. These
documents are:
o Statement of Additional Information of Government Mortgage Fund,
dated December 19, 2001 (the "Government Mortgage Fund Statement");
o Prospectus and Statement of Additional Information relating to
Mercury Fund, each dated May 29, 2002;
o Annual Report to Stockholders of Mercury Fund for the fiscal year
ended January 31, 2002; and
o Statement of Additional Information relating to this Proxy Statement
and Prospectus, dated July 24, 2002 (the "Reorganization Statement
of Additional Information").
The Prospectus of Mercury Fund and the Reorganization Statement of
Additional Information also are incorporated by reference into this Proxy
Statement and Prospectus. The Commission maintains a web site
(http://www.sec.gov) that contains the Reorganization Statement of Additional
Information, other material incorporated herein by reference, and other
information regarding Government Mortgage Fund and Mercury Fund.
The address of the principal executive offices of Government Mortgage
Fund and Mercury Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
and the telephone number is (609) 282-2800.
TABLE OF CONTENTS
INTRODUCTION......................................................................................................1
Certain Defined Terms Used in this Proxy Statement and Prospectus........................................1
SUMMARY...........................................................................................................2
The Reorganization.......................................................................................2
What will Stockholders of Mercury Fund Receive in the Reorganization?....................................2
What are the Reasons for the Reorganization?.............................................................2
Fee Tables...............................................................................................3
RISK FACTORS AND SPECIAL CONSIDERATIONS..........................................................................12
COMPARISON OF THE FUNDS..........................................................................................14
Financial Highlights....................................................................................14
Investment Objectives and Policies......................................................................19
Other Investment Policies...............................................................................26
Investment Restrictions.................................................................................27
Management..............................................................................................27
Purchase of Shares......................................................................................29
Redemption of Shares....................................................................................29
Exchange of Shares......................................................................................29
Performance.............................................................................................30
Code of Ethics..........................................................................................31
Stockholder Rights......................................................................................31
Limitation of Liability.................................................................................31
Dividends...............................................................................................31
Automatic Dividend Reinvestment Plan....................................................................31
Tax Information.........................................................................................32
Portfolio Transactions..................................................................................32
Portfolio Turnover......................................................................................32
Additional Information..................................................................................32
THE REORGANIZATION...............................................................................................34
General.................................................................................................34
Procedure...............................................................................................35
Terms of the Agreement and Plan.........................................................................35
Potential Benefits to Stockholders of Mercury Fund as a Result of the Reorganization....................36
Tax Consequences of the Reorganization..................................................................37
Capitalization..........................................................................................39
INFORMATION CONCERNING THE SPECIAL MEETING.......................................................................39
Date, Time and Place of Meeting.........................................................................39
Solicitation, Revocation and Use of Proxies.............................................................39
Record Date and Outstanding Shares......................................................................40
Security Ownership of Certain Beneficial Owners and Management of Government Mortgage Fund
and Mercury Fund......................................................................................40
Voting Rights and Required Vote.........................................................................40
ADDITIONAL INFORMATION...........................................................................................41
LEGAL PROCEEDINGS................................................................................................41
LEGAL OPINIONS...................................................................................................41
-i-
EXPERTS..........................................................................................................41
STOCKHOLDERS' MEETINGS...........................................................................................42
STOCKHOLDER PROPOSALS............................................................................................42
EXHIBIT I - AGREEMENT AND PLAN OF REORGANIZATION...............................................................I-1
EXHIBIT II - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND REGISTERED OWNERS
OF SHARES OF GOVERNMENT MORTGAGE FUND AND MERCURY FUND............................................II-1
-ii-
INTRODUCTION
This Proxy Statement and Prospectus is furnished to the stockholders of
Mercury Fund in connection with the solicitation of proxies on behalf of the
Board of Directors of Asset Program for use at the Meeting to be held at the
offices of Fund Asset Management, L.P. ("FAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey on October 8, 2002, at 9:30 a.m. Eastern time. The
mailing address for Asset Program and Mercury Fund is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy
Statement and Prospectus is August ____, 2002.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation
to the Secretary of Asset Program at the address indicated above or by voting
in person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions
marked thereon or otherwise as provided therein. Unless instructions to the
contrary are marked, properly executed proxies of Mercury Fund will be voted
"FOR" approval of the Agreement and Plan.
Assuming a quorum is present at the Meeting, consummation of the
Reorganization requires, among other things, the affirmative vote of the
stockholders of Mercury Fund representing a majority of the outstanding shares
of Mercury Fund entitled to be voted thereon. The Boards of Asset Program and
Government Mortgage Fund together may amend the Agreement and Plan and change
the terms of the Reorganization at any time prior to the approval thereof by
the stockholders of Mercury Fund. See "Information Concerning the Special
Meeting."
This Proxy Statement and Prospectus is being used to solicit the vote of
the stockholders of Mercury Fund. The Board of Asset Program knows of no
business other than that described above that will be presented for
consideration at the Meeting. If any other matter is properly presented, it is
the intention of the persons named in the enclosed proxy to vote in accordance
with their best judgment.
This Proxy Statement and Prospectus serves as a prospectus of Government
Mortgage Fund under the Securities Act of 1933 (the "Securities Act"), in
connection with the issuance of shares of beneficial interest of Government
Mortgage Fund pursuant to the terms of the Agreement and Plan.
Certain Defined Terms Used in this Proxy Statement and Prospectus
Government Mortgage Fund is organized as a Massachusetts business trust.
Mercury Fund is a series of Asset Program, which is organized as a Maryland
corporation. In each jurisdiction, nomenclature varies. For ease of reference
and clarity of presentation, shares of common stock of Mercury Fund and shares
of beneficial interest of Government Mortgage Fund are hereinafter referred to
as "shares," holders of shares are hereinafter referred to as "stockholders,"
the Directors and officers of Asset Program are hereinafter sometimes referred
to as Directors and officers of Mercury Fund, the Trustees of Government
Mortgage Fund and the Directors of Mercury Fund are hereinafter referred to as
"Board Members," the Board of Trustees of Government Mortgage Fund and the
Board of Directors of Mercury Fund are hereinafter referred to as a "Board,"
and the Articles of Incorporation of Asset Program and the Declaration of Trust
of Government Mortgage Fund, each as amended and supplemented, are hereinafter
referred to as a "Charter." Government Mortgage Fund and Mercury Fund are
sometimes referred to herein individually as a "Fund" and collectively as the
"Funds," as the context requires. The fund resulting from the Reorganization
is sometimes referred to herein as the "Combined Fund."
-1-
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated by
reference) and is qualified in its entirety by reference to the more complete
information contained in this Proxy Statement and Prospectus and in the
Agreement and Plan, attached hereto as Exhibit I.
The Reorganization
The Boards of Government Mortgage Fund and Mercury Fund unanimously
approved the Reorganization at Meetings held on April 10, 2002.
Following the Reorganization, the Board of Asset Program will take action
to terminate Mercury Fund as a series of Asset Program under Maryland law.
What will Stockholders of Mercury Fund Receive in the Reorganization?
If the Agreement and Plan is approved and the Reorganization is
consummated:
o You will become a stockholder of Government Mortgage Fund; and
o You will receive shares of Government Mortgage Fund with the same
aggregate net asset value as the shares of Mercury Fund that you
held immediately prior to the Reorganization as follows:
If prior to the Reorganization After the Reorganization
you held shares of Mercury Fund you will hold shares of
of Government Mortgage Fund of
-------------------------------- ---------------------------
Class I Class A
Class A Class D
Class B Class B
Class C Class C
The Reorganization has been structured with the intention that it qualify
as a tax-free reorganization for Federal income tax purposes. See "The
Reorganization--Tax Consequences of the Reorganization." You should consult
your tax adviser regarding the tax effects of the Reorganization in light of
your individual circumstances.
What are the Reasons for the Reorganization?
The Board of Mercury Fund, including all of the Board Members who are not
"interested persons" of Mercury Fund as defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"), has determined that the
Reorganization is in the best interests of Mercury Fund, and that the
interests of the stockholders of Mercury Fund with respect to net asset value
will not be diluted as a result of effecting the Reorganization. However, a
stockholder of Mercury Fund will hold a lower percentage of ownership in the
Combined Fund than such stockholder holds in Mercury Fund prior to the
Reorganization.
In reaching its conclusions, the Board of Mercury Fund considered a
number of factors, including the following:
After the Reorganization, stockholders of Mercury Fund
o will remain invested in a diversified open-end fund with a
substantially larger combined asset base;
-2-
o are likely to benefit from reduced operating expenses per share as
stockholders of the Combined Fund, and are likely to benefit further
from a reduced management fee rate as stockholders of the Combined
Fund;
o will experience improved economies of scale as stockholders of the
Combined Fund;
o are expected to benefit from greater flexibility in portfolio
management as stockholders of the Combined Fund; and
o may redeem their shares or exchange them into certain other Merrill
Lynch mutual funds.
In addition, the Board considered FAM's agreement to bear expenses of the
Reorganization attributable to Mercury Fund in excess of $116,000.
See "Fee Tables" below and "The Reorganization--Potential Benefits to
Stockholders of Mercury Fund as a Result of the Reorganization."
If all of the requisite approvals are obtained with respect to the
Reorganization, it is anticipated that the Reorganization will occur as soon
as practicable after such approvals, provided that the Funds have obtained an
opinion of counsel concerning the tax consequences of the Reorganization as
set forth in the Agreement and Plan. Under the Agreement and Plan, the
Reorganization may be abandoned at any time (whether before or after approval
thereof by the stockholders of Mercury Fund) prior to the Closing Date (as
defined below), or the Closing Date may be postponed, (i) by consent of the
Boards of the Funds; (ii) by the Board of Mercury Fund if any condition of
Mercury Fund's obligations has not been fulfilled or waived by such Board; or
(iii) by the Board of Government Mortgage Fund if any condition of Government
Mortgage Fund's obligations has not been fulfilled or waived by such Board.
The Boards of Mercury Fund and Government Mortgage Fund may together amend the
Agreement and Plan to change the terms of the Reorganization at any time prior
to the approval thereof by the stockholders of Mercury Fund.
Fee Tables
The fee tables below provide information about the fees and expenses
attributable to shares of each class of the Funds, assuming the Reorganization
had taken place on February 28, 2002, and the estimated pro forma annualized
fees and expenses attributable to each class of shares of the Combined Fund.
Future fees and expenses may be greater or less than those indicated below.
-3-
Fee Table for Stockholders of Government Mortgage Fund,
Mercury Fund and the Pro Forma Combined Fund
as of February 28, 2002 (unaudited)
Class A Shares of
Government Mortgage Fund
and Class I Shares of
Mercury Fund Class B Shares(b)
------------------------------------------------------------------
Pro Pro
Actual Forma Actual Forma
-------------------------------- ---------------------------------
Government Government
Mercury Mortgage Combined Mercury Mortgage Combined
Fund Fund Fund Fund Fund Fund
--------- ----------- ---------- -------- ----------- ------------
Stockholder Fees (fees paid directly from a stockholder's
investment)(a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price).......... 4.00%(c) 4.00%(c) 4.00%(c) None None None
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds,
whichever is lower).................................... None(d) None(d) None(d) 4.00%(c) 4.00%(c) 4.00%(c)
Maximum Sales Charge (Load) Imposed on Dividend
Reinvestments.......................................... None None None None None None
Redemption Fee............................................. None None None None None None
Exchange Fee............................................... None None None None None None
Annual Fund Operating Expenses (expenses that are deducted
from Fund assets):
Management Fees(e)......................................... 0.50% 0.47% 0.47% 0.50% 0.47% 0.47%
Distribution and/or Service (12b-1) Fees(f)................ None None None 0.75% 0.75% 0.75%
Other Expenses (including transfer agency fees) (g)........ 0.45% 0.25% 0.25% 0.45% 0.26% 0.26%
----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses(h).................... 0.95% 0.72% 0.72% 1.70% 1.48% 1.48%
===== ===== ===== ===== ===== =====
- ---------
See footnotes on page 6.
-4-
Fee Table for Stockholders of Government Mortgage Fund,
Mercury Fund and the Pro Forma Combined Fund
as of February 28, 2002 (unaudited)
Class D Shares of
Government Mortgage Fund
and Class A Shares of
Class C Shares Mercury Fund
---------------------------------------------------------------------
Pro Pro
Actual Forma Actual Forma
------------------------------------- -------------------------------
Government Government
Mortgage Combined Mercury Mortgage Combined
Mercury Fund Fund Fund Fund Fund Fund
------------ ---------- --------- -------- ---------- ----------
Stockholder Fees (fees paid directly from a stockholder's
investment)(a):
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price)....... None None None 4.00%(c) 4.00%(c) 4.00%(c)
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)................................ 1.00%(c) 1.00%(c) 1.00%(c) None(d) None(d) None(d)
Maximum Sales Charge (Load) Imposed on Dividend
Reinvestments....................................... None None None None None None
Redemption Fee........................................... None None None None None None
Exchange Fee............................................. None None None None None None
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets):
Management Fees(e)....................................... 0.50% 0.47% 0.47% 0.50% 0.47% 0.47%
Distribution and/or Service (12b-1) Fees(f).............. 0.80% 0.80% 0.80% 0.25% 0.25% 0.25%
Other Expenses (including transfer agency fees)(g)....... 0.45% 0.26% 0.26% 0.45% 0.25% 0.25%
----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses(h).................. 1.75% 1.53% 1.53% 1.20% 0.97% 0.97%
===== ===== ===== ===== ===== =====
- -------------------------
See footnotes on page 6.
-5-
(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may
charge clients a processing fee (currently $5.35) when a client buys or
sells shares.
(b) Class B shares of Mercury Fund automatically convert to Class A shares
about ten years after initial purchase and will no longer be subject to
distribution fees. Class B shares of Government Mortgage Fund
automatically convert to Class D shares about ten years after initial
purchase and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) A stockholder may pay a deferred sales charge if such stockholder
purchases $1 million or more and redeems within one year.
(e) FAM is currently waiving its management fee from Mercury Fund. Government
Mortgage Fund has agreed to pay, and the Combined Fund will pay, FAM a
monthly fee at the annual rate of 0.50% of the average daily net assets
of the Fund for the first $500 million; 0.475% of the average daily net
assets of the Fund from $500 million to $1.0 billion; 0.45% of the
average daily net assets of the Fund from $1.0 billion to $1.5 billion;
0.425% of the average daily net assets of the Fund from $1.5 billion to
$2.0 billion; 0.40% of the average daily net assets of the Fund from $2.0
billion to $2.5 billion; 0.375% of the average daily net assets of the
Fund from $2.5 billion to $3.5 billion; 0.35% of the average daily net
assets of the Fund from $3.5 billion to $5.0 billion; 0.325% of the
average daily net assets of the Fund from $5.0 billion to $6.5 billion;
0.30% of the average daily net assets of the Fund in excess of $6.5
billion.
(f) Government Mortgage Fund and Mercury Fund each call the "Service Fee" an
"Account Maintenance Fee." Account Maintenance Fee is the term used in
the Prospectuses of the Funds and all other Fund materials. If a
stockholder holds Class B shares or Class C shares over time, it may cost
that stockholder more in distribution (12b-1) fees than the maximum sales
charge that such stockholder would have paid if he or she had bought one
of the other classes.
(g) Financial Data Services, Inc. ("FDS"), an affiliate of FAM, provides
transfer agency services to Government Mortgage Fund and Mercury Fund.
The Funds each pay a fee for these services. FAM, or its affiliates, also
provide certain accounting services to these Funds and the Funds
reimburse FAM, or its affiliates, for such services.
(h) FAM has agreed to voluntarily waive management fees and/or reimburse
expenses of Mercury Fund. The Total Annual Fund Operating Expenses for
Mercury Fund shown in the table do not reflect such voluntary
management fee waiver and/or reimbursement of expenses because FAM may
discontinue them at any time without notice. After giving effect to such
waiver and reimbursement, the Total Annual Fund Operating Expenses for
Mercury Fund was 0.25% for Class A shares, 0.75% for Class B shares and
0.80% for Class C shares. All management fees and other expenses for
Class I shares were waived or reimbursed.
-6-
EXAMPLES:
These examples assume that you invest $10,000 in the relevant Fund for the
time periods indicated, that your investment has a 5% return each year, that
you pay the sales charges, if any, that apply to the particular class and that
the Fund's operating expenses remain the same. This assumption is not meant to
indicate that 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:
---
1 Year 3 Years 5 Years 10 Years
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class A Shares of Government
Mortgage Fund and Class I Shares
of Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $493 $691 $904 $1,520
Government Mortgage Fund $471 $621 $785 $1,259
Combined Fund* $471 $621 $785 $1,259
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class B Shares of Government
Mortgage Fund and Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund+ $573 $836 $1,123 $2,009**
Government Mortgage Fund $551 $668 $808 $1,768***
Combined Fund* $551 $668 $808 $1,768***
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class C Shares of Government
Mortgage Fund and Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $278 $551 $949 $2,062
Government Mortgage Fund $256 $483 $834 $1,824
Combined Fund* $256 $483 $834 $1,824
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class D Shares of Government
Mortgage Fund and Class I Shares
of Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $517 $766 $1,033 $1,796
Government Mortgage Fund $495 $697 $915 $1,542
Combined Fund* $495 $697 $915 $1,542
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class A Shares of Government
Mortgage Fund and Class I of
Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $493 $691 $904 $1,520
Government Mortgage Fund $471 $621 $785 $1,259
Combined Fund* $471 $621 $785 $1,259
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class B Shares of Government
Mortgage Fund and Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $173 $536 $923 $2,009**
Government Mortgage Fund $151 $468 $808 $1,768***
Combined Fund* $151 $468 $808 $1,768***
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class C Shares of Government
Mortgage Fund and Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $178 $551 $949 $2,062
Government Mortgage Fund $156 $483 $834 $1,824
Combined Fund* $156 $483 $834 $1,824
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Class D Shares of Government
Mortgage Fund and Class A of
Mercury Fund
- ------------------------------------- ------------------ ------------------- ------------------- -------------------
Mercury Fund $517 $766 $1,033 $1,796
Government Mortgage Fund $495 $697 $915 $1,542
Combined Fund* $495 $697 $915 $1,542
- -------------------
* Assuming the Reorganization had taken place on February 28, 2002.
** Assumes conversion to Class A shares approximately ten years after purchase.
*** Assumes conversion to Class D shares approximately ten years after purchase.
+ Class B shares of Government Mortgage Fund are subject to a contingent
deferred sales charge ("CDSC") for four years after the purchase of
shares, while Class B shares of Mercury Fund are subject to a CDSC for
six years after the purchase of shares. If Class B shares of Mercury Fund
were subject to the same CDSC schedule as Government Mortgage Fund, an
investor's expenses for the 1, 3, 5 and 10 year periods assuming
redemption at the end of the period would be $573, $736, $923 and $2,009,
respectively.
The foregoing Fee Tables and Examples are intended to assist investors in
understanding the costs and expenses that a stockholder of Mercury Fund or
Government Mortgage Fund bears directly or indirectly as compared to the costs
and expenses that would be borne by such investors taking into account the
Reorganization. The Examples set forth above assume reinvestment of all
dividends and distributions and utilize a 5% annual rate of return as mandated
by Commission regulations. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST
-7-
OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLES. See "Summary," "The Reorganization--Potential Benefits to
Stockholders of Mercury Fund as a Result of the Reorganization," "Comparison
of the Funds--Management," "--Purchase of Shares" and "--Redemption of
Shares."
Government Mortgage Fund Government Mortgage Fund was organized under the laws of the Commonwealth of
Massachusetts on July 20, 1984. Government Mortgage Fund is a diversified, open-end
investment company.
As of June 28, 2002, Government Mortgage Fund had net assets of approximately $1.9
billion.
Mercury Fund Mercury Fund is one of three series of Asset Program, which was incorporated under the
laws of the State of Maryland on May 12, 1994. Asset Program is a diversified, open-end
investment company.
As of June 28, 2002, Mercury Fund had net assets of approximately $81 million.
Comparison of the Funds Investment Objectives. The investment objectives of Government Mortgage Fund and
Mercury Fund are substantially similar. Both Funds seek high current return through a
fully managed investment policy utilizing U.S. Government securities, U.S. Government
agency securities, including Government National Mortgage Association ("GNMA")
mortgage-backed certificates ("GNMA Certificates") and other mortgage-backed government
securities.
Investment Policies. Each of Government Mortgage Fund and Mercury Fund invests in a
portfolio of securities that are issued or guaranteed by the U.S. Government, by various
agencies of the U.S. Government and by various instrumentalities which have been
established or sponsored by the U.S. Government, with the combination varying in
response to changing markets and conditions. In choosing investments, the Funds consider
various factors, including the relative yields of different types of U.S. Government
securities, the Fund's assessment of future interest rate patterns and the desirability
of holding U.S. Government securities on which they may write covered options. Each Fund
may seek to enhance its return through the use of certain portfolio strategies involving
options and to hedge its portfolio through the use of options and futures transactions.
Neither Fund is limited as to the maturities of its portfolio investments. Each Fund may
also invest up to 5% of its assets in obligations issued or guaranteed by the
International Bank for Reconstruction and Development, an international organization of
which the United States is a member country.
Under normal circumstances, at least 80% of Government Mortgage Fund's total assets
consists of GNMA Certificates, other U.S. Government securities representing ownership
interests in mortgage pools, or U.S. Government securities of issuers whose primary
purpose is to facilitate the making of residential or commercial mortgages. Mercury Fund
has authority to invest in all securities issued or guaranteed by the U.S. Government or
its agencies of any maturity, although under certain circumstances a significant portion
of its assets may consist of GNMA Certificates and other U.S. Government securities
representing ownership interests in mortgage pools. Mercury Fund invests substantially
all (at least 80%) of its total assets in
-8-
securities issued or guaranteed by the U.S. Government, U.S. Government agencies or U.S.
Government sponsored enterprises.
Portfolio Management. FAM serves as the investment adviser to Government Mortgage Fund.
FAM, doing business as Mercury Advisors, serves as the investment adviser to Mercury
Fund. FAM is responsible for the management of the investment portfolio and for
providing administrative services to each Fund.
The portfolio managers of Government Mortgage Fund and Mercury Fund are Frank Viola and
Teresa L. Giacino, who have served as portfolio managers of the Funds since 2001. Mr.
Viola and Ms. Giacino will serve as portfolio managers of the Combined Fund.
Management Fees. Pursuant to a management agreement with FAM, Government Mortgage Fund
pays FAM a monthly management fee at the annual rate calculated as follows:
Portion of average daily value Management Fee
of net assets:
---------------------------------- ---------------------
Not exceeding $500 million 0.500%
$500 million to $1 billion 0.475%
$1 billion to $1.5 billion 0.450%
$1.5 billion to $2 billion 0.425%
$2 billion to $2.5 billion 0.400%
$2.5 billion to $3.5 billion 0.375%
$3.5 billion to $5 billion 0.350%
$5 billion to $6.5 billion 0.325%
Exceeding $6.5 billion 0.300%
Pursuant to a management agreement between FAM and Mercury Fund, Mercury Fund pays FAM a
monthly fee at the annual rate of 0.50% of the Fund's average daily net assets. FAM has
voluntarily waived management fees and/or reimbursed expenses of the Mercury Fund since
commencement of the Fund's operations. However, such waiver and/or reimbursement may be
discontinued by FAM at any time without notice.
After the Reorganization, the effective management fee rate applicable to the Combined
Fund, at current asset levels, would be lower than Mercury Fund's current management fee
rate.
See "Summary--Fee Tables" and "Comparison of the Funds--Management."
Class Structure. Government Mortgage Fund and Mercury Fund each offer four classes of
common stock. Government Mortgage Fund's Class A, Class D, Class B and Class C shares
are substantially the same as Mercury Fund's Class I, Class A, Class B and Class C
shares, respectively, except that (i) they represent ownership interests in a different
investment portfolio; and (ii) Class B shares of Government Mortgage Fund are subject to
a different contingent deferred sales charge ("CDSC") schedule and for a period of four
years rather than the six years associated with the corresponding Class B shares of
Mercury Fund. See "Comparison of the Funds--Purchase of Shares,"
-9-
"--Redemption of Shares" and "Additional Information--Stockholder Services."
Overall Annual Expense Ratio. The tables below show the total operating expense ratio
for each class of shares for Mercury Fund and Government Mortgage Fund as of February
28, 2002 and, assuming the Reorganization had taken place on February 28, 2002, the
estimated pro forma operating expense ratio for each class of shares of the Combined
Fund (in each case, including class specific distribution and account maintenance fees
with respect to the Funds).
Total Operating Expense Ratios
------------------------------
Fund Class A/I* Class B Class C Class D/A**
---- --------- ------- ------- ---------
Government Mortgage Fund 0.72% 1.48% 1.53% 0.97%
Mercury Fund 0.95%*** 1.70%*** 1.75%*** 1.20%***
Combined Fund Pro Forma Total Operating Expense Ratios****
------------------------------------------------------
Class A Class B Class C Class D
------- ------- ------- -------
Combined Fund 0.72% 1.48% 1.53% 0.97%
-----------------
* Class A for Government Mortgage Fund and Class I for Mercury Fund.
** Class D for Government Mortgage Fund and Class A for Mercury Fund.
*** FAM has voluntarily waived management fees and/or reimbursed expenses of
Mercury Fund. The Total Annual Fund Operating Expenses shown in the table do not
reflect such voluntary management fee waiver and/or reimbursement of expenses
because FAM may discontinue them at any time without notice. After taking into
account such waiver and reimbursement, the total operating expense ratio for
Mercury Fund shares was 0.25% for Class A shares, 0.75% for Class B shares and
0.80% for Class C shares. All management and other expenses for Class I shares
were waived or reimbursed.
**** Assumes the Reorganization had taken place on February 28, 2002.
Purchase of Shares. Shares of Government Mortgage Fund are offered continuously for sale
to the public in the same manner as shares of Mercury Fund. See "Comparison of the
Funds--Purchase of Shares."
Redemption of Shares. The redemption procedures for shares of Government Mortgage Fund
are the same as the redemption procedures for shares of Mercury Fund. For purposes of
computing any CDSC that may be payable upon disposition of shares of Government Mortgage
Fund distributed to Mercury Fund stockholders in the Reorganization, the holding period
of Mercury Fund shares outstanding on the date the Reorganization takes place will be
"tacked" onto the holding period of the shares of Government Mortgage Fund distributed
in the Reorganization. See "Comparison of the Funds--Redemption of Shares."
Dividends. Each Fund distributes its net investment income monthly and net realized
capital gains, if any, at least annually. See "Comparison of the Funds--Dividends and
Distributions."
-10-
Net Asset Value. Mercury Fund and Government Mortgage Fund each determines net asset
value of each class of shares once daily, Monday through Friday, as of the close of
business on the New York Stock Exchange ("NYSE"), generally 4:00 p.m. New York time, on
each day the NYSE is open for trading (a "Business Day") based on prices at the time of
closing. The Funds compute net asset value per share in the same manner. See "Comparison
of the Funds--Additional Information--Net Asset Value."
Voting Rights. The corresponding voting rights of the stockholders of the Funds are
substantially similar. See "Comparison of the Funds--Additional Information--Capital
Stock."
Other Significant Considerations. Stockholder services, including exchange privileges,
available to Mercury Fund and Government Mortgage Fund stockholders are similar. See
"Comparison of the Funds--Additional Information--Stockholder Services." An automatic
dividend reinvestment plan is available to stockholders of each Fund. The plans are
similar. See "Comparison of the Funds--Automatic Dividend Reinvestment Plan." Other
stockholder services, including the provision of annual and semi-annual reports, are the
same for both Funds. "Comparison of the Funds--Stockholder Services."
Tax Considerations The Funds will receive an opinion of counsel with respect to the Reorganization to the
effect that, among other things, neither Government Mortgage Fund nor Mercury Fund will
recognize any gain or loss on the transaction, and no stockholder of Mercury Fund will
recognize any gain or loss upon receipt of shares of Government Mortgage Fund.
Consummation of the Reorganization is subject to the receipt of such opinion of counsel.
See "The Reorganization--Tax Consequences of the Reorganization." The Reorganization
will not affect the status of Government Mortgage Fund as a regulated investment
company.
-11-
RISK FACTORS AND SPECIAL CONSIDERATIONS
The investment risks associated with an investment in Mercury Fund are
substantially similar to the principal investment risks associated with an
investment in Government Mortgage Fund. Such risks include interest rate risk,
credit risk, market and selection risk, mortgage backed securities risk,
borrowing risk, call and redemption risk, securities lending risk, derivatives
risk, indexed and inverse floating rate securities risk, repurchase agreements
risk, as well as the risks associated with investing in when issued
securities, delayed delivery securities, forward commitments, illiquid
securities, restricted securities, Rule 144A securities and swap agreements.
The risk factors associated with an investment in Government Mortgage Fund are
set forth below and in the Government Mortgage Fund Prospectus that
accompanies this Proxy Statement and Prospectus under the caption "Details
about the Fund--Investment Risks."
Unless otherwise noted, each Fund is subject to the following principal
risks.
Interest Rate Risk -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term securities.
Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
Market and Selection Risk -- Market risk is the risk that the bond 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 securities that
Fund management selects will underperform the bond market, relevant indices or
other funds with similar investment objectives and investment strategies.
Mortgage Backed Securities -- Mortgage backed securities represent the right
to receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage backed securities will
be paid off more quickly than originally anticipated and a Fund has to invest
the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, certain types of mortgage backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as "extension risk."
Because of prepayment risk and extension risk mortgage backed securities react
differently to changes in interest rates than other fixed income securities.
Small movements in interest rates (both increase and decrease) may quickly and
significantly reduce the value of certain mortgage backed securities.
Most mortgage backed securities are issued by Federal government agencies,
such as the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("Freddie Mac"), or the Federal National
Mortgage Association ("Fannie Mae"). Principal and interest payments on
mortgage backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. Such
securities have very little credit risk, but may be subject to substantial
interest rate risks.
Mortgage backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches issued by
government agencies and interest rates move in a manner not anticipated by
Fund management, it is possible that the Fund could lose all or substantially
all of its investment.
-12-
Borrowing Risk -- Each Fund may borrow for temporary or emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return.
Call and Redemption Risk -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond a Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower yields.
Securities Lending -- Each Fund may lend securities with a value not exceeding
33 1/3% of its total assets to financial institutions that provide cash or
securities issued or guaranteed by the U.S. as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, the Fund may lose money and there may be
a delay in recovering the loaned securities. The Fund could also lose money if
it does not recover the securities and/or the value of the collateral falls,
including the value of investments made with cash collateral. These events
could trigger adverse tax consequences to the Fund.
Derivatives -- Each Fund may use derivative instruments including indexed and
inverse securities, futures, options, options on futures, interest rate swaps
and credit default swaps. Derivatives allow the Fund to increase or decrease
its risk exposure more quickly and efficiently than other types of
instruments.
Derivatives are volatile and involve significant risks, including:
o Credit risk -- the risk that the counterparty (the party on the
other side of the transaction) on a derivative transaction will be
unable to honor its financial obligation to the Fund.
o Leverage risk -- the risk associated with certain types of
investments or trading strategies that relatively small market
movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount
originally invested.
o Liquidity risk -- the risk that certain securities may be difficult
or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.
Each Fund may use derivatives for hedging purposes, including anticipatory
hedges, as well as to seek to enhance total returns. Hedging is a strategy in
which the Fund uses a derivative to offset the risks associated with other
Fund holdings. While hedging can reduce losses, it can also reduce or
eliminate gains or cause losses if the market moves in a different manner than
anticipated by the Fund or if the cost of the derivative outweighs the benefit
of the hedge. Hedging also involves the risk that changes in the value of the
derivative will not match those of the holdings being hedged as expected by
the Fund, in which case any losses on the holdings being hedged may not be
reduced. There can be no assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be either available or cost
effective. The Funds are not required to use hedging and may choose not to do
so.
Indexed and Inverse Floating Rate Securities -- Each Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Funds may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
interest rates increase and increase when interest rates decrease. Investments
in inverse floaters may subject the Fund to the risks of reduced or eliminated
interest payments and losses of principal. In addition, certain indexed
securities and inverse floaters may increase or decrease in value at a greater
rate than the underlying interest rate, which effectively leverages the Fund's
investment. Indexed securities and inverse floaters are derivative securities
and can be considered speculative. Indexed and inverse securities involve
credit risk and certain indexed and inverse securities may involve currency
risk, leverage risk and liquidity risk.
Repurchase Agreements -- Each Fund may enter into certain types of repurchase
agreements. Under a repurchase agreement, the seller agrees to repurchase a
security at a mutually agreed upon time and price. If the other party to a
-13-
repurchase agreement defaults on its obligation, the Fund may suffer delays
and incur costs or even lose money in exercising its rights under the
agreement.
When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve
the risk that the security a Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs, the Fund both loses the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
Illiquid Securities -- Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily sell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly sell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities
that a Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no active
trading market.
Restricted securities may be illiquid. The Funds may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Funds may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if a Fund's management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the securities.
Rule 144A Securities -- Rule 144A securities are restricted securities that
can be resold to qualified institutional buyers, but not to the general
public. Rule 144A securities may have an active trading market, but carry the
risk that the active trading market may not continue.
Swap Agreements -- Swap agreements involve the risk that the party with whom
the Fund has entered into the swap will default on its obligation to pay the
Fund and the risk that the Fund will not be able to meet its obligations to
pay the other party to the agreement. Mercury Fund does not invest in swap
agreements.
COMPARISON OF THE FUNDS
Financial Highlights
Government Mortgage Fund. The Financial Highlights table is intended to
help you understand Government Mortgage Fund's financial performance for the
periods shown. Certain information reflects financial results for a single
Government Mortgage Fund share. The total returns in the table represent the
rate an investor would have earned or lost on an investment in shares of
Government Mortgage Fund (assuming reinvestment of all dividends). Except for
the six months ended February 28, 2002, the information has been audited by
Deloitte & Touche LLP whose report, along with Government Mortgage Fund's
financial statements, is included in Government Mortgage Fund's Annual Report
that accompanies this Proxy Statement and Prospectus.
The following per share data and ratios have been derived from
information provided in the financial statements.
-14-
Government Mortgage Fund - Financial Highlights
Class A
----------------------------------------------------------------
For the Six
Months
Ended
February 28, For the Year ended August 31,
----------------------------------------------
2002
(unaudited) 2001 2000 1999 1998
----------------- ---------- -------- ------------ -------------
Increase (Decrease) in Net Asset Value:
- ----------------------------------------- ----------------------------------------------------------------
Per Share Operating Performance:
- ----------------------------------------- ----------------------------------------------------------------
Net asset value, beginning of period..... $ 9.95 $ 9.44 $ 9.37 $ 9.80 $ 9.64
- ----------------------------------------- ----------------------------------------------------------------
Investment income--net................... .25 .57 .58 .55 .60
- ----------------------------------------- ----------------------------------------------------------------
Realized and unrealized gain (loss) .08 .51 .07 (.43) .16
on investments-- net...................
- ----------------------------------------- ----------------------------------------------------------------
Total from investment operations......... .33 1.08 .65 .12 .76
- ----------------------------------------- ----------------------------------------------------------------
Less dividends from investment (.25) (.57) (.58) (.55) (.60)
income -- net..........................
- ----------------------------------------- ----------------------------------------------------------------
Net asset value, end of period........... $ 10.03 $ 9.95 $ 9.44 $ 9.37 $ 9.80
- ----------------------------------------- ----------------------------------------------------------------
Total Investment Return:*
- ----------------------------------------- ----------------------------------------------------------------
Based on net asset value per share....... 3.39%++ 11.77% 7.23% 1.24% 8.10%
- ----------------------------------------- ----------------------------------------------------------------
Ratios To Average Net Assets:
- ----------------------------------------- ----------------------------------------------------------------
Expenses.......................... .72%** .75% .75% .70% .68%
- ----------------------------------------- ----------------------------------------------------------------
Investment income--net............. 5.19%** 5.84% 6.23% 5.71% 6.18%
- ----------------------------------------- ----------------------------------------------------------------
Supplemental Data:
- ----------------------------------------- ----------------------------------------------------------------
Net assets, end of period (in thousands). $ 256,345 $ 234,930 $ 192,119 $ 212,131 $ 277,568
- ----------------------------------------- ----------------------------------------------------------------
Portfolio turnover................ 145.78% 199.30% 37.28% 58.16% 301.88%
- ----------------------------------------- ----------------------------------------------------------------
- ---------
* Total investment returns exclude the effects of sales charges.
** Annualized.
++ Aggregate total investment return.
Government Mortgage Fund - Financial Highlights (continued)
Class B
----------------------------------------------------------------
For the Six
Months
Ended
February 28, For the Year ended August 31,
----------------------------------------------
2002
(unaudited) 2001 2000 1999 1998
----------------- ---------- -------- ------------ -------------
Increase (Decrease) in Net Asset Value:
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Per Share Operating Performance:
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Net asset value, beginning of period...... $ 9.95 $ 9.44 $ 9.36 $ 9.79 $ 9.63
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Investment income--net.................... .22 .50 .51 .48 .53
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Realized and unrealized gain (loss) .08 .51 .08 (.43) .16
on investments-- net....................
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Total from investment operations .30 1.01 .59 .05 .69
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Less dividends from investment (.22) (.50) (.51) (.48) (.53)
income -- net...........................
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Net asset value, end of period............ $ 10.03 $ 9.95 $ 9.44 $ 9.36 $ 9.79
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Total Investment Return:*
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Based on net asset value per share........ 3.00%++ 10.91% 6.53% .46% 7.28%
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Ratios To Average Net Assets:
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Expenses.................................. 1.48%** 1.52% 1.52% 1.46% 1.45%
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Investment income--net.................... 4.42%** 5.07% 5.47% 4.95% 5.42%
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Supplemental Data:
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Net assets, end of period (in thousands).. $ 546,596 $ 466,432 $ 405,846 $ 571,969 $ 627,818
- ------------------------------------------ ------------ ----------- ------------ ------------ ------------
Portfolio turnover........................ 145.78% 199.30% 37.28% 58.16% 301.88%
- ---------
* Total investment returns exclude the effects of sales charges.
** Annualized.
++ Aggregate total investment return.
-15-
Government Mortgage Fund--Financial Highlights (continued)
Class C
----------------------------------------------------------------
For the Six
Months
Ended
February 28, For the Year ended August 31,
----------------------------------------------
2002
(unaudited) 2001 2000 1999 1998
----------------- ---------- -------- ------------ -------------
Increase (Decrease) in Net Asset
Value:
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Per Share Operating Performance:
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Net asset value, beginning of period..... $ 9.95 $ 9.44 $ 9.36 $ 9.79 $ 9.63
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Investment income--net................... .21 .49 .51 .48 .52
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Realized and unrealized gain (loss)
on investments-- net................... .08 .51 .08 (.43) .16
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Total from investment operations .29 1.00 .59 .05 .68
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Less dividends from investment (.21) (.49) (.51) (.48) (.52)
income-- net...........................
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Net asset value, end of period........... $ 10.03 $ 9.95 $ 9.44 $ 9.36 $ 9.79
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Total Investment Return:*
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Based on net asset value per share....... 2.98%++ 10.86% 6.47% .41% 7.23%
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Ratios To Average Net Assets:
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Expenses................................. 1.53%** 1.57% 1.57% 1.51% 1.51%
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Investment income--net................... 4.32%** 5.00% 5.43% 4.90% 5.35%
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Supplemental Data:
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Net assets, end of period (in thousands). $ 167,229 $ 56,706 $ 30,593 $ 46,614 $ 43,038
- ----------------------------------------- ------------ ----------- ----------- ------------ ------------
Portfolio turnover....................... 145.78% 199.30% 37.28% 58.16% 301.88%
- ---------
* Total investment returns exclude the effects of sales charges.
** Annualized.
++ Aggregate total investment return.
Government Mortgage Fund - Financial Highlights (continued)
Class D
----------------------------------------------------------------
For the Six
Months
Ended
February 28, For the Year ended August 31,
----------------------------------------------
2002
(unaudited) 2001 2000 1999 1998
----------------- ---------- -------- ------------ -------------
Increase (Decrease) in Net Asset
Value:
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Per Share Operating Performance:
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Net asset value, beginning of period.. $ 9.95 $ 9.44 $ 9.36 $ 9.79 $ 9.63
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Investment income--net................... .24 .55 .56 .53 .58
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Realized and unrealized gain (loss)
on investments-- net................... .08 .51 .08 (.43) .16
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Total from investment operations .32 1.06 .64 .10 .74
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Less dividends from investment
income-- net........................... (.24) (.55) (.56) (.53) (.58)
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Net asset value, end of period........... $ 10.03 $ 9.95 $ 9.44 $ 9.36 $ 9.79
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Total Investment Return:*
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Based on net asset value per share....... 3.26%++ 11.49% 7.08% .98% 7.84%
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Ratios To Average Net Assets:
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Expenses................................. .97%** 1.00% 1.00% .95% .93%
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Investment income--net................... 4.94%** 5.59% 5.99% 5.47% 5.94%
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Supplemental Data:
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Net assets, end of period (in thousands.. $ 771,829 $ 729,136 $ 720,311 $ 795,813 $ 866,013
- ----------------------------------------- ------------ ----------- ------------ ------------ ------------
Portfolio turnover................ 145.78% 199.30% 37.28% 58.16% 301.88%
- ---------
* Total investment returns exclude the effects of sales charges.
** Annualized.
++ Aggregate total investment return.
-16-
Mercury Fund--Financial Highlights
Mercury Fund. The Financial Highlights table is intended to help you
understand Mercury Fund's financial performance for the periods shown. Certain
information reflects financial results for a single Mercury Fund share. The
total returns in the table represent the rate an investor would have earned or
lost on an investment in shares of Mercury Fund (assuming reinvestment of all
dividends). The information has been audited by Deloitte & Touche LLP whose
report, along with Mercury Fund's financial statements, is included in Mercury
Fund's Annual Report, which is available upon request.
The following per share data and ratios have been derived from
information provided in the financial statements.
Class I++ Class A++
----------------------------------------- -----------------------------------------------
For the Year ended January 31, For the Year ended January 31,
----------------------------------------- -----------------------------------------------
2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value:
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year..... $ 10.41 $ 9.85 $10.52 $ 10.48 $ 10.20 $ 10.41 $ 9.84 $10.52 $ 10.48 $ 10.20
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net................. .57 .66 .64 .64 .69 .55 .64 .61 .61 .67
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net............. .13 .56 (.67) .21 .35 .12 .57 (.68) .21 .35
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations....... .70 1.22 (.03) .85 1.04 .67 1.21 (.07) .82 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net............... (.57) (.66) (.64) (.64) (.69) (.55) (.64) (.61) (.61) (.67)
Realized gain on
investments--net..................... (.02) --- --- (.17) (.07) (.02) --- --- (.17 ) (.07)
In excess of realized gain
on investments--net.................. --- --- --- ---+ --- --- --- --- ---+ ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions...... (.59) (.66) (.64) (.81) (.76) (.57) (.64) (.61) (.78) (.74)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period......... $ 10.52 $ 10.41 $ 9.85 $ 10.52 $ 10.48 $ 10.51 $ 10.41 $ 9.84 $ 10.52 $10.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share..... 6.89% 12.85% (.28)% 8.39% 10.66% 6.53% 12.68% (.63)% 8.12% 10.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement......... .00% .00% .00% .00% .00% .25% .25% .25% .25% .25%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses............................... 1.10% 1.38% 1.38% 1.73% 2.00% 1.36% 1.63% 1.67% 1.67% 2.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net................. 5.37% 6.49% 6.22% 6.13% 6.80% 5.08% 6.26% 6.02% 5.73% 6.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in
thousands)............................. $ 4,700 $ 600 $ 140 $ 1,278 $ 3,233 $ 5,413 $ 1,980 $ 708 $ 1,701 $ 315
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover..................... 185.42% 84.53% 91.75% 310.91% 361.31% 185.42% 84.53% 91.75% 310.91% 361.31%
- ------------------------------------------------------------------------------------------------------------------------------------
----------
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
++ Prior to April 3, 2000, Class I shares were designated as Class A
shares and Class A shares were designated as Class D shares.
-17-
Mercury Fund--Financial Highlights (continued)
Class B Class C
----------------------------------------------- ------------------------------------------
For the Year ended January 31, For the Year ended January 31,
----------------------------------------------- ------------------------------------------
2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
------- -------- -------- -------- ------- ------- ------- -------- ------ --------
Increase (Decrease) in Net Asset Value:
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year.. $ 10.39 $ 9.83 $ 10.51 $ 10.48 $ 10.20 $ 10.39 $ 9.83 $10.51 $ 10.48 $ 10.19
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net.............. .49 .59 .56 .56 .61 .49 .58 .56 .55 .60
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments--net.......... .13 .56 (.68) .20 .35 .14 .56 (.68) .20 .36
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations.... .62 1.15 (.12) .76 .96 .63 1.14 (.12) .75 .96
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net............ (.49) (.59) (.56) (.56) (.61) (.49) (.58) (.56) (.55) (.60)
Realized gain on investments--
net............................... (.02) --- --- (.17) (.07) (.02) --- --- (.17) (.07)
In excess of realized gain
on investments---net.............. --- --- --- ---+ --- --- --- --- ---+ ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions... (.51) (.59) (.56) (.73) (.68) (.51) (.58) (.56) (.72) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year........ $ 10.50 $ 10.39 $ 9.83 $ 10.51 $ 10.48 $ 10.51 $ 10.39 $ 9.83 $ 10.51 $ 10.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share.. 6.10% 12.02% (1.13)% 7.48% 9.76% 6.16% 11.97% (1.18)% 7.43% 9.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement...... .75% .75% .75% .75% .75% .80% .80% .80% .80% .80%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses............................ 1.87% 2.19% 2.22% 2.34% 2.82% 1.94% 2.25% 2.33% 2.47% 2.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net.............. 4.61% 5.81% 5.54% 5.26% 5.94% 4.58% 5.75% 5.49% 5.21% 5.88%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in
thousands).......................... $ 47,936 $ 16,121 $ 12,045 $ 14,817 $ 6,627 $ 18,217 $ 6,790 $ 3,400 $ 4,679 $ 2,057
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover.................. 185.42% 84.53% 91.75% 310.91% 361.31% 185.42% 84.53% 91.75% 310.91% 361.31%
- ------------------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
-18-
Investment Objectives and Policies
The investment objectives of Government Mortgage Fund and Mercury Fund
are substantially similar. Each Fund seeks high current return through
investments primarily in U.S. Government and government agency securities,
including GNMA Certificates and other mortgage backed government securities.
Government Mortgage Fund and Mercury Fund seek to achieve their
investment objectives through fully-managed investment policies utilizing U.S.
Government and government agency securities, including GNMA Certificates and
other mortgage backed government securities. Under normal circumstances, at
least 80% of Government Mortgage Fund's total assets consists of GNMA
Certificates, other U.S. Government securities representing ownership
interests in mortgage pools, or U.S. Government securities of issuers whose
primary purpose is to facilitate the making of residential or commercial
mortgages. Mercury Fund has authority to invest in all securities issued or
guaranteed by the U.S. Government or its agencies of any maturity, although
under certain circumstances a significant portion of its assets may consist of
GNMA Certificates and other U.S. Government securities representing ownership
interests in mortgage pools. Mercury Fund invests substantially all (at least
80%) of its total assets in securities issued or guaranteed by the U.S.
Government, U.S. Government agencies or U.S. Government sponsored enterprises.
In choosing investments, Government Mortgage Fund and Mercury Fund each
considers factors such as the relative yields of different types of U.S.
Government securities and its assessment of future interest rate patterns.
Neither Government Mortgage Fund nor Mercury Fund is limited as to the
maturities of their portfolio investments. The Funds may seek to enhance their
return through the use of options and futures transactions. The hedging
strategies are intended to reduce volatility in the net asset value of Fund
shares.
The investment objective of each Fund is a fundamental policy of the Fund
and may not be changed without the approval of a majority of the Fund's
outstanding voting securities as defined in the Investment Company Act.
Government Mortgage Fund and Mercury Fund have the following investment
strategies and policies.
GNMA Certificates and Other Mortgage Backed Government Securities. Each
Fund invests in GNMA Certificates. GNMA Certificates are mortgage backed
securities of the modified pass through type, which means that both interest
and principal payments (including prepayments) are passed through monthly to
the holder of the Certificate. The National Housing Act provides that the full
faith and credit of the United States is pledged to the timely payment of
principal and interest by GNMA of amounts due on these GNMA Certificates. Each
Certificate evidences an interest in a specific pool of mortgage loans insured
by the Federal Housing Administration ("FHA") or the Farmers Home
Administration or guaranteed by the Veterans Administration ("VA"). GNMA is a
wholly owned corporate instrumentality of the United States within the
Department of Housing and Urban Development.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments, which have maximum maturities of 30 years.
The average life may be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of prepayments or
refinancing of such mortgages. Such prepayments are passed through to the
registered holder with the regular monthly payments of principal and interest.
In addition, GNMA offers a pass through security backed by adjustable rate
mortgages. As prepayment rates vary widely, it is not possible to predict
accurately the average life of a particular pool. The actual yield of each
GNMA Certificate is influenced by the prepayment experience of the mortgage
pool underlying the certificate.
In addition to GNMA Certificates, Mercury Fund and Government Mortgage
Fund may invest in mortgage backed securities issued by Fannie Mae and by the
Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae, a federally
chartered and privately owned corporation, issues pass through securities and
certificates representing an interest in a pool of Fannie Mae pass through
securities which are guaranteed as to payment of principal and interest by
Fannie Mae. FHLMC, a corporate instrumentality of the United States, issues
participation certificates which represent an interest in mortgages from
FHLMC's portfolio and securities representing an interest in a pool of FHLMC
participation certificates. FHLMC guarantees the timely payment of interest
and the ultimate collection of principal. As is the case with GNMA
Certificates, the actual maturity of and realized yield on particular Fannie
Mae and FHLMC mortgage backed securities will vary based on the prepayment
experience of the underlying pool of mortgages. Securities guaranteed by
Fannie Mae and FHLMC are not backed by the full faith and credit of the United
States.
-19-
Mortgage backed U.S. Government securities typically provide a higher
potential for current income than other types of U.S. Government securities;
however, U.S. Treasury bills, notes and bonds typically provide a higher
potential for capital appreciation than mortgage backed securities.
Payments of principal and interest on mortgage backed securities are made
more frequently than are payments on conventional debt securities. In
addition, holders of mortgage backed securities may receive unscheduled
payments of principal at any time representing prepayments on the underlying
mortgage loans or financial assets. Such prepayments may usually be made by
the related obligor without penalty. Prepayment rates are affected by changes
in prevailing interest rates and numerous other economic, geographic, social
and other factors. Changes in the rate of prepayments will generally affect
the yield to maturity of the security. Moreover, when the holder of the
security attempts to reinvest prepayments or even the scheduled payments of
principal and interest, it may receive a rate of interest which is higher or
lower than the rate on the mortgage backed securities originally held. To the
extent that mortgage backed securities are purchased at a premium, mortgage
foreclosures and principal prepayments may result in a loss to the extent of
the premium paid. If such securities are bought at a discount, both scheduled
payments of principal and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income which, when
distributed to stockholders, will be taxable as ordinary income.
Derivatives. Mercury Fund and Government Mortgage Fund may use
instruments referred to as Derivatives. Derivatives are financial instruments
the value of which is derived from another security, a commodity (such as gold
or oil) or an index (a measure of value or rates, such as the Standard &
Poor's 500 Index or the prime lending rate). Derivatives allow the Funds to
increase or decrease the level of risk to which the Funds are exposed more
quickly and efficiently than transactions in other types of instruments. The
Funds may use Derivatives for hedging purposes or to seek to increase total
returns.
Hedging. Hedging is a strategy in which a Derivative is used to offset
the risks associated with Fund holdings. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite
manner to market movements. While hedging can reduce losses, it can also
reduce or eliminate gains or cause losses if the market moves in a different
manner than anticipated by the Fund or if the cost of the Derivative outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the Derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings being hedged
may not be reduced.
The types of Derivative instruments and trading strategies that Mercury
Fund and Government Mortgage Fund may use include the following:
Options and Futures Portfolio Strategies. Each of Mercury Fund and
Government Mortgage Fund may seek to increase its return through the use of
options on the underlying securities and may hedge all or a portion of its
portfolio investments against fluctuations in interest rates through the use
of options, interest rate futures and options on interest rate futures. While
the Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of Fund shares, the Fund's net asset value will fluctuate.
The Funds may only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in interest rates
occur. There can be no assurance that a Fund's hedging transactions will be
effective.
Each of Mercury Fund and Government Mortgage Fund is authorized to use
certain strategies involving options and futures. Such instruments are
referred to collectively herein as "Strategic Instruments."
Options on Securities and Securities Indices. Each of Mercury Fund and
Government Mortgage Fund may invest in options on individual securities and
baskets of securities. Government Mortgage Fund may also invest in options on
particular measurements of value or rate (an "index"), such as an index of the
price of Treasury securities or an index representative of short term interest
rates.
Purchasing Options. Each of Mercury Fund and Government Mortgage Fund is
authorized to purchase put options on securities held in its portfolio or
securities indices the performance of which is substantially correlated to
securities held in its portfolio. When a Fund purchases a put option, in
consideration for an upfront payment (the "option premium") the Fund acquires
a right to sell to another party specified securities owned by the Fund at a
-20-
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put.
Each of Mercury Fund and Government Mortgage Fund is also authorized to
purchase call options on securities it intends to purchase or securities
indices the performance of which substantially correlates with the performance
of the types of securities it intends to purchase. When a Fund purchases a
call option, in consideration for the option premium the Fund acquires a right
to purchase from another party specified securities at the exercise price on
or before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified
securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a call option may protect the Fund from having to pay more for a security
as a consequence of increases in the market value for the security during a
period when the Fund is contemplating its purchase, in the case of an option
on a security, or attempting to identify specific securities in which to
invest in a market the Fund believes to be attractive, in the case of an
option on an index (an "anticipatory hedge"). In the event the Fund determines
not to purchase a security underlying a call option, however, the Fund may
lose the entire option premium.
Each of Mercury Fund and Government Mortgage Fund is also authorized to
purchase put or call options in connection with closing out put or call
options it has previously sold.
Writing Options. Each of Mercury Fund and Government Mortgage Fund is
authorized to write (i.e., sell) call options on securities held in its
portfolio or securities indices the performance of which is substantially
correlated with securities held in its portfolio. When a Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before the expiration date, in the case
of an option on a securities index. The Fund may write call options to earn
income, through the receipt of option premiums. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
Each of Mercury Fund and Government Mortgage Fund may also write put
options on securities. Additionally, Government Mortgage Fund may write put
options on securities indices. When a Fund writes a put option, in return for
an option premium the Fund gives another party the right to sell to the Fund a
specified security at the exercise price on or before the expiration date, in
the case of an option on a security, or agrees to pay to another party an
amount based on any decline in a specified securities index below a specified
level on or before the expiration date, in the case of an option on a
securities index. Each Fund may write put options to earn income, through the
receipt of option premiums. In the event the party to which a Fund has written
an option fails to exercise its rights under the option because the value of
the underlying securities is greater than the exercise price, the Fund will
profit by the amount of the option premium. By writing a put option, however,
a Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of the security at the time of exercise as
long as the put option is outstanding, in the case of an option on a security,
or make a cash payment reflecting any decline in the index, in the case of an
option on an index. Accordingly, when either Fund writes a put option it is
exposed to a risk of loss in the event the value of the underlying securities
falls below the exercise price, which loss potentially may substantially
exceed the amount of option premium received by the Fund for writing the put
option. Each Fund will write a put option on a security (and, in the case of
Government Mortgage Fund, a securities index), only if the Fund would be
willing to purchase the security at the exercise price for investment purposes
(in the case of an option on a security) or is writing the put in connection
with trading strategies involving
-21-
combinations of options -- for example, the sale and purchase of options with
identical expiration dates on the same security or index but different
exercise prices (a technique called a "spread").
Each of Mercury Fund and Government Mortgage Fund is also authorized to
sell call or put options in connection with closing out call or put options it
has previously purchased.
Other than with respect to closing transactions, Mercury Fund and
Government Mortgage Fund will only write call or put options that are
"covered." A put option will be considered covered if the Fund has segregated
assets with respect to such option in the manner described in "Risk Factors in
Options and Futures" below. A call option will be considered covered if the
Fund owns the securities it would be required to deliver upon exercise of the
option (or, in the case of an option on a securities index, securities which
substantially replicate the performance of such index) or owns a call option,
warrant or convertible instrument which is immediately exercisable for, or
convertible into, such security.
Options on GNMA Certificates. The following information relates to unique
characteristics of options on GNMA Certificates. Since the remaining principal
balance of GNMA Certificates declines each month as a result of mortgage
payments, each of Mercury Fund and Government Mortgage Fund, as a writer of a
GNMA call holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of exercise, may find that the GNMA Certificates it
holds no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will purchase additional GNMA
Certificates from the same pool (if obtainable) or other GNMA Certificates in
the cash market in order to maintain its "cover."
A GNMA Certificate held by Mercury Fund or Government Mortgage Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the GNMA coupon
rate at which new pools are originated under the FHA/VA loan ceiling in effect
at any given time. If this should occur, the Fund will no longer be covered,
and the Fund will either enter into a closing purchase transaction or replace
such Certificate with a certificate which represents cover. When the Fund
closes its position or replaces such Certificate, it may realize an
unanticipated loss and incur transaction costs.
Types of Options. Each of Mercury Fund and Government Mortgage Fund may
engage in transactions in options on securities or securities indices on
exchanges and in the over the counter ("OTC") markets. In general, exchange
traded options have standardized exercise prices and expiration dates and
require the parties to post margin against their obligations, and the
performance of the parties' obligations in connection with such options is
guaranteed by the exchange or a related clearing corporation. OTC options have
more flexible terms negotiated between the buyer and the seller, but generally
do not require the parties to post margin and are subject to greater risk of
counterparty default. See "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Strategic Instruments" below.
Futures. Each of Mercury Fund and Government Mortgage Fund may engage in
transactions in futures and options thereon. Futures are standardized,
exchange traded contracts which obligate a purchaser to take delivery, and a
seller to make delivery, of a specific amount of a commodity at a specified
future date at a specified price. No price is paid upon entering into a
futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing
any loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits each Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, each Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect each Fund from having to
pay more for securities as a consequence of increases in the market value for
such securities during a period when the Fund was attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive. In the event that such
-22-
securities decline in value or such Fund determines not to complete an
anticipatory hedge transaction relating to a futures contract, however, the
Fund may realize a loss relating to the futures position.
In order to comply with current applicable regulations of the Commodity
Futures Trading Commission ("CFTC") pursuant to which the Funds avoid being
deemed a "commodity pool operator," the Funds are limited in their futures
trading activities to positions which constitute "bona fide hedging" positions
within the meaning and intent of applicable CFTC rules, or to non-hedging
positions for which the aggregate initial margin and premiums will not exceed
5% of the liquidation value of either Fund's assets.
Risk Factors in Options and Futures. Use of Strategic Instruments for
hedging purposes involves the risk of imperfect correlation in movements in
the value of the Strategic Instruments and the value of the instruments being
hedged. If the value of the Strategic Instruments moves more or less than the
value of the hedged instruments Mercury Fund or Government Mortgage Fund will
experience a gain or loss which will not be completely offset by movements in
the value of the hedged instruments.
Each of Mercury Fund and Government Mortgage Fund intends to enter into
transactions involving Strategic Instruments only if there appears to be a
liquid secondary market for such instruments or, in the case of illiquid
instruments traded in OTC transactions, such instruments satisfy the criteria
set forth below under "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Strategic Instruments." However, there can be no
assurance that, at any specific time, either a liquid secondary market will
exist for a Strategic Instrument or either Fund will otherwise be able to sell
such instrument at an acceptable price. It may therefore not be possible to
close a position in a Strategic Instrument without incurring substantial
losses, if at all.
Certain transactions in Strategic Instruments (e.g., futures
transactions, sales of put options) and other types of transactions in which
each Fund may engage (e.g., delayed delivery transactions, discussed below)
may expose each Fund to potential losses which exceed the amount originally
invested by such Fund in such instruments. When Mercury Fund or Government
Mortgage Fund engages in such a transaction, the Fund will deposit in a
segregated account at its custodian liquid securities with a value at least
equal to the Fund's exposure, on a mark-to-market basis, to the transaction
(as calculated pursuant to requirements of the Commission). Such segregation
will ensure that the Fund has assets available to satisfy its obligations with
respect to the transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Strategic Instruments. Certain Strategic Instruments traded in OTC
markets, including OTC options, may be substantially less liquid than other
instruments in which Mercury Fund or Government Mortgage Fund may invest. The
absence of liquidity may make it difficult or impossible for each Fund to sell
such instruments promptly at an acceptable price. The absence of liquidity may
also make it more difficult for the Fund to ascertain a market value for such
instruments. Each Fund will therefore acquire illiquid OTC instruments (i) if
the agreement pursuant to which the instrument is purchased contains a formula
price at which the instrument may be terminated or sold, or (ii) for which
Fund management anticipates the Fund can receive on each business day at least
two independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
Each of Mercury Fund and Government Mortgage Fund has therefore adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the securities underlying OTC
call options currently outstanding which have been sold by the Fund and margin
deposits on the Fund's outstanding OTC options exceeds 15% of the net assets
of the Fund, taken at market value, together with all other assets of the Fund
which are deemed to be illiquid or are otherwise not readily marketable.
However, if an OTC option is sold by either Fund to a dealer in U.S.
Government securities recognized as a "primary dealer" by the Federal Reserve
Bank of New York and the Fund has the unconditional contractual right to
repurchase such OTC option at a predetermined price, then the Fund will treat
as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying security minus the option's exercise
price).
-23-
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that Government Mortgage Fund or Mercury Fund have
unrealized gains in such instruments or has deposited collateral with its
counterparty such Fund is at risk that its counterparty will become bankrupt
or otherwise fail to honor its obligations. Government Mortgage Fund and
Mercury Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in
transactions in Strategic Instruments traded in OTC markets only with
financial institutions which have substantial capital or which have provided
the Fund with a third party guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments. Neither
Government Mortgage Fund nor Mercury Fund may use any Strategic Instrument to
gain exposure to an asset or type or class of assets that it would be
prohibited by its investment restrictions from purchasing directly.
Interest Rate Swaps, Caps and Floors. Government Mortgage Fund and
Mercury Fund may enter into interest rate swaps, which are OTC contracts in
which each party agrees to make a periodic payment based on an index or the
value of an asset in return for a periodic payment from the other party based
on a different index or asset.
In order to hedge the value of a Fund's portfolio against interest rate
fluctuations or to enhance a Fund's income, a Fund may enter into various
transactions, such as interest rate swaps and the purchase or sale of interest
rate caps and floors. The Funds expect to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio or to protect against any increase in the price of securities
the Funds anticipate purchasing at a later date. The Funds intend to use these
transactions primarily as a hedge and not as a speculative investment.
However, the Funds may also invest in interest rate swaps to enhance income or
to increase their yield during periods of steep interest rate yield curves
(i.e., wide differences between short term and long term interest rates).
The Funds usually will enter into interest rate swap transactions on a
net basis, i.e., the two payment streams are netted out, with the Funds
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these transactions are entered into for good faith
hedging purposes, FAM believes that such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of such Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis, and an amount of cash or liquid securities having
an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the interest
rate swap transaction is entered into on other than a net basis, the full
amount of the Fund's obligations will be accrued on a daily basis, and the
full amount of the Fund's obligations will be maintained in a segregated
account by the Fund's custodian.
In an interest rate swap, the Funds exchange with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if either Fund holds a
mortgage backed security with an interest rate that is reset only once each
year, it may swap the right to receive interest at this fixed rate for the
right to receive interest at a rate that is reset every week. This would
enable the Fund to offset a decline in the value of the mortgage backed
security due to rising interest rates but would also limit its ability to
benefit from falling interest rates. Conversely, if either Fund holds a
mortgage backed security with an interest rate that is reset every week and it
would like to lock in what it believes to be a high interest rate for one
year, it may swap the right to receive interest at this variable weekly rate
for the right to receive interest at a rate that is fixed for one year. Such a
swap would protect the Fund from a reduction in yield due to falling interest
rates and may permit the Fund to enhance its income through the positive
differential between one week and one year interest rates, but would preclude
it from taking full advantage of rising interest rates.
The Funds also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that
a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor.
-24-
Typically the parties with which the Funds will enter into interest rate
transactions will be broker-dealers and other financial institutions. The
Funds will enter into interest rate swap, cap or floor transactions only with
counterparties that are rated investment grade quality by at least one
nationally recognized statistical rating organization at the time of entering
into such transaction or whose creditworthiness is believed by FAM to be
equivalent to such rating. If there is a default by the other party to such a
transaction, the Funds will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps
and floors, however, are less liquid than swaps. Certain Federal income tax
requirements may limit each Fund's ability to engage in certain interest rate
transactions. Gains from transactions in interest rate swaps distributed to
stockholders will be taxable as ordinary income or, in certain circumstances,
as long term capital gains to stockholders.
Credit Default Swap Agreements. Each of Mercury Fund and Government
Mortgage Fund may enter into credit default swap agreements. The "buyer" in a
credit default contract is obligated to pay the "seller" a periodic stream of
payments over the term of the contract provided that no credit event with
respect to an underlying reference obligation has occurred. Generally a credit
event means bankruptcy, failure to pay, obligation acceleration or modified
restructuring. If a credit event occurs, the seller typically must pay the
buyer the "par value" (full notional value) of the reference obligation in
exchange for the reference obligation. A Fund may be either the buyer or
seller in the transaction. If either Fund is a buyer and no credit event
occurs, such Fund loses its investment and recovers nothing. However, if a
credit event occurs, the buyer receives full notional value for a reference
obligation that may have little or no value. As a seller, each Fund receives a
fixed rate of income throughout the term of the contract, which typically is
between one month and five years, provided that no credit event occurs. If a
credit event occurs, the seller must pay the buyer the full notional value of
the reference obligation.
Credit default swaps involve greater risks than if either Fund had
invested in the reference obligation directly. In addition to general market
risks, credit default swaps are subject to illiquidity risk, counterparty risk
and credit risks. The Funds will enter into swap agreements only with
counterparties who are rated investment grade quality by at least one
nationally recognized statistical rating organization at the time of entering
into such transaction or whose creditworthiness is believed by FAM to be
equivalent to such rating. A buyer also will lose its investment and recover
nothing should no credit event occur. If a credit event were to occur, the
value of the reference obligation received by the seller, coupled with the
periodic payments previously received, may be less than the full notional
value it pays to the buyer, resulting in a loss of value to such Fund.
The Funds will only buy a credit default swap if they own the reference
obligation. If a Fund is a seller of a credit default swap, it will maintain
an amount of cash or liquid instruments having an aggregate net asset value at
least equal to the full notional value of the reference obligation in a
segregated account with the Fund's custodian. The value of these assets will
be monitored daily to ensure that their marked to market value at all times
will exceed the corresponding obligation of the Fund.
Indexed and Inverse Floating Rate Securities. Mercury Fund and Government
Mortgage Fund may invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the underlying
index or interest rate rises and fall when the index or interest rate falls.
The Funds may also invest in securities whose return is inversely related to
changes in an interest rate ("inverse floaters"). In general, inverse floaters
change in value in a manner that is opposite to most bonds -- that is,
interest rates on inverse floaters will decrease when short-term rates
increase and increase when short-term rates decrease. Investments in indexed
securities and inverse floaters may subject a Fund to the risk of reduced or
eliminated interest payments. Investments in indexed securities also may
subject a Fund to loss of principal. In addition, certain indexed securities
and inverse floaters may increase or decrease in value at a greater rate than
the underlying interest rate, which effectively leverages the Fund's
investment. As a result, the market value of such securities will generally be
more volatile than that of fixed rate securities. Both indexed securities and
inverse floaters can be derivative securities and can be considered
speculative.
-25-
Other Investment Policies
Government Mortgage Fund and Mercury Fund have adopted certain other
investment policies described below.
When Issued Securities and Delayed Delivery Transactions. The Funds may
purchase U.S. Government securities on a when issued basis, and each may
purchase or sell U.S. Government securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered
an advantageous yield and price to the Fund at the time of entering into the
transaction.
Stripped Mortgage Backed Securities. The Funds may invest in stripped
mortgage backed securities ("SMBSs") issued by agencies or instrumentalities
of the United States. SMBSs are derivative multiclass mortgage backed
securities. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common variety of SMBS is where one class (the
principal only or PO class) receives some of the interest and most of the
principal from the underlying assets, while the other class (the interest only
or IO class) receives most of the interest and the remainder of the principal.
In the most extreme case, the IO class receives all of the interest, while the
PO class receives all of the principal. While a Fund may purchase securities
of a PO class, it is more likely to purchase the securities of an IO class.
The yield to maturity of an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying assets,
and a rapid rate of principal payments in excess of that considered in pricing
the securities will have a material adverse effect on an IO security's yield
to maturity. If the underlying mortgage assets experience greater than
anticipated payments of principal, a Fund may fail to recoup fully its initial
investment in IOs. In addition, there are certain types of IOs which represent
the interest portion of a particular class as opposed to the interest portion
of the entire pool. The sensitivity of this type of IO to interest rate
fluctuations may be increased because of the characteristics of the principal
portion to which they relate. As a result of the above factors, a Fund
generally will purchase IOs only as a component of so called "synthetic"
securities. This means that purchases of IOs will be matched with certain
purchases of other securities, such as POs, inverse floating rate CMOs or
fixed rate securities; as interest rates fall, presenting a greater risk of
unanticipated prepayments of principal, the negative effect on a Fund because
of its holdings of IOs should be diminished somewhat because of the increased
yield on the inverse floating rate CMOs or the increased appreciation on the
POs or fixed rate securities. IOs and POs are considered by the staff of the
Commission to be illiquid securities and, consequently, the Fund will not
invest in IOs or POs in an amount which, taken together with the Fund's other
investments in illiquid securities, exceeds 15% of the Fund's net assets.
Short Sales. The Funds may from time to time make short sales. These
transactions will involve either short sales of securities retained in a
Fund's portfolio or securities which it has the right to acquire without the
payment of further consideration (a short sale "against the box").
Repurchase Agreements. The Funds may invest in U.S. Government securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or primary dealer in
U.S. Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed upon time and price, thereby determining the yield during
the term of the agreement. This results in a fixed rate of return insulated
from market fluctuations during such period. The Funds may not invest in
repurchase agreements maturing in more than seven days if, as a result, more
than 15% of the Fund's net assets would be invested in illiquid securities,
including such repurchase agreements. In the event of default by the seller
under a repurchase agreement, such Fund may suffer time delays and incur costs
or possible losses in connection with the disposal of the collateral.
Securities Lending. The Funds may lend portfolio securities, with a value
not in excess of 33 1/3% of its total assets, to brokers, dealers and
financial institutions and receive collateral in cash or U.S. Government
securities which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The Funds
receive the income on the loaned securities. Where a Fund receives securities
as collateral, the Fund receives a fee for its loan from the borrower. Where a
Fund receives cash collateral, it may invest such collateral and retain the
amount earned, net of any amount rebated to the borrower. As a result, the
Fund's yield may increase. Loans of securities are terminable at any time and
the borrower, after notice is required to return
-26-
borrowed securities within the standard time period for settlement of
securities transactions. The Funds may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with their loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, a Fund could experience delays
and costs in gaining access to the collateral. The Funds could also suffer a
loss in the event of losses on investments made with cash collateral or, in
the event of borrower default, where the value of the collateral falls below
the market value of the borrowed securities. The Funds have received an
exemptive order from the Commission permitting them to lend portfolio
securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") or its affiliates, and to retain an affiliate of the Funds as lending
agent. See "Portfolio Transactions and Brokerage."
Borrowing of Money. Except to the extent permitted by a Fund's investment
policies as set forth in its Prospectus and Statement of Additional
Information, the Fund may not borrow money to purchase portfolio securities.
However, the Funds may borrow from banks as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in amounts not
exceeding 10% (taken at market value) of its total assets and pledge its
assets to secure such borrowings. The Funds will not purchase portfolio
securities while any borrowings are outstanding.
For a detailed discussion of investment policies of Mercury Fund and
Government Mortgage Fund regarding futures and options, including the risks
associated therewith, see "Details About the Fund--Investment Risks" in the
Mercury Fund Prospectus, and "Details About the Fund--Investment Risks" in the
Government Mortgage Fund Prospectus, "Dividends and Taxes--Tax Treatment of
Options and Futures Transactions" in the Mercury Fund Statement, "Dividends
and Taxes--Tax Treatment of Options and Futures" in the Government Mortgage
Fund Statement, "Investment Objective and Policies--Other Investment Policies
and Practices" in the Mercury Fund Statement, and "Investment Objective and
Policies--Other Investment Practices" in the Government Mortgage Fund
Statement.
Investment Restrictions
Mercury Fund and Government Mortgage Fund have identical investment
restrictions. See "Investment Objective and Policies--Investment Restrictions"
in the Mercury Fund and Government Mortgage Fund Statements.
Management
Management and Advisory Arrangements. FAM serves as the investment
adviser to Government Mortgage Fund. FAM, doing business as Mercury Advisors,
serves as the investment adviser to Mercury Fund.
Pursuant to a management agreement between FAM and Government Mortgage
Fund, Government Mortgage Fund pays FAM a monthly management fee at the annual
rate calculated as follows:
Portion of average daily value of net assets: Management Fee
--------------------------------------------------- -----------------
Not exceeding $500 million 0.500%
$500 million to $1 billion 0.475%
$1 billion to $1.5 billion 0.450%
$1.5 billion to $2 billion 0.425%
$2 billion to $2.5 billion 0.400%
$2.5 billion to $3.5 billion 0.375%
$3.5 billion to $5 billion 0.350%
$5 billion to $6.5 billion 0.325%
Exceeding $6.5 billion 0.300%
Pursuant to a management agreement between FAM and Asset Program, Mercury
Fund is obligated to pay FAM a monthly management fee at the annual rate of
0.50% of the Fund's average daily net assets. FAM is currently waiving the
management fee due from Mercury Fund, but may discontinue such waiver at any
time.
-27-
Sales Charges; 12b-1 Fees. Class A and Class D shares of Government
Mortgage Fund and Class I and Class A shares of Mercury Fund are sold subject
to a front-end sales charge, and Class B and Class C shares of Government
Mortgage Fund and Mercury Fund are subject to a contingent deferred sales
charge. Under separate class-specific plans adopted pursuant to Rule 12b-1
under the Investment Company Act, Government Mortgage Fund pays fees in
connection with account maintenance for each of Class B, Class C and Class D
shares and in connection with distribution for each of Class B and Class C
shares ("12b-1 fees"), and Mercury Fund pays 12b-1 fees in connection with
account maintenance for each of Class A, Class B and Class C shares and in
connection with distribution for each of Class B and Class C shares. Set forth
below is a comparison of the 12b-1 fees as well as the maximum applicable
sales charges for Government Mortgage Fund and Mercury Fund:
12b-1 Annual Fee Rates and Sales Charges
(as a percentage of average daily net assets of the applicable share class)
---------------------------------------------------------------------------
- -------------------------------- ------------------------- ---------------------- --------------------------
Maximum Front-End1 or
Account Maintenance Fee Distribution Fee Contingent Deferred
Sales Charge2
- -------------------------------- ------------------------- ---------------------- --------------------------
Government Government Government
Share Class Mortgage Mercury Mortgage Mercury Mortgage ercury
Fund Fund Fund Fund Fund Fund
- -------------------------------- ------------- ----------- ----------- ---------- ------------ -------------
Class A Shares of Government
Mortgage Fund None None None None 4.00% 4.00%
Class I Shares of Mercury
Fund
- -------------------------------- ------------- ----------- ----------- ---------- ------------ -------------
Class B Shares of
Government Mortgage Fund
and Mercury Fund 0.25% 0.25% 0.50% 0.50% 4.00% 4.00%
- -------------------------------- ------------- ----------- ----------- ---------- ------------ -------------
Class C Shares of
Government Mortgage Fund
and Mercury Fund 0.25% 0.25% 0.55% 0.55% 1.00% 1.00%
- -------------------------------- ------------- ----------- ----------- ---------- ------------ -------------
Class D Shares of Government
Mortgage Fund 0.25% 0.25% None None 4.00% 4.00%
Class A Shares of Mercury
Fund
- -------------------------------- ------------- ----------- ----------- ---------- ------------ -------------
---------
1 Class A shares and Class D shares of Government Mortgage Fund and
Class I and Class D shares of Mercury Fund are subject to a front-end
sales charge. See "Purchase of Shares - Initial Sales Charge
Alternatives - Class A and Class D Shares" in the Government Mortgage
Fund Statement and "Purchase of Shares - Initial Sales Charge
Alternatives - Class I and Class A Shares" in the Statement of
Additional Information relating to Mercury Fund, dated May 29, 2002.
2 Class B shares and Class C shares of Government Mortgage Fund and
Mercury Fund are subject to a contingent deferred sales charge. See
"Purchase of Shares - Deferred Sales Charge Alternatives - Class B and
Class C Shares" in the Government Mortgage Fund Statement and the
Statement of Additional Information relating to Mercury Fund, dated
May 29, 2002.
-28-
Purchase of Shares
Government Mortgage Fund and Mercury Fund each offer four classes of
shares. Government Mortgage Fund's Class A, Class D, Class B and Class C
shares are substantially the same as Mercury Fund's Class I, Class A, Class B
and Class C shares, respectively, except that the CDSC period of Class B
shares of Government Mortgage Fund is four years and the CDSC period of Class
B shares of Mercury Fund is six years, and each Fund's share classes represent
ownership interests in a different investment portfolio. For a complete
discussion of the four classes of shares and the purchase and distribution
procedures related thereto for Government Mortgage Fund and Mercury Fund, see
"Your Account--Merrill Lynch Select PricingSM System" and "--How to Buy, Sell,
Transfer and Exchange Shares" in the Government Mortgage Fund Prospectus and
"Pricing of Shares" and "How to Buy, Sell, Transfer and Exchange Shares" in
the Mercury Fund Prospectus.
Redemption of Shares
The redemption procedures for shares of Government Mortgage Fund are the
same as the redemption procedures for shares of Mercury Fund. For purposes of
computing any CDSC that may be payable upon disposition of shares of
Government Mortgage Fund distributed to Mercury Fund stockholders in the
Reorganization, the holding period of Mercury Fund shares outstanding on the
date the Reorganization takes place will be tacked onto the holding period of
the shares of Government Mortgage Fund distributed in the Reorganization. See
"Your Account--Merrill Lynch Select PricingSM System," "--How to Buy, Sell,
Transfer and Exchange Shares" and "--Participation in Fee-Based Programs" in
the Government Mortgage Fund Prospectus and "Pricing of Shares," "How to Buy,
Sell, Transfer and Exchange Shares" and "Participation in Fee-Based Programs"
in the Mercury Fund Prospectus.
Exchange of Shares
The exchange privilege for the Class A, Class B, Class C and Class D
shares of Government Mortgage Fund is similar to the exchange privilege for
the Class I, Class B, Class C and Class A shares of Mercury Fund,
respectively, except that Government Mortgage Fund stockholders receive shares
of other mutual funds advised by FAM or its affiliate, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and Mercury Fund stockholders receive
shares of other Mercury mutual funds. Mutual funds advised by FAM or MLIM are
together referred to herein as "FAM/MLIM-advised mutual funds." U.S.
stockholders of each class of shares of Government Mortgage Fund have an
exchange privilege with certain other FAM/MLIM-advised mutual funds and Summit
Cash Reserves Fund ("Summit"), a series of Financial Institutional Series
Trust, which is a Merrill Lynch-sponsored money market fund specifically
designated for exchange by holders of Class A, Class B, Class C and Class D
shares of FAM/MLIM-advised mutual funds. Under the Merrill Lynch Select
PricingSM System, Class A stockholders may exchange Class A shares of
Government Mortgage Fund for Class A shares of a second FAM/MLIM-advised
mutual fund if the stockholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A stockholder wants to exchange Class A shares for shares of a second
FAM/MLIM-advised mutual fund, and the stockholder does not hold Class A shares
of the second fund in his or her account at the time of the exchange and is
not otherwise eligible to acquire Class A shares of the second fund, the
stockholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
FAM/MLIM-advised mutual fund at any time as long as, at the time of the
exchange, the stockholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other FAM/MLIM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of Government Mortgage Fund is "tacked" to the holding
period of the newly acquired shares of the other fund. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
FAM/MLIM-advised mutual funds specifically designated as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares
with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the stockholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by Government Mortgage Fund's distributor.
-29-
U.S. stockholders of Class I, Class A, Class B and Class C shares of
Mercury Fund have an exchange privilege with certain other Mercury mutual
funds and Summit Cash Reserves Fund. Class I stockholders may exchange Class I
shares of the Fund for Class I shares of a second Mercury mutual fund. If the
Class I stockholder wants to exchange Class I shares for shares of a second
Mercury mutual fund or for Class A shares of Summit, but does not hold Class I
shares of the second fund or Class A shares of Summit in his or her account at
the time of exchange and is not otherwise eligible to acquire Class I shares
of the second fund or Class A shares of Summit, the stockholder 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 stockholder is eligible
to acquire Class I shares of such Mercury mutual fund. Class B and Class C
shares will be exchangeable for Class B or Class C shares, respectively, of
another Mercury mutual fund or for Class B shares of Summit. 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 or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
Class I, Class A, Class B and Class C shares also will be exchangeable for
shares of certain Mercury mutual funds specifically designated as 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 utilized in an exchange must have been held
by the stockholder for at least 15 days.
Performance
General. The following tables provide performance information for each
class of shares of each Fund, including and excluding maximum applicable sales
charges, for the periods indicated. Past performance is not indicative of
future performance.
Government Mortgage Fund
Average Annual Total Return
Class A Shares Class B Shares Class C Shares Class D Shares
----------------- ------------------ ----------------- ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge* Charge Charge* Charge Charge* Charge Charge*
Period (%) (%) (%) (%) (%) (%) (%) (%)
- ------ ------- ------- ------ ---------- ------ ------- ------ -------
Year Ended 5/31/02............... 3.82% 8.15% 3.32% 7.32% 6.27% 7.27% 3.56% 7.88%
Five Years Ended 5/31/02......... 6.29% 7.16% 6.34% 6.34% 6.29% 6.29% 6.02% 6.89%
Ten Years Ended 5/31/02.......... -- -- 5.81% 5.81% -- -- 5.92% 6.35%
Inception (10/21/94) through 7.11% 7.69% -- -- 6.82% 6.82% -- --
5/31/02..........................
- -------------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 4.00%. The maximum CDSC on
Class B shares is 4.0% and is reduced to 0% after 4 years. Class C
shares are subject to a 1.0% CDSC for one year.
Mercury Fund
Average Annual Total Return
Class I Shares** Class B Shares Class C Shares Class A Shares**
----------------- ------------------ ----------------- ------------------
With Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales Sales
Charge Charge* Charge Charge* Charge Charge* Charge Charge*
Period (%) (%) (%) (%) (%) (%) (%) (%)
- ------ ------- ------- ------ ---------- ------ ------- ------ -------
Year Ended 5/31/02............... 3.80% 8.13% 3.22% 7.22% 6.29% 7.29% 3.45% 7.76%
Five Years Ended 5/31/02......... 6.93% 7.81% 6.65% 6.96% 6.92% 6.92% 6.62% 7.50%
Inception (2/1/95) through 5/31/02 7.71% 8.31% 7.43% 7.43% 7.39% 7.39% 7.41% 8.01%
- -------------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class I and Class A shares is 4.00%. The maximum CDSC on
Class B shares is 4.0% and is reduced to 0% after six years. Class C
shares are subject to a 1.0% CDSC for one year.
** Prior to April 3, 2000, Class I Shares were designated as Class A
Shares, and Class A Shares were designated as Class D Shares.
-30-
Code of Ethics
Each Board has approved the same Code of Ethics under Rule 17j-1 of the
Investment Company Act, which covers the Fund and the Fund's investment
adviser. The Code of Ethics establishes procedures for personal investing and
restricts certain transactions. Employees subject to the Code of Ethics may
invest in securities for their personal investment accounts, including
securities that may be purchased or held by the respective Fund.
Stockholder Rights
Stockholders of Government Mortgage Fund are entitled to one vote for
each share held and fractional votes for fractional shares held and will vote
on the election of Board Members and any other matter submitted to a
stockholder vote. Government Mortgage Fund does not intend to hold annual
meetings of stockholders. Voting rights for Board Members are not cumulative.
Shares of Government Mortgage Fund to be issued to stockholders of the Mercury
Fund in the Reorganization will be fully paid and, except as stated below,
non-assessable, will have no preemptive rights, and will have the conversion
rights described in this Proxy Statement and Prospectus and in the Government
Mortgage Fund Prospectus. Each share of Government Mortgage Fund is entitled
to participate equally in dividends declared by the Fund and in the net assets
of the Fund on liquidation or dissolution after satisfaction of outstanding
liabilities, except that Class B, Class C and Class D shares bear certain
additional expenses. See "Stockholders' Meetings" below for additional
information. Rights attributable to shares of Mercury Fund are similar to
those described above.
Limitation of Liability
Government Mortgage Fund is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, stockholders of such
a trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the Declaration of Trust of Government
Mortgage Fund contains an express disclaimer of stockholder liability for acts
or obligations of Government Mortgage Fund and provides for indemnification
and reimbursement of expense out of Government Mortgage Fund's property for
any stockholder held personally liable for the obligations of Government
Mortgage Fund. Thus, the risk of a stockholder incurring financial loss on
account of stockholder liability is limited to circumstances in which
Government Mortgage Fund itself would be unable to meet its obligations. Given
the nature of Government Mortgage Fund's assets and operations, the
possibility of Government Mortgage Fund being unable to meet its obligations
is remote and the risk to Government Mortgage Fund's stockholders is remote.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of Government Mortgage Fund is liable to Government Mortgage
Fund or to any stockholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of Government
Mortgage Fund, except as such liability may arise from his or her own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his or
her duties. It also provides that all third persons shall look solely to
Government Mortgage Fund property for satisfaction of claims arising in
connection with the affairs of Government Mortgage Fund. With the exceptions
stated, the Declaration of Trust provides that a Trustee, officer, employee or
agent is entitled to be indemnified against all liability in connection with
the affairs of Government Mortgage Fund.
Dividends
It is the intention of each Fund to distribute substantially all of its
net investment income. Each Fund distributes dividends from net investment
income monthly. All net realized capital gains, if any, will be distributed to
each Fund's stockholders at least annually. From time to time, each Fund may
declare a special distribution at or about the end of the calendar year in
order to comply with Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the year.
Automatic Dividend Reinvestment Plan
Each of Government Mortgage Fund and Mercury Fund offers its stockholders
an Automatic Dividend Reinvestment Plan (each, a "Plan" and collectively, the
"Plans") with the same terms. Pursuant to the Plans,
-31-
dividends will be automatically reinvested, without sales charge, in
additional full and fractional shares of the relevant Fund unless a
stockholder has elected to receive such dividends in cash. For further
information about the Plans, see "Your Account--How to Buy, Sell, Transfer and
Exchange Shares" in the Government Mortgage Fund Prospectus and "Account
Choices--How to Buy, Sell, Transfer and Exchange Shares" in the Mercury Fund
Prospectus.
After the Reorganization, former stockholders of Mercury Fund who elected
to receive dividends in cash will continue to receive dividends in cash from
the Combined Fund; dividends paid to all other former Mercury Fund
stockholders will be automatically reinvested in shares of the Combined Fund.
If a stockholder currently owns shares of Government Mortgage Fund and shares
of Mercury Fund, after the Reorganization that stockholder's election with
respect to the dividends of Government Mortgage Fund will control unless the
stockholder specifically elects a different option.
Tax Information
The tax consequences associated with investment in shares of Mercury Fund
are identical to the tax consequences associated with investment in shares of
Government Mortgage Fund. See "Summary--Tax Considerations" and "The
Reorganization--Tax Consequences of the Reorganization" herein, and "Your
Account--Dividends and Taxes" in the Government Mortgage Fund Prospectus.
Portfolio Transactions
The procedures for engaging in portfolio transactions are generally the
same for Government Mortgage Fund and Mercury Fund. After the Reorganization,
the Combined Fund will utilize the portfolio transaction procedures of
Government Mortgage Fund. For a discussion of Government Mortgage Fund's
procedures, see "Portfolio Transactions" in the Government Mortgage Fund
Statement of Additional Information.
Portfolio Turnover
Generally, neither Government Mortgage Fund nor Mercury Fund purchases
securities for short term trading profits. Government Mortgage Fund and
Mercury Fund may dispose of securities without regard to the time that they
have been held when such action, for defensive or other reasons, appears
advisable to the Fund's investment adviser. Neither Government Mortgage Fund
nor Mercury Fund has any limit on its portfolio turnover rate. A high
portfolio turnover rate may result in negative tax consequences, such as an
increase in capital gain dividends or in ordinary income dividends
representing the excess of net short-term capital gains over net long-term
capital losses or accrued market discount. High portfolio turnover also may
involve correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions that are borne directly by the Fund. The
following table illustrates the portfolio turnover rates for the Funds for the
last two fiscal years:
------------------------------------- -------------------------------------- --------------------------------------
Portfolio Turnover Rate for Fiscal Portfolio Turnover Rate for Fiscal
Fund Year Ended August 31, 2000/January Year Ended August 31, 2001/January
31, 2001* 31, 2002*
------------------------------------- -------------------------------------- --------------------------------------
Government Mortgage Fund 37.28% 199.30%+
------------------------------------- -------------------------------------- --------------------------------------
Mercury Fund 84.53% 185.42%+
------------------------------------- -------------------------------------- --------------------------------------
* The fiscal year end of Government Mortgage Fund is August 31 and the
fiscal year end of Mercury Fund is January 31.
+ The increase in the portfolio turnover rate for each Fund shown above
was due to a significant net inflow of assets into the Funds, change in
interest rates and an increase in the use of purchase and sale
contracts involving GNMA Certificates.
Additional Information
Net Asset Value. Both Mercury Fund and Government Mortgage Fund determine
net asset value of each class of its shares once daily as of the close of
business on the NYSE on each day during which the NYSE is open
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for trading based on prices at the time of closing. The NYSE generally closes
at 4:00 p.m. Eastern time. Net asset value is computed by dividing the market
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.
Stockholder Services. Government Mortgage Fund offers a number of
stockholder services and investment plans designed to facilitate investment in
shares of the Fund. In addition, U.S. stockholders of each class of shares of
Government Mortgage Fund have an exchange privilege with certain other
FAM/MLIM-advised mutual funds. Stockholder services, including exchange
privileges, available to stockholders of Mercury Fund are similar to those of
Government Mortgage Fund, except that Mercury Fund stockholders have an
exchange privilege with certain other Mercury mutual funds. For a description
of these services, see "Investment Objectives and Policies - Exchange of
Shares" in this Proxy Statement and Prospectus and see "Shareholder Services"
in the Government Mortgage Fund Statement of Additional Information.
Custodian. The Bank of New York ("BONY") acts as custodian of the cash
and securities for each of the Funds. BONY's principal business address is 90
Washington Street, 12th Floor, New York, New York 11286. It is anticipated
that BONY will serve as the custodian of the Combined Fund.
Accounting Services. Each of Government Mortgage Fund and Mercury Fund
has entered into an agreement with State Street Bank and Trust Company ("State
Street") effective January 1, 2001, pursuant to which State Street provides
certain accounting services to Government Mortgage Fund and Mercury Fund.
Government Mortgage Fund and Mercury Fund each pay a fee for these services.
Prior to January 1, 2001, FAM provided accounting services to Government
Mortgage Fund and Mercury Fund and was reimbursed by each Fund at its cost in
connection with such services. FAM continues to provide certain accounting
services to Government Mortgage Fund and Mercury Fund and the Funds reimburse
FAM for these services.
The tables below show the amounts paid by Government Mortgage Fund and
Mercury Fund to State Street and to FAM for accounting services for the
periods indicated.
-------------------------------------------- -----------------------------------------
Government Mortgage Fund Mercury Fund
- --------------------------- -------------------------------------------- -----------------------------------------
Fiscal Year* Paid to State Street Paid to FAM Paid to State Street Paid to FAM
- --------------------------- --------------------- ---------------------- ---------------------- ------------------
2002 $198,662** $26,655** $30,433 $4,793
- --------------------------- --------------------- ---------------------- ---------------------- ------------------
2001 $263,702*** $106,729 $897*** $22,200
- --------------------------- --------------------- ---------------------- ---------------------- ------------------
2000 N/A $398,927 N/A $13,556
- --------------------------- --------------------- ---------------------- ---------------------- ------------------
* The fiscal year end of Government Mortgage Fund is August 31 and the
fiscal year end of Mercury Fund is January 31.
** Represents payments made for the six months ended February 28, 2002.
*** Represents payments pursuant to the agreement with State Street
commencing on January 1, 2001.
Transfer Agent, Dividend Disbursing Agent and Registrar. Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484,
serves as the transfer agent, dividend disbursing agent and registrar with
respect to Government Mortgage Fund and Mercury Fund (the "Transfer Agent"),
pursuant to separate registrar, transfer agency and service agreements with
each of the Funds. Government Mortgage Fund pays between $16.00 and $20.00 for
each Class A or Class D stockholder account and between $19.00 and $23.00 for
each Class B or Class C stockholder account, depending on the level of service
required. Mercury Fund pays between $11.00 and $20.00 for each Class I or
Class A stockholder account and between $14.00 and $23.00 per Class B or Class
C stockholder account, depending on the level of service required. Government
Mortgage Fund and Mercury Fund each reimburse FDS for certain transaction
charges and out-of-pocket expenses incurred by FDS under the Transfer Agency
Agreement. The following table sets forth the transfer agent fees paid by
Government Mortgage Fund and Mercury Fund for the last two fiscal years:
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---------------------------------------------------------------
Fiscal Year*
------------------------------------------- ---------------------------------------------------------------
Fund 2002 2001
------------------------------------------- -------------------------------- ------------------------------
Government Mortgage Fund $1,344,964** $2,715,350
------------------------------------------- -------------------------------- ------------------------------
Mercury Fund $79,561 $47,537
------------------------------------------- -------------------------------- ------------------------------
* The fiscal year end of Government Mortgage Fund is August 31 and the
fiscal year end of Mercury Fund is January 31.
** For the six months ended February 28, 2002.
Capital Stock. Government Mortgage Fund is authorized to issue an
unlimited number of shares of beneficial interest, par value $.10 per share,
which are divided into four classes, designated Class A, Class B, Class C and
Class D shares. Asset Program is authorized to issue 200,000,000 shares of
common stock, par value $0.10 per share, of which 33,750,000 have been
designated to Mercury Fund as follows: 6,250,000 Class I shares, 6,250,000
Class A shares, 15,000,000 Class B shares and 6,250,000 Class C shares.
The types of expenses attributable to Class A, Class B, Class C and Class
D shares of Government Mortgage Fund and Class I, Class A, Class B and Class C
shares of Mercury Fund are identical in all respects, except that at current
asset levels the management fee due from Mercury Fund would be at a higher
rate than the management fee due from Government Mortgage Fund (see
"Management -- Management and Advisory Arrangements") (however, currently FAM
is waiving the management fee due from Mercury Fund but may discontinue this
waiver at any time) and (ii) Class B shares of Mercury Fund are subject to a
longer CDSC period and a different CDSC schedule than Class B shares of
Government Mortgage Fund (see "Management -- Sales Charges; 12b-1 Fees").
Stockholder Inquiries. Stockholder inquiries with respect to Government
Mortgage Fund and Mercury Fund may be addressed to the respective Fund by
telephone at (609) 282-2800 or at the address set forth on the cover page of
this Proxy Statement and Prospectus.
THE REORGANIZATION
General
Under the Agreement and Plan (attached hereto as Exhibit I), Government
Mortgage Fund will acquire substantially all of the assets, and assume
substantially all of the liabilities, of Mercury Fund, a series of Asset
Program, in exchange solely for an equal aggregate value of newly issued
shares of beneficial interest, with a par value of $.10 per share, of
Government Mortgage Fund. Such shares of Government Mortgage Fund received by
Mercury Fund will then be distributed on a proportionate basis to the
stockholders of Mercury Fund in exchange for their shares of common stock of
Mercury Fund, with a par value of $.10 per share. These transactions are
referred to as the "Reorganization".
Generally, the assets transferred by Mercury Fund to Government Mortgage
Fund will equal all investments of Mercury Fund held in its portfolio after
the close of business on the NYSE on the business day prior to the date the
Reorganization takes place ("Valuation Time") and all other assets of Mercury
Fund as of such time.
Shares of Government Mortgage Fund will be distributed to stockholders of
Mercury Fund as follows: holders of Class I, A, B and C shares of Mercury Fund
who own such shares as of the Valuation Time will be entitled to receive Class
A, D, B and C shares, respectively, of Government Mortgage Fund (the
"Corresponding Shares"). The aggregate net asset value of the Corresponding
Shares of Government Mortgage Fund to be received by each stockholder of
Mercury Fund will equal the aggregate net asset value of the shares of Mercury
Fund owned by such stockholder as of the Valuation Time. See "Terms of the
Agreement and Plan -- Valuation of Assets and Liabilities" for information
concerning the calculation of net asset value.
Since the Corresponding Shares will be issued at net asset value and the
shares of Mercury Fund will be valued at net asset value, the interests of
holders of shares of Mercury Fund will not be diluted as a result of the
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Reorganization. Because the Combined Fund will have a larger asset base than
Mercury Fund as a result of the Reorganization, a stockholder of Mercury Fund
likely will hold a lower percentage of ownership in the Combined Fund than he
or she did in Mercury Fund immediately prior to the Reorganization.
Procedure
The Board of Asset Program, including all of the Board Members who are
not "interested persons" of Asset Program as defined in the Investment Company
Act, unanimously approved the Agreement and Plan and the submission of such
Agreement and Plan to the stockholders of Mercury Fund for approval. The Board
of Government Mortgage Fund, including all of the Board Members who are not
"interested persons" of the Fund, also unanimously approved the Agreement and
Plan. No vote of the stockholders of Government Mortgage Fund is required.
If the stockholders of Mercury Fund approve the Agreement and Plan at the
Meeting, and all required regulatory approvals are obtained and certain
conditions are either met or waived, it is presently anticipated that the
Reorganization will take place as soon as practicable after such approval.
THE BOARD OF ASSET PROGRAM RECOMMENDS THAT MERCURY FUND STOCKHOLDERS
APPROVE THE AGREEMENT AND PLAN.
Terms of the Agreement and Plan
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, a copy of which is attached hereto as Exhibit I.
Valuation of Assets and Liabilities. Full shares of Government Mortgage
Fund, and to the extent necessary, fractional shares of Government Mortgage
Fund, of an aggregate net asset value equal to the value of the assets of
Mercury Fund, determined as hereinafter provided, shall be issued by
Government Mortgage Fund, in return for such assets of Mercury Fund. The
respective assets of the Funds will be valued as of the Valuation Time. The
assets of each Fund will be valued according to the procedures set forth under
"Your Account--How Shares Are Priced" in the Government Mortgage Fund
Prospectus. Such valuation and determination shall be made by Government
Mortgage Fund in cooperation with Mercury Fund. Purchase orders for Mercury
Fund shares which have not been confirmed as of the Valuation Time will be
treated as assets of Mercury Fund for purposes of the Reorganization;
redemption requests which have not settled as of the Valuation Time will be
treated as liabilities for purposes of the Reorganization.
Distribution of Corresponding Shares. As soon as practicable after the
Closing Date (the next full business day following the Valuation Time),
Mercury Fund will liquidate and distribute the Corresponding Shares of
Government Mortgage Fund received by it pro rata to its stockholders in
exchange for such stockholders' proportional interests in Mercury Fund. The
Corresponding Shares of Government Mortgage Fund received by the stockholders
will have the same aggregate net asset value as each such stockholders'
interest in Mercury Fund held on the Closing Date. Generally, the liquidation
and distributions will be accomplished by opening new accounts on the books of
Government Mortgage Fund in the names of the stockholders of Mercury Fund and
transferring to those stockholders' accounts the shares of Government Mortgage
Fund representing such stockholders' interests in Mercury Fund.
No sales charge or fee of any kind will be charged to stockholders of
Mercury Fund in connection with their receipt of Corresponding Shares of
Government Mortgage Fund in the Reorganization.
Expenses. The expenses of the Reorganization that are directly
attributable to Mercury Fund are expected to include the expenses incurred in
preparing, printing and mailing the proxy materials to be utilized in
connection with the meeting of stockholders of the Fund to consider the
Reorganization, the expenses related to the solicitation of proxies to be
voted at that meeting and a portion of the expenses related to the printing of
the Proxy Statement and Prospectus and of the Reorganization Statement of
Additional Information. The expenses of the Reorganization that are directly
attributable to Mercury Fund will be borne by Mercury Fund up to a maximum of
$116,000 and by
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FAM in excess of that amount. The expenses for Government Mortgage Fund are
expected to include the expenses incurred in printing sufficient copies of
Government Mortgage Fund's Prospectus and Annual Report that will accompany
the mailing of the Proxy Statement and Prospectus. The expenses of the
Reorganization that are directly attributable to Government Mortgage Fund will
be borne by FAM. Certain other expenses of the Reorganization, including
expenses in connection with obtaining the opinion of counsel with respect to
certain tax matters, the preparation of the Agreement and Plan, legal,
transfer agent and audit fees, will be borne equally by Mercury Fund (up to a
maximum of $116,000 as noted above) and FAM, which has agreed to bear
Government Mortgage Fund's Reorganization expenses, and entirely by FAM to the
extent Mercury Fund's $116,000 expense cap is exceeded. The expenses of the
Reorganization attributable to Government Mortgage Fund (borne by FAM) and
Mercury Fund (borne by FAM in excess of $116,000) are currently estimated to
be approximately $86,500 and $122,900, respectively.
Required Approvals. Consummation of the Reorganization is conditioned
upon the approval by the Board of Government Mortgage Fund and the Board of
Asset Program, as well as the receipt of certain regulatory approvals. In
addition, approval of the Agreement and Plan by Mercury Fund requires the
affirmative vote of the stockholders of Mercury Fund representing a majority
of the outstanding shares of Mercury Fund entitled to be voted thereon. All
classes of shares of Mercury Fund will vote together as a single class in
approving the Agreement and Plan. A vote of the stockholders of Government
Mortgage Fund is not required.
Termination of Mercury Fund. Following the transfer of the assets and
liabilities of Mercury Fund to Government Mortgage Fund and distribution of
the Corresponding Shares of Government Mortgage Fund to Mercury Fund's
stockholders, Asset Program will take action to terminate Mercury Fund as a
series of Asset Program under Maryland law.
Amendments and Conditions. The Agreement and Plan may be amended at any
time prior to the Closing Date with respect to any of the terms therein only
by agreement of all the parties to the Agreement and Plan. The obligations of
Mercury Fund and Government Mortgage Fund pursuant to the Agreement and Plan
are subject to various conditions, including a registration statement on Form
N-14 becoming effective, approval of the Reorganization by Mercury Fund's
stockholders, an opinion of counsel being received as to certain tax matters
and the continuing accuracy of various representations and warranties being
confirmed by the respective parties. The Boards may amend the Agreement and
Plan to change the terms of the Reorganization at any time prior to the
approval thereof by the shareholders of Mercury Fund.
Termination, Postponement and Waivers. The Agreement and Plan may be
terminated, and the Reorganization abandoned at any time, whether before or
after adoption thereof by the stockholders of Mercury Fund, prior to the
Closing Date, or the Closing Date may be postponed with respect to the
Reorganization: (i) by mutual consent of the Boards of Government Mortgage and
Mercury Fund; (ii) by the Board of Mercury Fund if any condition of Mercury
Fund's obligations has not been fulfilled or waived by such Board; or (iii) by
the Board of Government Mortgage Fund if any condition of Government Mortgage
Fund's obligations with respect to the Reorganization has not been fulfilled
or waived by such Board.
Potential Benefits to Stockholders of Mercury Fund as a Result of the
Reorganization
FAM and the Board of Mercury Fund have determined, after considering
numerous factors including the estimated costs associated with the
Reorganization, that stockholders of Mercury Fund are likely to benefit from
the Reorganization. Following the Reorganization, Mercury Fund stockholders
will remain invested in a diversified open-end fund that has substantially the
same investment objective as Mercury Fund and substantially the same sales
charges and account maintenance and distribution fees. In addition,
stockholders of Mercury Fund are likely to experience certain benefits,
including potential future economies of scale and the potential for greater
flexibility in portfolio management due to increased asset size. Also, at
current asset levels, the effective advisory fee rate for the Combined Fund
would be lower than the current contractual advisory fee rate for Mercury
Fund.
FAM believes that the Reorganization will also benefit the stockholders
of Mercury Fund because after the Reorganization, certain fixed costs, such as
printing stockholder reports and proxy statements, legal expenses, audit fees,
registration fees, mailing costs and other expenses would be spread across a
larger asset base, thereby potentially lowering the expense ratio borne by
stockholders of Mercury Fund.
-36-
To illustrate the potential economies of scale for Mercury Fund
stockholders, the following table sets forth the total operating expense ratio
for each class of shares both excluding and including the effect of fee
waivers, if any, as of February 28, 2002.
Class D Shares of
Class A Shares of Class B Shares of Class C Shares of Government Mortgage
Government Mortgage Government Mortgage Government Fund and Class A
Fund and Class I Shares Fund and Mortgage Fund and Shares of Mercury
of Mercury Fund Mercury Fund* Mercury Fund Fund*
-------------------------------------------------------------------------------------------------
Excluding Including Excluding Including Excluding Including Excluding Including
Fee Fee Fee Fee Fee Fee Fee Fee
Waivers Waivers Waivers Waivers Waivers Waivers Waivers Waivers
------------------------------------------------------------------------------------ ------------
Government 0.72% 0.72% 1.48% 1.48% 1.53% 1.53% 0.97% 0.97%
Mortgage Fund
Mercury Fund 0.95% 0.00% 1.70% 0.75% 1.75% 0.80% 1.20% 0.25%
Combined Fund** 0.72% 0.72% 1.48% 1.48% 1.53% 1.53% 0.97% 0.97%
* Class B shares of Mercury Fund automatically convert to Class A shares
about ten years after initial purchase and will no longer be subject to
distribution fees. Class B shares of Government Mortgage Fund
automatically convert to Class D shares about ten years after initial
purchase and will no longer be subject to distribution fees.
** Assuming the Reorganization had taken place on February 28, 2002.
FAM is currently waiving receipt of management fees and/or reimbursing other
expenses due from Mercury Fund but such waiver and reimbursement may be
discontinued by FAM at any time. FAM has agreed to bear all Reorganization
expenses attributable to Mercury Fund in excess of $116,000.
The following tables set forth the net assets of the Funds for each of
their last three fiscal year ends and as of May 31, 2002.
Government Mortgage Fund Mercury Fund
----------------------------------- -------------------------------
As of 8/31/99 $1,626,527,000 As of 1/31/00 $16,293,000
As of 8/31/00 $1,348,869,000 As of 1/31/01 $25,491,000
As of 8/31/01 $1,487,204,000 As of 1/31/02 $76,266,000
As of 5/31/02 $1,824,167,000 As of 5/31/02 $83,858,000
Management does not believe that Mercury Fund is likely to attract
significant assets and believes that it is likely to experience net
redemptions resulting over time in a higher operating expense ratio. As
discussed above, in the Reorganization stockholders of Mercury Fund will
benefit by continuing to be invested in an open-end fund with a similar
investment objective, a lower advisory fee and a larger asset base. FAM has
agreed to bear all Reorganization expenses attributable to Government Mortgage
Fund and all such Mercury Fund expenses in excess of $116,000.
In approving the Reorganization, the Board of Mercury Fund determined
that the interests of existing stockholders of Mercury Fund would not be
diluted as a result of the Reorganization.
Tax Consequences of the Reorganization
Summary. Asset Program, on behalf of Mercury Fund, and Government
Mortgage Fund will receive an opinion of counsel with respect to the
Reorganization to the effect that, among other things, neither Fund will
-37-
recognize any gain or loss on the transaction, and no stockholder of Mercury
Fund will recognize any gain or loss upon receipt of shares of Government
Mortgage Fund in the Reorganization.
General. The Reorganization has been structured with the intention that
it qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Government Mortgage Fund and Mercury Fund
have elected and qualified for the special tax treatment afforded "regulated
investment companies" under the Code, and Government Mortgage Fund intends to
continue to so qualify after the Reorganization. The Funds will receive an
opinion of counsel to the effect that for Federal income tax purposes: (i) the
transfer by Mercury Fund of substantially all of its assets to Government
Mortgage Fund in exchange solely for shares of Government Mortgage Fund as
provided in the Agreement and Plan will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and each Fund will be deemed to
be a "party" to a reorganization within the meaning of Section 368(b); (ii) in
accordance with Section 361(a) of the Code, no gain or loss will be recognized
by Mercury Fund as a result of the transfer of its assets solely in exchange
for Government Mortgage Fund shares or on the distribution of the shares of
Government Mortgage Fund to its stockholders under Section 361(c)(1); (iii)
under Section 1032 of the Code, no gain or loss will be recognized by
Government Mortgage Fund on the receipt of assets of Mercury Fund in exchange
for Government Mortgage Fund shares; (iv) in accordance with Section 354(a)(1)
of the Code, no gain or loss will be recognized by the stockholders of Mercury
Fund on the receipt of Corresponding Shares of Government Mortgage Fund in
exchange for their shares of Mercury Fund; (v) in accordance with Section
362(b) of the Code, the tax basis of Mercury Fund's assets in the hands of
Government Mortgage Fund will be the same as the tax basis of such assets in
the hands of Mercury Fund immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Corresponding Shares of
Government Mortgage Fund received by the stockholders of Mercury Fund in the
Reorganization (including fractional shares to which they may be entitled)
will be equal to the tax basis of the shares of Mercury Fund surrendered in
exchange; (vii) in accordance with Section 1223 of the Code, a stockholder's
holding period for the Corresponding Shares of Government Mortgage Fund
(including fractional shares to which they may be entitled) will be determined
by including the period for which such stockholder held Mercury Fund shares
exchanged therefor, provided that such shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, Government Mortgage Fund's
holding period with respect to Mercury Fund's assets transferred will include
the period for which such assets were held by Mercury Fund; and (ix) pursuant
to Section 381(a) of the Code and regulations thereunder, Government Mortgage
Fund will succeed to and take into account certain tax attributes of Mercury
Fund, such as earnings and profits, capital loss carryovers and method of
accounting.
Under Section 381(a) of the Code, Government Mortgage Fund will succeed
to and take into account certain tax attributes of Mercury Fund, including,
but not limited to, earnings and profits, any net operating loss carryovers,
any capital loss carryovers and method of accounting. The Code, however,
contains special limitations with regard to the use of net operating losses,
capital losses and other similar items in the context of certain
reorganizations, including tax-free reorganizations pursuant to Section
368(a)(1)(C) of the Code, which could reduce the benefit of these attributes
to Government Mortgage Fund. As of February 28, 2002, Mercury Fund had
unrealized losses. Government Mortgage Fund had significant undistributed net
realized capital losses and net unrealized appreciation as of the same date.
After the Reorganization, stockholders will benefit from the ability of the
Combined Fund to use realized capital losses to offset any realized capital
gains and will also share in any unrealized appreciation (and the tax
consequences on realization thereof) of the Combined Fund.
Stockholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the
foregoing relates only to Federal income tax consequences, stockholders also
should consult their tax advisers as to the foreign, state and local tax
consequences of the Reorganization.
Status as a Regulated Investment Company. Government Mortgage Fund and
Mercury Fund have elected and qualified to be taxed as regulated investment
companies under Sections 851-855 of the Code and, after the Reorganization,
Government Mortgage Fund intends to continue to so qualify.
-38-
Capitalization
The following tables set forth as of February 28, 2002: (i) the
capitalization of Government Mortgage Fund, (ii) the capitalization of Mercury
Fund, and (iii) the pro forma capitalization of the Combined Fund as adjusted
to give effect to the Reorganization assuming the Reorganization was
consummated as of that date.
Capitalization of Government Mortgage Fund, Mercury Fund and
Pro Forma Combined Fund as of February 28, 2002
Government Mortgage Fund
Class A Class B Class C Class D
Total Net Assets: $256,344,749 $546,595,662 $167,229,449 $771,828,833
Shares Outstanding: 25,545,456 54,484,390 16,671,340 76,937,905
Net Asset Value Per
Share: $10.03 $10.03 $10.03 $10.03
Mercury Fund
Class I Class B Class C Class A
Total Net Assets: $5,121,609 $50,375,671 $19,109,701 $6,656,532
Shares Outstanding: 482,718 4,758,388 1,803,357 628,362
Net Asset Value Per
Share: $10.61 $10.59 $10.60 $10.59
Combined Fund*
Class A Class B Class C Class D
Total Net Assets: $261,466,358 $596,971,333 $186,339,150 $778,485,365
Shares Outstanding: 26,068,431 59,518,578 18,578,180 77,615,689
Net Asset Value Per
Share: $10.03 $10.03 $10.03 $10.03
- ---------------------
* Total Net Assets and Net Asset Value Per Share include the aggregate
value of Mercury Fund's net assets that would have been transferred to
Government Mortgage Fund had the Reorganization been consummated on
February 28, 2002. The data does not take into account expenses
incurred in connection with the Reorganization or the actual number of
shares that would have been issued. No assurance can be given as to how
many shares of Government Mortgage Fund the stockholders of Mercury
Fund will receive on the date the Reorganization takes place, and the
foregoing should not be relied upon to reflect the number of shares of
Government Mortgage Fund that actually will be received on or after
such date.
INFORMATION CONCERNING THE SPECIAL MEETING
Date, Time and Place of Meeting
The Meeting will be held on October 8, 2002, at the offices of Fund Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at 9:30 a.m.
Eastern time.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Mercury Fund. Although
-39-
mere attendance at the Meeting will not revoke a proxy, a stockholder present
at the Meeting may withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated on a properly
executed proxy, such shares will be voted "FOR" approval of the Agreement and
Plan.
It is not anticipated that any other matters will be brought before the
Meeting. If, however, any other business properly is brought before the
Meeting, proxies will be voted in accordance with the judgment of the persons
designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of Mercury Fund at the close of business
on the Record Date are entitled to vote at the Meeting or any adjournment
thereof. At the close of business on the Record Date, the number of shares
issued, outstanding and entitled to vote is ___________________.
Security Ownership of Certain Beneficial Owners and Management of Government
Mortgage Fund and Mercury Fund
At the Record Date, the Board Members and officers of Government Mortgage
Fund as a group (14 persons) owned an aggregate of less than 1% of the
outstanding shares of Government Mortgage Fund and owned an aggregate of less
than 1% of the outstanding shares of common stock of Merrill Lynch & Co., Inc.
To the knowledge of Government Mortgage Fund, as of the Record Date,
except as set forth in Exhibit II to this Proxy Statement and Prospectus, no
person or entity owned of record or beneficially 5% or more of any class of
the outstanding shares of Government Mortgage Fund.
At the Record Date, the Board Members and officers of Asset Program as a
group (16 persons) owned an aggregate of less than 1% of the outstanding
shares of Mercury Fund and owned an aggregate of less than 1% of the
outstanding shares of common stock of Merrill Lynch & Co., Inc.
To the knowledge of Mercury Fund, as of the Record Date, except as set
forth in Exhibit II to this Proxy Statement and Prospectus, no person or
entity owned of record or beneficially 5% or more of any class of the
outstanding shares of Mercury Fund.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of each
class of Mercury Fund is entitled to one vote. Approval of the Agreement and
Plan by Mercury Fund requires the affirmative vote of the stockholders of
Mercury Fund representing a majority of the outstanding shares of Mercury Fund
entitled to be voted thereon. All classes of shares of Mercury Fund will vote
together as a single class in approving the Agreement and Plan. A vote of the
stockholders of Government Mortgage Fund is not required.
Stockholders of Mercury Fund are not entitled to demand the fair value of
their shares upon a transfer of assets and will be bound by the terms of the
Reorganization if approved at the Meeting. However, any stockholder of Mercury
Fund may redeem his or her respective shares prior to the Reorganization.
A quorum for purposes of the Meeting consists of a majority of the shares
of Mercury Fund entitled to vote at the Meeting, present in person or by
proxy. If, by the time scheduled for the Meeting, a quorum of the stockholders
of Mercury Fund is not present or if a quorum is present but sufficient votes
in favor of the Agreement and Plan are not received from the stockholders of
Mercury Fund, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Mercury Fund present in person or by proxy and
entitled to vote at the session of the Meeting to be adjourned. The persons
named as proxies will vote in
-40-
favor of any such adjournment if they determine that adjournment and
additional solicitation are reasonable and in the interests of Mercury Fund's
stockholders.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Mercury Fund up to $116,000 and by FAM beyond that amount. FAM will
reimburse banks, brokers and others for their reasonable expenses in
forwarding proxy solicitation materials to the beneficial owners of shares of
Mercury Fund and will reimburse certain persons that the Fund may employ for
their reasonable expenses in assisting in the solicitation of proxies from
such beneficial owners of shares of the Fund. See "The Reorganization - Terms
of the Agreement and Plan of Reorganization - Expenses."
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of Mercury Fund. Mercury Fund has retained Georgeson Shareholder
Communications, Inc., with offices at 17 State Street, New York, New York
10004, to aid in the solicitation of proxies at a cost of approximately $ ,
plus out-of-pocket expenses, which are estimated to be $____.
Broker-dealer firms, including Merrill Lynch, holding shares of Mercury
Fund in "street name" for the benefit of their customers and clients will
request the instructions of such customers and clients on how to vote their
shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will
not be permitted to vote without instructions with respect to the approval of
the Agreement and Plan. Properly executed proxies that are returned but which
are marked "abstain" or with respect to which a broker-dealer has received no
instructions and therefore has declined to vote on the proposal ("broker
non-votes") will be counted as present for the purposes of determining a
quorum. However, such abstentions and broker non-votes will have the same
effect as a vote against approval of the Agreement and Plan.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statements and the exhibits relating
thereto which the Funds have filed with the Commission under the Securities
Act and the Investment Company Act, to which reference is hereby made.
Each Fund files reports and other information with the Commission.
Reports, proxy statements, registration statements and other information filed
by each Fund can be inspected and copied at the public reference facilities of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials also can be obtained from the
public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Funds,
that file electronically with the Commission.
LEGAL PROCEEDINGS
There are no material legal proceedings to which either Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be
passed upon for Government Mortgage Fund and Mercury Fund by Sidley Austin
Brown & Wood LLP, 787 Seventh Avenue, New York, New York 10019. Sidley Austin
Brown & Wood LLP will rely as to matters of Massachusetts law on the opinion
of Bingham McCutchen LLP, 150 Federal Street, Boston, Massachusetts 02110.
EXPERTS
The financial highlights of the Funds, other than the unaudited
information, included in this Proxy Statement and Prospectus have been so
included in reliance on the reports of Deloitte & Touche LLP ("D&T"),
independent auditors, given on their authority as experts in auditing and
accounting. The principal business address
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of D&T is Two World Financial Center, New York, New York 10281-1008. D&T will
serve as the independent auditors for the Combined Fund after the
Reorganization.
STOCKHOLDERS' MEETINGS
Stockholders of Mercury Fund are entitled to one vote for each share held
and fractional votes for fractional shares held and will vote on any matter
submitted to a stockholder vote. As a Maryland corporation, Mercury Fund does
not intend to hold meetings of stockholders in any year in which the
Investment Company Act does not require stockholders to act upon any of the
following matters: (i) election of Board Members; (ii) approval of a
management agreement; or (iii) approval of distribution arrangements. The
Charter of Mercury Fund does not require it to hold an annual meeting of
stockholders. Mercury Fund will be required, however, to call special meetings
of its stockholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements or of
a change in the fundamental policies, objectives or restrictions. Mercury Fund
also would be required to hold a stockholders' meeting to elect new Board
Members at such time as less than a majority of the Board Members holding
office have been elected by stockholders. The by-laws of Mercury Fund provide
that a stockholders' meeting may be called with respect to Mercury Fund at any
time by a majority of the Board Members, the President, or on the written
request of the holders of at least 10% of the outstanding capital stock of
Mercury Fund entitled to vote at such meeting.
Stockholders of Government Mortgage Fund are entitled to one vote for
each share held and entitled to vote on any matter submitted to a stockholder
vote. There normally will be no meetings of stockholders for the purposes of
electing Board Members unless and until such time as less than a majority of
the Board Members holding office have been elected by stockholders, at which
time the Board Members then in office will call a stockholders' meeting for
the election of Board Members. The Charter of Government Mortgage Fund
provides that a stockholders' meeting may be called with respect to Government
Mortgage Fund at any time by a majority of the Board Members and shall be
called on the written request of the holders of at least 10% of the
outstanding shares of Government Mortgage Fund having voting rights.
Stockholders may, in accordance with the terms of the Charter, cause a meeting
of stockholders to be held for the purpose of voting on the removal of Board
Members. Also, Government Mortgage Fund will be required to call a special
meeting of stockholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of Government Mortgage Fund.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent
meetings of stockholders of Mercury Fund must be received by Mercury Fund
within a reasonable time before the solicitation relating to such meeting is
to be made by the Board of Mercury Fund in order to be considered in Mercury
Fund's proxy statement and form of proxy relating to the meeting. The persons
named as proxies in any future proxy materials of Mercury Fund may exercise
discretionary authority with respect to any stockholder proposal presented at
any subsequent meeting of the stockholders of Mercury Fund if written notice
of such proposal has not been received by Mercury Fund within a reasonable
time before Mercury Fund begins to print and mail the proxy solicitation
materials to be used in connection with such meeting. Written proposals with
regard to Mercury Fund should be sent to the Secretary of the Fund, 800
Scudders Mill Road, Plainsboro, New Jersey 08536. If the Reorganization is
approved, the Meeting will be the last meeting for Mercury Fund's
stockholders.
By Order of the Board,
Bradley J. Lucido
Assistant Secretary
The Asset Program, Inc., on behalf of Mercury U.S.
Government Securities Fund
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EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of the
day of , 2002, by and between Merrill Lynch U.S. Government
Mortgage Fund, a Massachusetts business trust ("Government Mortgage Fund"), and
The Asset Program, Inc., a Maryland corporation ("Asset Program").
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by Government Mortgage
Fund of substantially all of the assets, and the assumption by Government
Mortgage Fund of substantially all of the liabilities, of Mercury U.S.
Government Securities Fund ("Mercury Fund"), a series of Asset Program, (2)
the issuance by Government Mortgage Fund of shares of beneficial interest,
with a par value of $.10 per share, of Government Mortgage Fund to Mercury
Fund with an aggregate net asset value equal to the value of the assets
acquired by Government Mortgage Fund, reduced by the amount of liabilities
assumed by Government Mortgage Fund, and (3) the subsequent distribution of
Corresponding Shares (defined below) of Government Mortgage Fund to Mercury
Fund shareholders in proportion to such shareholders' interest in Mercury
Fund.
The transaction described above will be referred to herein as the
"Reorganization." Asset Program and Mercury Fund are sometimes referred to
herein as "Mercury Fund;" Mercury Fund and Government Mortgage Fund are
sometimes referred to herein collectively as the "Funds." Asset Program is
organized as a Maryland corporation and Government Mortgage Fund is organized
as a Massachusetts business trust. In each jurisdiction, nomenclature varies.
As used herein, shares of common stock of Mercury Fund and shares of
beneficial interest of Government Mortgage Fund are referred to as "shares" or
"Common Stock," holders of shares or Common Stock are referred to as
"shareholders," the Board of Trustees of Government Mortgage Fund and the
Board of Directors of Asset Program are each referred to as a "Board" and the
Directors or Trustees of each Fund are referred to as "Board Members."
In the course of the Reorganization, shares of Government Mortgage Fund
will be distributed to shareholders of Mercury Fund as follows: holders of
Class I, A, B and C shares of Mercury Fund who own such shares as of the
Valuation Time (as defined in Section 3(c) of this Agreement) will be entitled
to receive Class A, D, B and C shares, respectively, of Government Mortgage
Fund (the "Corresponding Shares"). The aggregate net asset value of the
Corresponding Shares of Government Mortgage Fund to be received by each
shareholder of Mercury Fund will equal the aggregate net asset value of the
shares of Mercury Fund owned by such shareholder as of the Valuation Time. In
consideration therefor, on the Closing Date (as defined in Section 7 of this
Agreement), Government Mortgage Fund shall acquire substantially all of the
assets of Mercury Fund and assume substantially all of Mercury Fund's
obligations and liabilities then existing, whether absolute, accrued,
contingent or otherwise. It is intended that the Reorganization described in
this Plan shall be a reorganization within the meaning of Section 368(a)(1)(C)
of the Internal Revenue Code of 1986, as amended (the "Code"), and any
successor provision.
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As promptly as practicable after the consummation of the Reorganization,
the Board of Asset Program shall take such action necessary to terminate
Mercury Fund as a series of Asset Program in accordance with the laws of the
State of Maryland.
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Government Mortgage Fund and Asset Program, on behalf of
Mercury Fund, hereby agree as follows:
1. Representations and Warranties of Asset Program.
Asset Program, on behalf of Mercury Fund, represents and warrants to, and
agrees with Government Mortgage Fund that:
(a) Asset Program is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out
this Agreement. Mercury Fund is a duly authorized series of Asset
Program. Asset Program has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and
to carry out this Agreement.
(b) Asset Program is duly registered under the Investment Company
Act of 1940, as amended (the "1940 Act") as an open-end management
investment company (File No. 811-7177), and such registration has not
been revoked or rescinded and is in full force and effect. Asset Program
has elected and qualified Mercury Fund at all times since its inception
for the special tax treatment afforded regulated investment companies
("RICs") under Sections 851-855 of the Code and intends to continue to so
qualify Mercury Fund through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Mercury Fund Investments"
shall mean (i) the investments of Mercury Fund shown on the schedule of
its investments as of the Valuation Time (as defined in Section 3(c) of
this Agreement) furnished to Government Mortgage Fund pursuant to
Sections 1(e) and 9(b); and (ii) all other assets owned by Mercury Fund
or liabilities existing as of the Valuation Time.
(d) Asset Program has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Government Mortgage Fund has been furnished with a statement of
assets and liabilities and a schedule of investments of Mercury Fund,
each as of January 31, 2002, said financial statements having been
examined by Deloitte & Touche LLP, independent public accountants. An
unaudited statement of assets and liabilities of
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Mercury Fund and an unaudited schedule of investments of Mercury Fund,
each as of the Valuation Time, will be furnished to Government Mortgage
Fund at or prior to the Closing Date for the purpose of determining the
number of shares of Government Mortgage Fund to be issued pursuant to
Section 4 of this Agreement; and each will fairly present the financial
position of Mercury Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a consistent basis.
(f) Government Mortgage Fund has been furnished with Mercury Fund's
Annual Report for the year ended January 31, 2002, and any subsequent
Semi-Annual Report which may be available, and the financial statements
appearing in such reports fairly present the financial position of
Mercury Fund as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) Government Mortgage Fund has been furnished with the prospectus
and statement of additional information of Asset Program with respect to
Mercury Fund, each dated May 29, 2002, and said prospectus and statement
of additional information do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Asset Program, threatened against it or
Mercury Fund which assert liability on the part of Asset Program or
Mercury Fund, which materially affect their financial condition or its
ability to consummate the Reorganization. Neither Asset Program nor
Mercury Fund is charged with nor, to the best of the knowledge of Asset
Program, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its
business.
(i) There are no material contracts outstanding relating to Mercury
Fund to which Asset Program is a party that have not been disclosed in
the N-14 Registration Statement (as defined in subsection (o) below) or
will not otherwise be disclosed to Government Mortgage Fund prior to the
Valuation Time.
(j) Asset Program is not a party to or obligated under any contract
or other commitment or obligation, and is not subject to any order or
decree, and there is no provision of its Articles of Incorporation, as
amended or supplemented, or its by-laws, as amended, which would be
violated by its execution of or performance under this Agreement.
(k) Mercury Fund has no liabilities known to Mercury Fund or Asset
Program of a material amount, contingent or otherwise, other than those
shown on its statement of assets and liabilities as of January 31, 2002
referred to above, those incurred in the ordinary course of its business
as an investment company since the date of its most recent Annual or
Semi-Annual Report, and those incurred in connection with the
Reorganization. As of the Valuation Time, Asset Program will advise
Government
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Mortgage Fund in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of business,
existing or accrued as of such time with respect to Mercury Fund.
(l) Asset Program has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it
on behalf of Mercury Fund, and has paid or has obtained extensions to
pay, all Federal, state and local taxes shown on said returns to be due
and owing and all assessments received by it, up to and including the
taxable year in which the Closing Date occurs. All tax liabilities of
Mercury Fund have been adequately provided for on its books, and no tax
deficiency or liability of Mercury Fund has been asserted and no question
with respect thereto has been raised by the Internal Revenue Service or
by any state or local tax authority for taxes in excess of those already
paid, up to and including the taxable year in which the Closing Date
occurs.
(m) At both the Valuation Time and the Closing Date, Asset Program
will have full right, power and authority to sell, assign, transfer and
deliver the Mercury Fund Investments. At the Closing Date, Asset Program
will have good and marketable title to all of the Mercury Fund
Investments, and Government Mortgage Fund will acquire, subject only to
the delivery of the Mercury Fund Investments as contemplated by this
Agreement, all of the Mercury Fund Investments free and clear of any
encumbrances, liens or security interests and without any restrictions
upon the transfer thereof (except those imposed by the Federal or state
securities laws and those imperfections of title or encumbrances as do
not materially detract from the value or use of the Mercury Fund
Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Asset Program
of the Reorganization, except such as may be required under the
Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act, or
state securities laws (which term as used herein shall include the laws
of the District of Columbia and Puerto Rico).
(o) The registration statement filed by Government Mortgage Fund on
Form N-14 relating to the shares of Government Mortgage Fund to be issued
pursuant to this Agreement, which includes the proxy statement of Mercury
Fund and the prospectus and statement of additional information of
Government Mortgage Fund (together, the "Proxy Statement and Prospectus")
with respect to the transactions contemplated herein, and any supplement
or amendment thereto or to the documents therein (as supplemented or
amended, the "N-14 Registration Statement"), on the effective date of the
N-14 Registration Statement, at the time of the shareholders meeting
referred to in Section 6(a) of this Agreement and on the Closing Date,
insofar as it relates to Mercury Fund (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and (ii) did not
or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and the Proxy Statement and
Prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the
I-4
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
and warranties in this subsection shall apply only to statements in or
omissions from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by Mercury Fund for use in the
N-14 Registration Statement as provided in Section 6(d) of this
Agreement.
(p) Asset Program is authorized to issue 200,000,000 shares of
common stock, par value $0.10 per share, of which 33,750,000 have been
designated to Mercury Fund as follows: 6,250,000 Class I shares,
6,250,000 Class A shares, 15,000,000 Class B shares and 6,250,000 Class C
shares, each outstanding share of which is fully paid and nonassessable
and has full voting rights.
(q) The books and records of Asset Program with respect to Mercury
Fund made available to Government Mortgage Fund and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of Mercury Fund.
(r) Mercury Fund will not sell or otherwise dispose of any of the
shares of Government Mortgage Fund to be received in the Reorganization,
except in distribution to its shareholders as provided herein.
(s) Mercury Fund has no plan or intention to sell or otherwise
dispose of the Mercury Fund Investments, except for dispositions made in
the ordinary course of business.
(t) At or prior to the Closing Date, Mercury Fund will have obtained
any and all regulatory, director, and shareholder approvals with respect
to Mercury Fund necessary to effect the Reorganization as set forth
herein.
2. Representations and Warranties of Government Mortgage Fund.
Government Mortgage Fund represents and warrants to, and agrees with,
Mercury Fund that:
(a) Government Mortgage Fund is a trust with transferable shares
duly organized, validly existing and in good standing in conformity with
the laws of the Commonwealth of Massachusetts, and has the power to own
all of its assets and to carry out this Agreement. Government Mortgage
Fund has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this
Agreement.
(b) Government Mortgage Fund is duly registered under the 1940 Act
as an open-end management investment company (File No. 811-5576), and
such registration has not been revoked or rescinded and is in full force
and effect. Government Mortgage Fund has elected and qualified at all
times since its inception for the special tax treatment afforded RICs
under Sections 851-855 of the Code and intends to continue to so qualify
both until consummation of the Reorganization and thereafter.
I-5
(c) Mercury Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Government Mortgage Fund,
each as of August 31, 2001, said financial statements having been
examined by Deloitte & Touche LLP, independent public accountants. An
unaudited statement of assets and liabilities of Government Mortgage Fund
and an unaudited schedule of investments of Government Mortgage Fund,
each as of the Valuation Time, will be furnished to Mercury Fund at or
prior to the Closing Date for the purpose of determining the number of
shares of Government Mortgage Fund to be issued pursuant to Section 4 of
this Agreement; and each will fairly present the financial position of
Government Mortgage Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) Mercury Fund has been furnished with Government Mortgage Fund's
Annual Report for the year ended August 31, 2001, and Government Mortgage
Fund's Semi-Annual Report for the period ended February 28, 2002. The
financial statements appearing therein fairly present the financial
position of Government Mortgage Fund as of the respective dates indicated,
in conformity with generally accepted accounting principles applied on a
consistent basis.
(e) Mercury Fund has been furnished with the prospectus and
statement of additional information of Government Mortgage Fund, each
dated December 19, 2001, including any amendments or supplements thereto,
and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(f) Government Mortgage Fund has full power and authority to enter
into and perform its obligations under this Agreement. Shareholders of
Government Mortgage Fund are not required to approve the Reorganization.
The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action of its Board and this Agreement
constitutes a valid and binding contract enforceable in accordance with
its terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Government Mortgage Fund, threatened
against it which assert liability on the part of Government Mortgage Fund
or which materially affect its financial condition or its ability to
consummate the Reorganization. Government Mortgage Fund is not charged
with or, to the best of its knowledge, threatened with any violation or
investigation of any possible violation of any provisions of any Federal,
state or local law or regulation or administrative ruling relating to any
aspect of its business.
(h) There are no material contracts outstanding to which Government
Mortgage Fund is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to Mercury Fund
prior to the Valuation Time.
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(i) Government Mortgage Fund is not a party to or obligated under
any contract or other commitment or obligation, and is not subject to any
order or decree, and there is no provision of its Declaration of Trust,
as amended or supplemented, or its by-laws, as amended, which would be
violated by its execution of or performance under this Agreement.
(j) Government Mortgage Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements
of assets and liabilities referred to above, those incurred in the
ordinary course of its business as an investment company since the date
of its most recent Annual or Semi-Annual Report and those incurred in
connection with the Reorganization. As of the Valuation Time, Government
Mortgage Fund will advise Mercury Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Government
Mortgage Fund of the Reorganization, except such as may be required under
the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(l) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meeting referred to in Section 6(a) of this
Agreement and on the Closing Date, insofar as it relates to Government
Mortgage Fund (i) complied or will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations thereunder and (ii) did not or will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading; and the Proxy Statement and Prospectus included therein
did not or will not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall apply only to statements in or omissions from the
N-14 Registration Statement made in reliance upon and in conformity with
information furnished by Government Mortgage Fund for use in the N-14
Registration Statement as provided in Section 6(d) of this Agreement.
(m) Government Mortgage Fund is authorized to issue an unlimited
number of shares of beneficial interest, par value $.10 per share, which
are divided into four classes, designated Class A, Class B, Class C and
Class D shares, each outstanding share of which is fully paid and
nonassessable and has full voting rights.
(n) The Government Mortgage Fund shares to be issued to Mercury Fund
for distribution to the shareholders of Mercury Fund pursuant to this
Agreement have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will
be fully paid and nonassessable and will have full voting rights, and no
person will have any preemptive right of subscription or purchase in
respect thereof.
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(o) At or prior to the Closing Date, the Government Mortgage Fund
shares to be transferred to Mercury Fund for distribution to the
shareholders of Mercury Fund on the Closing Date will be duly qualified
for offering to the public in all states of the United States in which
the sale of shares of Mercury Fund presently are qualified, and there
shall be a sufficient number of such shares registered under the 1933 Act
and with each pertinent state securities commission to permit the
transfers contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, Government Mortgage Fund will
have obtained any and all regulatory and Board approvals, necessary to
issue the shares of Government Mortgage Fund to Mercury Fund for
distribution to the shareholders of Mercury Fund.
3. The Reorganization.
(a) Subject to receiving the requisite approval of the shareholders
of Mercury Fund, and to the other terms and conditions contained herein,
Mercury Fund agrees to convey, transfer and deliver to Government
Mortgage Fund for the benefit of Government Mortgage Fund, and Government
Mortgage Fund agrees to acquire from Mercury Fund for the benefit of
Government Mortgage Fund, on the Closing Date all of the Mercury Fund
Investments (including interest accrued as of the Valuation Time on debt
instruments) of Mercury Fund, and assume substantially all of the
liabilities of Mercury Fund, in exchange solely for that number of shares
of Government Mortgage Fund provided in Section 4 of this Agreement.
Pursuant to this Agreement, as soon as practicable on or after the
Closing Date, Mercury Fund will distribute all Government Mortgage Fund
shares received by it to its shareholders in proportion to their
interests in Mercury Fund. Such distribution shall be accomplished by the
opening of shareholder accounts on the stock ledger records of Government
Mortgage Fund in the amounts due the shareholders of Mercury Fund based
on their respective holdings in Mercury Fund as of the Valuation Time.
(b) Mercury Fund will pay or cause to be paid to Government Mortgage
Fund any interest it receives on or after the Closing Date with respect
to Mercury Fund Investments transferred to Government Mortgage Fund
hereunder.
(c) The Valuation Time shall be 4:00 p.m. New York time, on , 2002,
or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time"). As used herein, the term Valuation Time
shall mean the date and time stated in the preceding sentence or if
Mercury Fund does not obtain the required vote of its shareholders prior
to the stated date and time, such later date and time as may be agreed
upon by Mercury Fund and Government Mortgage Fund.
(d) Government Mortgage Fund will acquire substantially all of the
assets of, and assume substantially all of the liabilities of, Mercury
Fund, except that recourse for such liabilities will be limited
substantially to the net assets of Mercury Fund acquired by Government
Mortgage Fund. The known liabilities of Mercury Fund as of the Valuation
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Time shall be confirmed in writing to Government Mortgage Fund by Mercury
Fund pursuant to Section 1(k) of this Agreement.
(e) Following the distribution referred to in Section 4 above,
Mercury Fund shall be terminated by Asset Program as a series of Asset
Program by such action as may be necessary in accordance with the laws of
the State of Maryland.
4. Issuance and Valuation of Government Mortgage Fund Shares in the
Reorganization.
Full shares of Government Mortgage Fund, and to the extent necessary, any
fractional shares of Government Mortgage Fund, of an aggregate net asset value
equal to the value of the assets of Mercury Fund acquired, determined as
hereinafter provided, reduced by the amount of liabilities of Mercury Fund
assumed by Government Mortgage Fund, shall be issued by Government Mortgage
Fund in exchange for such assets of Mercury Fund. The net asset value of each
of Mercury Fund and Government Mortgage Fund shall be determined as of the
Valuation Time in accordance with the procedures described in the prospectus
of Government Mortgage Fund in effect as of the Valuation Time. Such valuation
and determination shall be made by Government Mortgage Fund in cooperation
with Mercury Fund. Government Mortgage Fund shall issue its Class A, Class B,
Class C and Class D shares to Mercury Fund in certificates or share deposit
receipts (one in respect of each Class) registered in the name of Mercury
Fund. Mercury Fund shall distribute Corresponding Shares of Government
Mortgage Fund to its shareholders by redelivering such certificates or
receipts to Financial Data Services, Inc.
5. Payment of Expenses.
(a) The expenses of the Reorganization that are directly
attributable to Mercury Fund are expected to include the expenses
incurred in preparing, printing and mailing the proxy materials to be
utilized in connection with the meeting of shareholders of Mercury Fund
to consider the Reorganization, the expenses related to the solicitation
of proxies to be voted at that meeting and the expenses related to the
printing of the Proxy Statement and Prospectus. The expenses of the
Reorganization that are directly attributable to Mercury Fund will be
borne by Mercury Fund up to $116,000, and expenses exceeding such amount
will be borne by Fund Asset Management, L.P. ("FAM"). The expenses of the
Reorganization that are directly attributable to Government Mortgage Fund
are expected to include the expenses incurred in printing sufficient
copies of Government Mortgage Fund's prospectus and annual report that
will accompany the mailing of the Proxy Statement and Prospectus. The
expenses of the Reorganization that are directly attributable to
Government Mortgage Fund will be borne by FAM. Certain other expenses of
the Reorganization, including expenses in connection with obtaining the
opinion of counsel with respect to certain tax matters, the preparation
of this Agreement, legal, transfer agent and audit fees, will be borne
equally by Mercury Fund and FAM, which has agreed to bear Government
Mortgage Fund's expenses of the Reorganization, and entirely by FAM to
the extent Mercury Fund's $116,000 expense cap is exceeded.
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(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting
therefrom, including, without limitation, consequential damages.
6. Covenants of the Funds.
(a) Mercury Fund agrees to call a special meeting of its
shareholders to be held as soon as is practicable after the effective
date of the N-14 Registration Statement for the purpose of considering
the Reorganization as described in this Agreement, and it shall be a
condition to the obligations of Government Mortgage Fund and Mercury Fund
that the holders of a majority of the shares of Mercury Fund issued and
outstanding and entitled to vote thereon, shall have approved this
Agreement at such special meeting at or prior to the Valuation Time.
(b) Each Fund covenants to operate its respective business as
presently conducted between the date hereof and the Closing Date.
(c) (i) Asset Program agrees that following the consummation of the
Reorganization it will take such action as may be necessary to terminate
Mercury Fund as a series of Asset Program in accordance with the laws of
the State of Maryland, and (ii) Mercury Fund will not make any
distributions of any Government Mortgage Fund shares other than to its
shareholders and without first paying or adequately providing for the
payment of all of its liabilities not assumed by Government Mortgage
Fund, if any, and on and after the Closing Date shall not conduct any
business except in connection with its termination.
(d) Government Mortgage Fund will file the N-14 Registration
Statement with the Securities and Exchange Commission (the "Commission")
and will use its best efforts to provide that the N-14 Registration
Statement becomes effective as promptly as practicable. Mercury Fund and
Government Mortgage Fund agree to cooperate fully with each other, and
each will furnish to the other the information relating to itself to be
set forth in the N-14 Registration Statement as required by the 1933 Act,
the 1934 Act, the 1940 Act, and the rules and regulations thereunder and
the state securities laws.
(e) Mercury Fund and Government Mortgage Fund each agree that by the
Closing Date all of their Federal and other tax returns and reports
required to be filed on or before such date shall have been filed and all
taxes shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such taxes. In
connection with this covenant, Government Mortgage Fund and Mercury Fund
agree to cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes or a right
to a refund of taxes or participating in or conducting any audit or other
proceeding in respect of taxes. Government Mortgage Fund agrees to retain
for a period of ten (10) years following the Closing Date all returns,
schedules and work papers and all material records or other documents
relating to tax matters of Mercury Fund for its taxable period first
ending after the Closing Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential
except as otherwise may be necessary in connection with the filing of
returns
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or claims for refund or in conducting an audit or other proceeding. After
the Closing Date, Mercury Fund shall prepare, or cause its agents to
prepare, any Federal, state or local tax returns, including any Forms
1099, required to be filed by or with respect to it with respect to its
final taxable year ending with its complete liquidation and for any prior
periods or taxable years and further shall cause such tax returns and
Forms 1099 to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, Mercury
Fund shall bear any expenses incurred by it (other than for payment of
taxes) in connection with the preparation and filing of said tax returns
and Forms 1099 after the Closing Date to the extent that Mercury Fund
accrued such expenses in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne by FAM at the time
such tax returns and Forms 1099 are prepared.
(f) Mercury Fund agrees to mail to its shareholders of record
entitled to vote at the special meeting of shareholders at which action
is to be considered regarding this Agreement, in sufficient time to
comply with requirements as to notice thereof, a combined Proxy Statement
and Prospectus which complies in all material respects with the
applicable provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively, thereunder.
(g) Government Mortgage Fund has no plan or intention to sell or
otherwise dispose of the assets of Mercury Fund to be acquired in the
Reorganization, except for dispositions made in the ordinary course of
business.
(h) Following the consummation of the Reorganization, Government
Mortgage Fund expects to stay in existence and continue its business as
an open-end management investment company registered under the 1940 Act.
7. Closing Date.
(a) Delivery of the assets of Mercury Fund to be transferred,
together with any other Mercury Fund Investments, and the Government
Mortgage Fund shares to be issued to Mercury Fund, shall be made at the
offices of Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, New York,
New York 10019, at 10:00 a.m. on the next full business day following the
Valuation Time, or at such other place, time and date agreed to by
Mercury Fund and Government Mortgage Fund, the date and time upon which
such delivery is to take place being referred to herein as the "Closing
Date." To the extent that Mercury Fund Investments, for any reason, are
not transferable on the Closing Date, Mercury Fund shall cause such
Mercury Fund Investments to be transferred to Government Mortgage Fund's
account with The Bank of New York at the earliest practicable date
thereafter.
(b) Mercury Fund will deliver to Government Mortgage Fund on the
Closing Date confirmations or other adequate evidence as to the tax basis
of each of the Mercury Fund Investments delivered to Government Mortgage
Fund hereunder, certified by Deloitte & Touche LLP.
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(c) As soon as practicable after the close of business on the
Closing Date, Mercury Fund shall deliver to Government Mortgage Fund a
list of the names and addresses of all of its shareholders of record on
the Closing Date and the number of shares owned by each such shareholder,
certified to the best of its knowledge and belief by the transfer agent
of Mercury Fund or by its President.
8. Conditions of Mercury Fund.
The obligations of Mercury Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by (i) the Board of Asset
Program and the affirmative vote of the holders of a majority of the
shares of common stock of Mercury Fund issued and outstanding and
entitled to vote thereon, voting together as a single class at a meeting
of the shareholders of Mercury Fund at or prior to the Valuation Time,
and (ii) the Board of Government Mortgage Fund; and that Government
Mortgage Fund shall have delivered to Mercury Fund a copy of the
resolution approving this Agreement adopted by Government Mortgage Fund's
Board, certified by the Secretary of Government Mortgage Fund.
(b) That Government Mortgage Fund shall have furnished to Mercury
Fund a statement of Government Mortgage Fund's assets and liabilities,
with values determined as provided in Section 4 of this Agreement,
together with a schedule of its investments, all as of the Valuation
Time, certified on Government Mortgage Fund's behalf by its President (or
any Vice President) and its Treasurer, and a certificate signed by
Government Mortgage Fund's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Government Mortgage Fund
since the date of Government Mortgage Fund's most recent Annual or
Semi-Annual Report as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its
portfolio securities.
(c) That Government Mortgage Fund shall have furnished to Mercury
Fund a certificate signed by Government Mortgage Fund's President (or any
Vice President) and its Treasurer, dated as of the Closing Date,
certifying that, as of the Valuation Time and as of the Closing Date all
representations and warranties of Government Mortgage Fund made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates, and that Government Mortgage
Fund has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied at or prior to each
of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Mercury Fund shall have received an opinion of Bingham
McCutchen LLP, as Massachusetts counsel to Government Mortgage Fund, in
form satisfactory to Mercury Fund and dated the Closing Date, to the
effect that (i)
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Government Mortgage Fund is a trust with transferable shares of
beneficial interest, validly existing in conformity with the laws of the
Commonwealth of Massachusetts and duly authorized to transact business in
the Commonwealth of Massachusetts; (ii) the Corresponding Shares of
Government Mortgage Fund to be issued pursuant to this Agreement are duly
authorized and, upon delivery in accordance with the terms of this
Agreement, will be validly issued and outstanding and fully paid and
nonassessable by Government Mortgage Fund, except that shareholders of
Government Mortgage Fund may under certain circumstances be held
personally liable for Government Mortgage Fund's obligations, and no
shareholder of Government Mortgage Fund has any preemptive right to
subscription or purchase in respect thereof (pursuant to the Declaration
of Trust, as amended, or the by-laws of Government Mortgage Fund or, to
the best of such counsel's knowledge, the law of the Commonwealth of
Massachusetts); (iii) this Agreement, to the extent Massachusetts law
applies, has been duly authorized and executed by Government Mortgage
Fund; (iv) the execution and delivery of this Agreement by Government
Mortgage Fund and the consummation of the Reorganization in accordance
with the terms of this Agreement will not violate any material provisions
of the Declaration of Trust, as amended, or the by-laws, as amended, of
Government Mortgage Fund, or to the best of such counsel's knowledge,
Massachusetts law; (v) to the best of such counsel's knowledge, no
consent, approval, authorization or order of any Massachusetts state
court or governmental authority is required for the consummation by
Government Mortgage Fund of the Reorganization in accordance with the
terms of this Agreement, except such as may be required under
Massachusetts state securities laws about which such counsel need not
express an opinion. In giving the opinion set forth above, Bingham Dana
LLP may state that it is relying on certificates of officers of
Government Mortgage Fund with regard to matters of fact and certain
certificates and written statements of governmental officials with
respect to the good standing of Government Mortgage Fund.
(f) That Mercury Fund shall have received an opinion of Sidley
Austin Brown & Wood LLP, as counsel to Government Mortgage Fund, in form
and substance satisfactory to Mercury Fund and dated the Closing Date, to
the effect that (i) this Agreement represents a valid and binding
contract of Government Mortgage Fund, enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and court decisions with respect
thereto; provided, such counsel shall express no opinion with respect to
the application of equitable principles in any proceeding, whether at law
or in equity; (ii) the execution and delivery of this Agreement by
Government Mortgage Fund does not, and the consummation of the
Reorganization will not, violate any material provisions of any agreement
(known to such counsel) to which Government Mortgage Fund is a party or
by which Government Mortgage Fund is bound, except insofar as the parties
have agreed to amend such provision as a condition precedent to the
Reorganization; (iii) to the best of such counsel's knowledge, no
consent, approval, authorization or order of any United States federal
court or governmental authority is required for the consummation by
Government Mortgage Fund of the Reorganization, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and the
published rules and regulations of the Commission thereunder and such as
may be required under state securities laws; (iv) the
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N-14 Registration Statement has become effective under the 1933 Act, no
stop order suspending the effectiveness of the N-14 Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act, and the
N-14 Registration Statement, as of the effective date, appears on its
face to be appropriately responsive in all material respects to the
requirements of the 1933 Act, the 1934 Act and the 1940 Act and the
published rules and regulations of the Commission thereunder insofar as
they relate to Government Mortgage Fund; (v) the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings
and contracts and other documents insofar as they relate to Government
Mortgage Fund are accurate and fairly present the information required to
be shown; (vi) the information in the Proxy Statement and Prospectus
under "Comparison of the Funds--Tax Considerations" and "The
Reorganization--Tax Consequences of the Reorganization," to the extent
that it constitutes matters of law, summaries of legal matters or legal
conclusions, has been reviewed by such counsel and is correct in all
material respects as of the date of the Proxy Statement and Prospectus;
(vii) such counsel does not know of any statutes, legal or governmental
proceedings or contracts or other documents related to the Reorganization
insofar as they relate to Government Mortgage Fund of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (viii)
Government Mortgage Fund, to the knowledge of such counsel, is not
required to qualify to do business as a foreign entity in any
jurisdiction except as may be required by state securities laws, and
except where it has so qualified or the failure so to qualify would not
have a material adverse effect on Government Mortgage Fund or its
shareholders; (ix) such counsel does not have actual knowledge of any
material suit, action or legal or administrative proceeding pending or
threatened against Government Mortgage Fund, the unfavorable outcome of
which would materially and adversely affect Government Mortgage Fund; (x)
all actions required to be taken by Government Mortgage Fund to authorize
this Agreement and to effect the Reorganization have been duly authorized
by all necessary actions on the part of such Fund; and (xi) such opinion
is solely for the benefit of Mercury Fund and its Board Members and
officers. Such opinion also shall state that (A) while such counsel
cannot make any representation as to the accuracy or completeness of
statements of fact in the N-14 Registration Statement, nothing has come
to their attention that has caused them to believe that, on the effective
date of the N-14 Registration Statement, (1) the N-14 Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact relating to Government Mortgage Fund required to
be stated therein or necessary to make the statements therein not
misleading; and (2) the Proxy Statement and Prospectus included in the
N-14 Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact relating to Government
Mortgage Fund necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and (B)
such counsel does not express any opinion or belief as to the financial
statements or other financial or statistical data contained or
incorporated by reference in the N-14 Registration Statement. In giving
the opinion set forth above, Sidley Austin Brown & Wood LLP may state
that it is relying on certificates of officers of Government Mortgage
Fund with regard to matters of fact and certain certificates and
I-14
written statements of governmental officials with respect to the good
standing of Government Mortgage Fund.
(g) That Mercury Fund shall have received an opinion of Sidley
Austin Brown & Wood LLP to the effect that for Federal income tax
purposes (i) the transfer by Mercury Fund of substantially all of the
Mercury Fund Investments to Government Mortgage Fund in exchange solely
for shares of Government Mortgage Fund as provided in this Agreement will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Code and Mercury Fund and Government Mortgage Fund each will be
deemed to be a "party" to a reorganization within the meaning of Section
368(b) of the Code; (ii) in accordance with Section 361(a) of the Code,
no gain or loss will be recognized to Mercury Fund as a result of the
transfer of its assets solely in exchange for Government Mortgage Fund
shares or on the distribution of the shares of Government Mortgage Fund
to its shareholders under Section 361(c)(1) of the Code; (iii) under
Section 1032 of the Code, no gain or loss will be recognized to
Government Mortgage Fund on the receipt of assets of Mercury Fund in
exchange for Government Mortgage Fund shares; (iv) in accordance with
Section 354(a)(1) of the Code, no gain or loss will be recognized to the
shareholders of Mercury Fund on the receipt of Corresponding Shares of
Government Mortgage Fund in exchange for their shares of Mercury Fund;
(v) in accordance with Section 362(b) of the Code, the tax basis of
Mercury Fund's assets in the hands of Government Mortgage Fund will be
the same as the tax basis of such assets in the hands of Mercury Fund
immediately prior to the consummation of the Reorganization; (vi) in
accordance with Section 358 of the Code, immediately after the
Reorganization, the tax basis of the Corresponding Shares of Government
Mortgage Fund received by the shareholders of Mercury Fund in the
Reorganization (including fractional shares to which they may be
entitled) will be equal to the tax basis of the shares of Mercury Fund
surrendered in exchange; (vii) in accordance with Section 1223 of the
Code, a stockholder's holding period for the Corresponding Shares of
Government Mortgage Fund (including fractional shares to which he or she
may be entitled) will be determined by including the period for which
such stockholder held Mercury Fund shares exchanged therefor, provided,
that such shares were held as a capital asset; (viii) in accordance with
Section 1223 of the Code, Government Mortgage Fund's holding period with
respect to Mercury Fund's assets transferred will include the period for
which such assets were held by Mercury Fund; and (ix) the taxable year of
Mercury Fund will end on the effective date of the Reorganization, and
pursuant to Section 381(a) of the Code and regulations thereunder,
Government Mortgage Fund will succeed to and take into account certain
tax attributes of Mercury Fund, such as earnings and profits, capital
loss carryovers and method of accounting.
(h) That all proceedings taken by Government Mortgage Fund and its
counsel in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance to Mercury
Fund and its counsel.
(i) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Government Mortgage Fund,
contemplated by the Commission.
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(j) That Mercury Fund shall have received from Deloitte & Touche LLP
a letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior
to the Closing Date, in form and substance satisfactory to it, to the
effect that (i) they are independent public accountants with respect to
Government Mortgage Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder; (ii) in their
opinion, the financial statements and supplementary information of
Government Mortgage Fund included or incorporated by reference in the
N-14 Registration Statement and reported on by them comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; and (iii) on
the basis of limited procedures agreed upon by Mercury Fund and described
in such letter (but not an examination in accordance with generally
accepted auditing standards) consisting of a reading of any unaudited
interim financial statements and unaudited supplementary information of
Government Mortgage Fund included in the N-14 Registration Statement, and
inquiries of certain officials of Government Mortgage Fund responsible
for financial and accounting matters, nothing came to their attention
that caused them to believe that (a) such unaudited financial statements
and related unaudited supplementary information do not comply as to form
in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity
with generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements,
or (c) such unaudited supplementary information is not fairly stated in
all material respects in relation to the unaudited financial statements
taken as a whole; and (iv) on the basis of limited procedures agreed upon
by Mercury Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the information
relating to Government Mortgage Fund appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages
derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting
records of Government Mortgage Fund or from schedules prepared by
officials of Government Mortgage Fund having responsibility for financial
and reporting matters and such information is in agreement with such
records, schedules or computations made therefrom.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of
Government Mortgage Fund or would prohibit the Reorganization.
(l) That Mercury Fund shall have received from the Commission such
orders or interpretations as Sidley Austin Brown & Wood llp, as counsel
to Mercury Fund, deems reasonably necessary or desirable under the 1933
Act and the 1940 Act in connection with the Reorganization, provided that
such counsel shall have requested such orders as promptly as practicable,
and all such orders shall be in full force and effect.
I-16
9. Government Mortgage Fund Conditions.
The obligations of Government Mortgage Fund hereunder with respect to
Mercury Fund shall be subject to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by (i) the Board of Government
Mortgage Fund; (ii) the Board of Asset Program; and (iii) by the
affirmative vote of the holders of a majority of the shares of common
stock of Mercury Fund issued and outstanding and entitled to vote
thereon, voting together as a single class; and that Mercury Fund shall
have delivered to Government Mortgage Fund a copy of the resolution
approving this Agreement adopted by Mercury Fund's Board, and a
certificate setting forth the vote that Mercury Fund's shareholders
obtained, each certified by the Secretary of Mercury Fund.
(b) That Mercury Fund shall have furnished to Government Mortgage
Fund a statement of its assets and liabilities, with values determined as
provided in Section 4 of this Agreement, together with a schedule of
investments with its respective dates of acquisition and tax costs, all
as of the Valuation Time, certified on Mercury Fund's behalf by its
President (or any Vice President) and its Treasurer, and a certificate of
both such officers, dated the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date there has been no material
adverse change in the financial position of Mercury Fund since the date
of Mercury Fund's most recent Annual or Semi-Annual Report, as
applicable, other than changes in Mercury Fund Investments since that
date or changes in the market value of Mercury Fund Investments.
(c) That Mercury Fund shall have furnished to Government Mortgage
Fund a certificate signed by its President (or any Vice President) and
its Treasurer, dated the Closing Date, certifying that as of the
Valuation Time and as of the Closing Date all representations and
warranties of Mercury Fund made in this Agreement are true and correct in
all material respects with the same effect as if made at and as of such
dates and Mercury Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
at or prior to such dates.
(d) That Mercury Fund shall have delivered to Government Mortgage
Fund a letter from Deloitte & Touche LLP, dated the Closing Date, stating
that such firm has performed a limited review of the Federal, state and
local income tax returns of Mercury Fund for the period ended January 31,
2002 (which returns were prepared and filed by Mercury Fund), and that
based on such limited review, nothing came to their attention which
caused them to believe that such returns did not properly reflect, in all
material respects, the Federal, state and local income taxes of Mercury
Fund for the period covered thereby; and that for the period from
February 1, 2002 to and including the Closing Date and for any taxable
year of Mercury Fund ending upon liquidation, such firm has performed a
limited review to ascertain the amount of applicable Federal, state and
local taxes, and has determined that either such amount has been paid or
reserves established for payment of such taxes, this review to be based
on unaudited financial data; and that based on such limited review,
nothing has come to their attention which caused them to believe that the
taxes paid or reserves set aside for payment of such taxes
I-17
were not adequate in all material respects for the satisfaction of
Federal, state and local taxes for the period from February 1, 2002 to
and including the Closing Date and for any taxable year of Mercury Fund
ending upon the liquidation or that Mercury Fund would not continue to
qualify as a regulated investment company for Federal income tax purposes
for the tax years in question.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That Mercury Fund shall have delivered to Government Mortgage
Fund an opinion of Sidley Austin Brown & Wood LLP, as counsel to Asset
Program, in form and substance satisfactory to Government Mortgage Fund
and dated the Closing Date, to the effect that (i) Asset Program is a
corporation duly organized, validly existing and in good standing in
conformity with the laws of the State of Maryland; (ii) this Agreement
has been duly authorized, executed and delivered by Asset Program, and
represents a valid and binding contract, enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy,
insolvency, moratorium, fraudulent conveyance and similar laws relating
to or affecting creditors' rights generally and court decisions with
respect thereto; provided, such counsel shall express no opinion with
respect to the application of equitable principles in any proceeding,
whether at law or in equity; (iii) the execution and delivery of this
Agreement by Asset Program does not, and the consummation of the
Reorganization will not, violate any material provisions of Maryland law
or of the Articles of Incorporation, as amended or supplemented, the
by-laws, or any agreement (known to such counsel) to which Asset Program
is a party or by which Mercury Fund is bound, except insofar as the
parties have agreed to amend any such provision as a condition precedent
to the Reorganization; (iv) Asset Program has the power to sell, assign,
transfer and deliver the assets transferred by it hereunder and, upon
consummation of the Reorganization in accordance with the terms of this
Agreement, Asset Program will have duly transferred such assets and
liabilities in accordance with this Agreement; (v) to the best of such
counsel's knowledge, no consent, approval, authorization or order of any
United States federal court, Maryland state court or governmental
authority is required for the consummation by Mercury Fund of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder Maryland law and such as may be required under
state securities laws; (vi) the N-14 Registration Statement, as of its
effective date, appears on its face to be appropriately responsive in all
material respects to the requirements of the 1933 Act, the 1934 Act and
the 1940 Act and the published rules and regulations of the Commission
thereunder insofar as it relates to Mercury Fund; (vii) the descriptions
in the N-14 Registration Statement of statutes, legal and governmental
proceedings and contracts and other documents insofar as they relate to
Mercury Fund are accurate and fairly present the information required to
be shown; (viii) such counsel does not know of any statutes, legal or
governmental proceedings or contracts or other documents related to the
Reorganization insofar as they relate to Mercury Fund of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (ix)
Asset Program, to the knowledge of such counsel, is not required to
qualify to do business as a foreign corporation in any
I-18
jurisdiction except as may be required by state securities laws, and
except where it has so qualified or the failure so to qualify would not
have a material adverse effect on Mercury Fund or its shareholders; (x)
such counsel does not have actual knowledge of any material suit, action
or legal or administrative proceeding pending or threatened against Asset
Program, the unfavorable outcome of which would materially and adversely
affect Mercury Fund; (xi) all actions required to be taken by Asset
Program to authorize this Agreement and to effect the Reorganization have
been duly authorized by all necessary corporate actions; and (xii) such
opinion is solely for the benefit of Government Mortgage Fund and its
Board Members and officers. Such opinion also shall state that (a) while
such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement,
nothing has come to their attention that has caused them to believe that,
on the effective date of the N-14 Registration Statement, (1) the N-14
Registration Statement contained any untrue statement of a material fact
or omitted to state any material fact relating to Mercury Fund required
to be stated therein or necessary to make the statements therein not
misleading; and (2) the Proxy Statement and Prospectus included in the
N-14 Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact relating to Mercury Fund
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (b) such
counsel does not express any opinion or belief as to the financial
statements or other financial or statistical data contained or
incorporated by reference in the N-14 Registration Statement. In giving
the opinion set forth above, Sidley Austin Brown & Wood LLP may state
that it is relying on certificates of officers of Asset Program with
regard to matters of fact and certain certificates and written statements
of governmental officials with respect to the good standing of Asset
Program.
(g) That Government Mortgage Fund shall have received an opinion of
Sidley Austin Brown & Wood LLP with respect to the matters specified in
Section 8(g) of this Agreement.
(h) That Government Mortgage Fund shall have received from Deloitte
& Touche LLP a letter dated within three days prior to the effective date
of the N-14 Registration Statement and a similar letter dated within five
days prior to the Closing Date, in form and substance satisfactory to
Government Mortgage Fund, to the effect that (i) they are independent
public accountants with respect to Mercury Fund within the meaning of the
1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary
information of Mercury Fund included or incorporated by reference in the
N-14 Registration Statement and reported on by them comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by Mercury Fund and Government
Mortgage Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of Mercury Fund included in the N-14
Registration Statement, and inquiries of certain officials of Mercury
Fund responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited
financial statements
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and related unaudited supplementary information do not comply as to form
in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity
with generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements,
or (c) such unaudited supplementary information is not fairly stated in
all material respects in relation to the unaudited financial statements
taken as a whole; and (iv) on the basis of limited procedures agreed upon
by Government Mortgage Fund and Mercury Fund and described in such letter
(but not an examination in accordance with generally accepted auditing
standards), the information relating to Mercury Fund appearing in the
N-14 Registration Statement, which information is expressed in dollars
(or percentages derived from such dollars) (with the exception of
performance comparisons, if any), if any, has been obtained from the
accounting records of Mercury Fund or from schedules prepared by
officials of Mercury Fund having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(i) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Mercury Fund, contemplated
by the Commission.
(j) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, and no other
legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of
Mercury Fund or would prohibit the Reorganization.
(k) That Government Mortgage Fund shall have received from the
Commission such orders or interpretations as Sidley Austin Brown & Wood
LLP, as counsel to Government Mortgage Fund, deems reasonably necessary
or desirable under the 1933 Act and the 1940 Act in connection with the
Reorganization, provided, that such counsel shall have requested such
orders as promptly as practicable, and all such orders shall be in full
force and effect.
(l) That all proceedings taken by Mercury Fund and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Government Mortgage Fund.
(m) That prior to the Closing Date, Mercury Fund shall have declared
a dividend or dividends which, together with all such previous dividends,
shall have the effect of distributing to its shareholders all of its
investment company taxable income for the period to and including the
Closing Date, if any (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized to and
including the Closing Date.
I-20
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of Mercury Fund) prior to the Closing Date, or the Closing
Date may be postponed, (i) by mutual consent of the Boards of Government
Mortgage Fund and Mercury Fund; (ii) by the Board of Mercury Fund if any
condition of Mercury Fund's obligations set forth in Section 8 of this
Agreement has not been fulfilled or waived by such Board; or (iii) by the
Board of Government Mortgage Fund if any condition of Government Mortgage
Fund's obligations with respect to the Reorganization set forth in
Section 9 of this Agreement has not been fulfilled or waived by such
Board.
(b) If the transactions contemplated by this Agreement with respect
to the Reorganization have not been consummated by March 31, 2003, this
Agreement automatically shall terminate on that date unless a later date
is mutually agreed to by the Boards of Government Mortgage Fund and
Mercury Fund.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof with respect to the Reorganization, the same shall
become void and have no further effect, and there shall not be any
liability on the part of Government Mortgage Fund and Mercury Fund or
persons who are their directors, trustees, officers, agents or
shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of either Fund
(whichever is entitled to the benefit thereof), if, in the judgment of
such Board after consultation with its counsel, such action or waiver
will not have a material adverse effect on the benefits intended under
this Agreement to the shareholders of the Fund, on behalf of which such
action is taken. In addition, the Board of each Fund has delegated to FAM
the ability to make non-material changes to the transaction if FAM deems
it to be in the best interests of that Fund to do so.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement relating to Government Mortgage Fund
and Mercury Fund shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Government Mortgage Fund
nor Mercury Fund nor any of their officers, directors or trustees, agents
or shareholders shall have any liability with respect to such
representations or warranties after the Closing Date. This provision
shall not protect any officer, director or trustee, agent or shareholder
of any Fund against any liability to the entity for which that officer,
director or trustee, agent or shareholder so acts or to its shareholders,
to which that officer, director or trustee, agent or shareholder
otherwise would be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties in the conduct of
such office.
(f) If any order or orders of the Commission with respect to this
Agreement relating to the Reorganization shall be issued prior to the
Closing Date and shall impose
I-21
any terms or conditions which are determined by action of the Boards of
Government Mortgage Fund and Mercury Fund to be acceptable, such terms
and conditions shall be binding as if a part of this Agreement without
further vote or approval of the shareholders of Mercury Fund unless such
terms and conditions shall result in a change in the method of computing
the number of shares of Government Mortgage Fund to be issued to Mercury
Fund in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the
shareholders of Mercury Fund prior to the meeting at which the
Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless Mercury Fund promptly shall call a
special meeting of shareholders at which such conditions so imposed shall
be submitted for approval.
11. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with
the issuance of any shares to any person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), Government Mortgage Fund will
cause to be affixed upon the certificate(s) issued to such person (if
any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND (OR ITS
STATUTORY SUCCESSOR) (THE "FUND") OR ITS PRINCIPAL UNDERWRITER UNLESS
(1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE
UNDER THE SECURITIES ACT OF 1933 OR (2) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT
REQUIRED.
and, further, that stop transfer instructions will be issued to Government
Mortgage Fund's transfer agent with respect to such shares. Mercury Fund
will provide Government Mortgage Fund on the Closing Date with the name of
any stockholder who is to the knowledge of Mercury Fund an affiliate of
Mercury Fund on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each
of the parties, notwithstanding any investigation made by them or on
their behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be made by hand
delivery, prepaid certified mail or overnight service, addressed to any
Fund, in each case at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, Attn: Terry K. Glenn, President.
I-22
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization,
except as provided in Section 10(d) may not be changed other than by a
letter of agreement signed by each party to the Reorganization and shall
be governed by and construed in accordance with the laws of the State of
New York applicable to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended and
supplemented, of Asset Program are on file with the State Department of
Assessments and Taxation of the State of Maryland and notice is hereby
given that this instrument is executed on behalf of the Board Members of
Asset Program.
(f) It is expressly agreed that the obligations of Government
Mortgage Fund hereunder shall not be binding upon any of its Board
Members, shareholders, nominees, officers, agents, or employees
personally, but shall bind only the trust property of Government Mortgage
Fund as provided in such Fund's Declaration of Trust. The execution and
delivery of this Agreement has been authorized by the Board of Government
Mortgage Fund and signed by authorized officers of Government Mortgage
Fund, acting as such, and neither such authorization by such Board
Members, nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of
Government Mortgage Fund as provided in such Fund's Declaration of Trust.
I-23
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH U.S. GOVERNMENT
MORTGAGE FUND
By:______________________________
Attest:
- ------------------------------------
Secretary
THE ASSET PROGRAM, INC.
By:______________________________
Attest:
- ------------------------------------
Secretary
I-24
EXHIBIT II
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND
RECORD OWNERS OF SHARES OF GOVERNMENT MORTGAGE FUND AND MERCURY FUND
The following tables provide information about the persons or entities who, to
the knowledge of the relevant Fund, owned beneficially or of record 5% or more
of any class of that Fund's outstanding shares as of June 28, 2002:*
Government Mortgage Fund
- ------------------------
Percentage Percentage
Name and Address** of Class of Fund
- -------------------------------------------------------------------------------
Merrill Lynch Trust Co., FSB+ 14.77% of .022% of Fund
TTEE FBO Honda of America MFG., Inc. Class A
Merrill Lynch Trust Co., FSB+ 12.36% of .018% of Fund
TTEE FBO WorldCom 401(k) Salary Svgs Class A
Merrill Lynch Trust Co., FSB+ 10.77% of .016% of Fund
TTEE FBO Daimler Chrysler Corp Sal Class A
Merrill Lynch Trust Co., FSB+ 6.55% of .010% of Fund
TTEE FBO Daimler Chrysler Corp Hrly Class A
Mercury Fund
- ------------
Percentage Percentage
Name and Address*** of Class of Fund
- -------------------------------------------------------------------------------
RAM Group, Inc. 15.85% of .019% of Fund
Employee Svgs & Retirement Plan++ Class A
Arthur W. John IRRA++ 10.51% of .013% of Fund
FBO Arthur W. John Class A
Merrill Lynch Trust Co., FSB+ 10.51% of .013% of Fund
TTEE FBO The Jones Company P/S Plan Class A
Africare++ 9.72% of .012% of Fund
Class A
Alliance of American Insurers++ 8.32% of .010% of Fund
Retirement Plan U/A 03/01/1980 Class A
Merrill Lynch Trust Co., FSB+ 38.58% of .019% of Fund
TTEE FBO Merrill Lynch ATTN: East Region Class I
Merrill Lynch Deferred Compensation 2002 6.19% of .003% of Fund
700843 Class I
TTEE: Merrill Lynch
ATTN: M. Nordfords
- ---------------------------
* Shareholder information will be provided as of the Record Date in a
subsequent filing.
** Unless otherwise indicated, the address for each shareholder listed above is:
c/o Merrill Lynch U.S. Government Mortgage Fund, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
***Unless otherwise indicated, the address for each shareholder listed above is:
c/o Mercury U.S. Government Securities Fund, 800 Scudders Mill Road, Plainsboro,
New Jersey 08536.
+ Represents ownership by pension, 401(k) or similar retirement plans. Merrill
Lynch Trust Company is the record owner only. The underlying plan participants
have the authority to vote and dispose of the shares. To the knowledge of the
Fund, no underlyng plan participant is the beneficial owner of 5% or more of
any class of shares of the Fund.
++ Person or entity is the beneficial owner of the Fund shares.
II-1
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND
P.O. Box 9011
Princeton, New Jersey 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Combined Proxy Statement and Prospectus of
Mercury U.S. Government Securities Fund ("Mercury Fund"), a series of The
Asset Program, Inc. ("Asset Program"), and Merrill Lynch U.S. Government
Mortgage Fund ("Government Mortgage Fund"), dated July 24, 2002 (the "Proxy
Statement and Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling Government
Mortgage Fund at 1-800-995-6526, or by writing to Government Mortgage Fund
at the above address. This Statement of Additional Information has been
incorporated by reference into the Proxy Statement and Prospectus.
Further information about Government Mortgage Fund is contained in the
Statement of Additional Information of Government Mortgage Fund, dated
December 19, 2001 (the "Government Mortgage Fund Statement"), which is
incorporated by reference into and accompanies this Statement of Additional
Information.
The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the prospectus relating to Government
Mortgage Fund, the Government Mortgage Fund Statement, the prospectus of
Mercury Fund, the statement of additional information relating to Mercury
Fund, other material incorporated by reference and other information regarding
Government Mortgage Fund and Mercury Fund.
---------------------------
The date of this Statement of Additional Information is July 24, 2002
TABLE OF CONTENTS
General Information 3
Financial Statements 3
Information Pertaining to Trustees and Officers of Government
Mortgage Fund 3
2
GENERAL INFORMATION
Stockholders of Mercury Fund are being asked to approve the acquisition
by Government Mortgage Fund of substantially all of the assets, and the
assumption of substantially all of the liabilities, of Mercury Fund in
exchange solely for an equal aggregate value of newly issued shares of
beneficial interest, with a par value of $.10 per share, of Government
Mortgage Fund and the subsequent distribution of Corresponding Shares (defined
below) of Government Mortgage Fund to Mercury Fund stockholders in proportion
to such stockholders' interest in Mercury Fund. Thereafter Asset Program will
terminate Mercury Fund as a series of Asset Program under Maryland law. The
transaction described in this paragraph is referred to herein as the
"Reorganization."
Generally, the assets transferred by Mercury Fund to Government Mortgage
Fund will equal all investments of Mercury Fund held in its portfolio after
the close of business on the New York Stock Exchange on the business day prior
to the date the Reorganization takes place ("Valuation Time") and all other
assets of Mercury Fund as of such time.
Shares of Government Mortgage Fund will be distributed to stockholders of
Mercury Fund as follows: (a) holders of Class I, A, B and C shares of Mercury
Fund who own such shares as of the Valuation Time will be entitled to receive
Class A, D, B and C shares, respectively, of Government Mortgage Fund
("Corresponding Shares"). The aggregate net asset value of the Corresponding
Shares of Government Mortgage Fund to be received by each stockholder of
Mercury Fund will equal the aggregate net asset value of the shares of Mercury
Fund owned by such stockholder as of the Valuation Time.
A special meeting of the stockholders of Mercury Fund will be held at the
offices of Fund Asset Management, L.P. ("FAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey on October 8, 2002 at 9:30 a.m. Eastern time to
consider the Reorganization.
For detailed information about the Reorganization, stockholders of
Mercury Fund should refer to the Proxy Statement and Prospectus. For further
information about Government Mortgage Fund, stockholders should refer to the
Government Mortgage Fund Statement, which accompanies this Statement of
Additional Information and is incorporated by reference herein.
FINANCIAL STATEMENTS
Government Mortgage Fund
Audited financial statements and accompanying notes for the fiscal year
ended August 31, 2001 and the independent auditors' report thereon, dated
October 12, 2001, of Government Mortgage Fund are incorporated herein by
reference from Government Mortgage Fund's Annual Report, which accompanies
this Statement of Additional Information. Unaudited financial statements for
the six months ended February 28, 2002 are incorporated herein by reference
from Government Mortgage Fund's Semi-Annual Report which accompanies this
Statement of Additional Information.
Mercury Fund
Audited financial statements and accompanying notes for the fiscal year
ended January 31, 2002 and the independent auditors' report thereon, dated
March 14, 2002, of Mercury Fund are incorporated herein by reference from
Mercury Fund's Annual Report, which accompanies this Statement of Additional
Information.
INFORMATION PERTAINING TO TRUSTEES OF GOVERNMENT MORTGAGE FUND
Certain biographical and other information relating to each Trustee who
is not an "interested person" (as defined in the Investment Company Act) of
Government Mortgage Fund is set forth below, including information relating to
the number of funds advised by FAM or its affiliate, Merrill Lynch Investment
Managers, L.P. ("MLIM" and together with FAM, the "FAM/MLIM-Advised Funds"),
for which each Trustee of Government Mortgage Fund also serves as Trustee or
Director:
3
Position(s)
Held with
Government Term of Office* Number of
Mortgage and Length of Principal Occupation FAM/MLIM-Advised Public
Name, Address** and Age Fund Time Served During Past Five Years Funds Overseen Directorships
- -------------------------- ------------ --------------- ------------------------- ------------------ ----------------
James H. Bodurtha (58) Trustee Trustee since Director and Executive 39 registered None
2002 Vice President, The investment
China Business Group, companies
Inc. since 1996; consisting of 68
Chairman and Chief portfolios
Executive
Officer, China
Enterprise Management
Corporation from 1993
to 1996; Director and
Chairman, Berkshire
Holding Corporation
since 1980; Partner,
Squire, Sanders &
Dempsey from 1980 to
1993.
Joe Grills (67) Trustee Trustee since Member of the Committee 42 registered Kimco Realty
1994 of Investment of investment Corporation
Employee Benefit Assets companies
of the Association of consisting of 71
Financial portfolios
Professionals
("CIEBA")
since 1986; Member of
CIEBA's Executive
Committee since 1988
and its Chairman from
1991 to 1992;
Assistant Treasurer
of International
Business Machines
Corporation ("IBM")
and Chief Investment
Officer of IBM
Retirement Funds from
1986 to 1993; Member
of the Investment
Advisory Committee of
the State of New York
Common Retirement
Fund since 1989;
Member of the
Investment Advisory
Committee of the
Howard Hughes Medical
Institute from 1997
to 2000; Director,
Duke Management
Company since 1992
and Vice Chairman
thereof since 1998;
Director, LaSalle
Street Fund from 1995
to 2001; Director,
Kimco Realty
Corporation since
1997; Member of the
Investment Advisory
Committee of the
Virginia Retirement
System since 1998;
Director, Montpelier
Foundation since 1998
and its Vice Chairman
since 2000; 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.
4
Position(s)
Held with
Government Term of Office* Number of
Mortgage and Length of Principal Occupation FAM/MLIM-Advised Public
Name, Address** and Age Fund Time Served During Past Five Years Funds Overseen Directorships
- -------------------------- ------------ --------------- ------------------------- ------------------ ----------------
Herbert I. London (63) Trustee Trustee since John M. Olin Professor 39 registered None
2002 of Humanities, New York investment
University since 1993 companies
and Professor thereof consisting of 68
since 1980; portfolios
President,
Hudson Institute
since 1997 and
Trustee thereof since
1980; Dean, Gallatin
Division of New York
University from 1976
to 1993;
Distinguished Fellow,
Herman Kahn Chair,
Hudson Institute from
1984 to 1985;
Director, Damon Corp.
from 1991 to 1995;
Overseer, Center for
Naval Analyses from
1983 to 1993; Limited
Partner, Hypertech LP
since 1996.
Andre F. Perold (50) Trustee Trustee since Harvard Business 39 registered None
2002 School: George Gund investment
Professor of Finance and companies
Banking since 2000; consisting of 68
Senior Associate Dean, portfolios
Director of Faculty
Recruiting since 2001;
Finance Area Chair from
1996 to 2001; Sylvan C.
Coleman Professor of
Financial Management
from 1993 to 2000;
Trustee, Commonfund
from 1989 to 2001;
Director, Genbel
Securities Limited
and Gensec Bank since
1999; Director,
Stockback.com since
2001; Director,
Sanlam Limited since
2001; Director,
Sanlam Investment
Management from 1999
to 2001; Director,
Bulldogresearch.com
from 2000 to 2001;
Director, Quantec
Limited from 1991 to
1999.
Roberta Cooper Ramo (59) Trustee Trustee since Shareholder, Modrall, 39 registered None
2002 Sperling, Roehl, Harris investment
& Sisk, P.A. since 1993; companies
President, American Bar consisting of 68
Association from 1995 to portfolios
1996 and Member of the
Board of Governors
thereof from 1994 to
1997; Partner, Poole,
Kelly & Ramo, Attorneys
at Law, P.C. from 1977
to 1993; Director of
Coopers Inc. since
1999; Director of
ECMC Group (service
provider to students,
schools and lenders)
since 2001; Director,
United New Mexico
Bank (now Wells
Fargo) from 1983 to
1988; Director, First
National Bank of New
Mexico (now First
Security) from 1975
to 1976.
5
Position(s)
Held with
Government Term of Office* Number of
Mortgage and Length of Principal Occupation FAM/MLIM-Advised Public
Name, Address** and Age Fund Time Served During Past Five Years Funds Overseen Directorships
- -------------------------- ------------ --------------- ------------------------- ------------------ ----------------
Robert S. Salomon, Jr. (65) Trustee Trustee since Principal of STI 42 registered None
1996 Management (investment investment
advisor) since 1994; companies
Chairman and CEO of consisting of 71
Salomon Brothers Asset portfolios
Management Inc. from
1992 to 1995; Chairman
of Salomon Brothers
Equity Mutual Funds from
1992 to 1995; regular
columnist with Forbes
Magazine since 1992;
Director of Stock
Research and U.S. Equity
Strategist at Salomon
Brothers Inc. from 1975
to 1991; Trustee,
Commonfund from 1980 to
2001.
Melvin R. Seiden (71) Trustee Trustee since Director of Silbanc 42 registered None
1984 Properties, Ltd. (real investment
estate, investment and companies
consulting) since 1987; consisting of 71
Chairman and President portfolios
of Seiden & de Cuevas,
Inc. (private investment
firm) from 1964 to 1987.
Stephen R. Swensrud (68) Trustee Trustee since Chairman of Fernwood 42 registered None
1984 Advisors (investment investment
adviser) since 1996; companies
Principal of Fernwood consisting of 71
Associates (financial portfolios
consultant) since 1975;
Chairman of RPP
Corporation
(manufacturing) since
1978; Director,
International Mobile
Communications, Inc.
(telecommunications)
since 1998.
- ------------------
* Each Trustee serves until his or her successor is elected or qualified, or
until his or her death or resignation, or removal as provided in Government
Mortgage Fund's by-laws or charter or by statute or until December 31 of
the year in which he or she turns 72.
** The address of each Trustee is P.O. Box 9011, Princeton, New Jersey
08543-9011.
6
Certain biographical and other information relating to the Trustee who is
an "interested person" as defined in the Investment Company Act, and other
officers of Government Mortgage Fund is set forth below.
Position(s)
Held with
Government Term of Office* Number of
Mortgage and Length of Principal Occupation FAM/MLIM-Advised Public
Name, Address+ and Age Fund Time Served During Past Five Years Funds Overseen Directorships
- -------------------------- ------------ --------------- ------------------------- ------------------ ----------------
Terry K. Glenn (61)++ Trustee President* and Chairman (Americas 116 registered None
and Trustee** since Region) of FAM and MLIM investment
President 1999 (such terms as used companies
herein include their consisting of 184
corporate portfolios
predecessors)
since 2000; Executive
Vice President of FAM
and MLIM since 1983;
President of Merrill
Lynch Mutual Funds
since 1999; President
of FAM Distributors,
Inc. ("FAMD") since
1986 and Director
thereof since 1991;
Executive Vice
President and
Director of Princeton
Services, Inc.
("Princeton Services")
since 1993; President
of Princeton
Administrators, L.P.
("Princeton
Administrators")
since 1988; Director
of Financial Data
Services, Inc. since
1985.
Donald C. Burke (42) Vice Vice President First Vice President of 117 registered None
President since 1993 and FAM and MLIM since 1997 investment
and Treasurer since and the Treasurer companies
Treasurer 1999*** thereof since 1999; consisting of 185
Senior Vice President portfolios
and Treasurer of
Princeton Services
since 1999; Vice
President of FAMD
since 1999; Vice
President of FAM and
MLIM from 1990 to
1997; Director of
Taxation of MLIM
since 1990.
Teresa Giacino (39) Senior Senior Vice Vice President of MLIM 2 registered None
Vice President since since 1992. investment companies
President 2002 and consisting of 2
and Portfolio portfolios
Portfolio Manager since
Manager 2001***
Jeffrey B. Hewson (50) Senior Senior Vice Director (Global Fixed 2 registered None
Vice President since Income) of MLIM since investment
President 2000*** 1998; Vice President of companies
MLIM from 1989 to 1998; consisting of 2
Portfolio Manager of portfolios
MLIM since 1985
Bradley J. Lucido (36) Secretary Secretary since Director of MLIM since 9 registered None
1999*** 2002; Vice President of investment
FAM since 1999; Attorney companies
with FAM since 1995; consisting of 8
Attorney in private portfolios
practice from 1991 to
1995
Frank Viola (37) Senior Senior Vice Director and Portfolio 4 registered None
Vice President since Manager of MLIM since investment
President 2002 and 1997; Treasurer of companies
and Portfolio Merrill Lynch Bank & consisting of 4
Portfolio Manager since Trust from 1996 to 1997 portfolios
Manager 2001*** and Vice President of
Merrill Lynch Capital
Markets from 1993 to
1996.
- ------------------
+ The address for Mr. Glenn and each officer listed is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
7
++ Mr. Glenn is an "interested person," as defined in the Investment Company
Act, of the Fund based on his position with FAM, MLIM, FAMD, Princeton
Services and Princeton Administrators.
* Mr. Glenn was elected President of the Fund in 1999. Prior to that he
served as Executive Vice President of the Fund.
** Each Trustee serves until his or her successor is elected or qualified,
or until his or her death or resignation, or removal as provided in
Government Mortgage Fund's by-laws or charter or by statute, or until
December 31 of the year in which he or she turns 72.
*** Elected by and serves at the pleasure of the Board of Trustees of
Government Mortgage Fund.
Share Ownership. Information relating to each Trustee's share ownership
in Government Mortgage Fund and in all registered funds in the Merrill Lynch
family of funds that are overseen by the respective Trustee ("Supervised
Merrill Lynch Funds") as of June 28, 2002 is set forth in the chart below:
Aggregate Dollar
Range of Equity in Aggregate Dollar Range of
Government Mortgage Securities in Supervised
Name Fund Merrill Lynch Funds
- -------- ------------------- -------------------------
Interested Trustee:
Terry K. Glenn.............................................. None Over $100,000
Non-Interested Trustees:
James H. Bodurtha........................................... None $50,001 - $100,000
Joe Grills.................................................. None Over $100,000
Herbert I. London........................................... None $50,001 - $100,000
Andre F. Perold............................................. None Over $100,000
Roberta Cooper Ramo......................................... None $50,001 - $100,000
Melvin R. Seiden............................................ None $1 - $10,000
Robert S. Salomon, Jr....................................... None None
Stephen R. Swensrud......................................... None None
As of June 28, 2002, the Trustees and officers of Government Mortgage
Fund as a group (14 persons) owned an aggregate of less than 1% of the
outstanding shares of Government Mortgage Fund. At such date, Mr. Glenn, a
Trustee and officer of Government Mortgage Fund, and the other officers of
Government Mortgage Fund owned an aggregate of less than 1% of the outstanding
shares of common stock of Merrill Lynch & Co., Inc. (ML&Co."). As of June 30,
2002, none of the non-interested Trustees of Government Mortgage Fund nor any
of their immediate family members owned beneficially or of record any
securities of ML&Co.
Compensation of Trustees
Government Mortgage Fund pays each non-interested Trustee, for services
to Government Mortgage Fund, a fee of $2,500 per year plus $625 per in-person
meeting attended, together with each individual's actual out-of-pocket
expenses relating to attendance at meetings. Government Mortgage Fund also
compensates members of the Audit Committee, which consists of all of the
non-interested Trustees at the rate of $2,500 annually for service to
Government Mortgage Fund plus $625 per committee meeting attended. The
committee met four times during the fiscal year ended August 31, 2001.
The following table sets forth the compensation earned by the
non-interested Trustees for the fiscal year ended August 31, 2001 and the
aggregate compensation paid to them by MLIM/FAM-Advised funds for the calendar
year ended December 31, 2001.
8
Pension or Aggregate
Retirement Compensation
Benefits Accrued from Government
Compensation as Part of Estimated Mortgage Fund
Position from Government Annual and Other
with Government Government Mortgage Fund Benefits upon MLIM/FAM-Advised
Name Mortgage Fund Mortgage Fund Expenses Retirement Funds(1)
- ------- ---------------- ---------------- ----------------- ---------------- --------------------
James H. Bodurtha*......... Trustee None None None $160,000
Joe Grills................. Trustee $16,500 None None $259,500
Herbert I. London*......... Trustee None None None $160,000
Andre F. Perold*........... Trustee None None None $160,000
Roberta Cooper Ramo*....... Trustee None None None $160,000
Robert S. Salomon, Jr...... Trustee $16,500 None None $222,000
Melvin R. Seiden........... Trustee $16,500 None None $222,000
Stephen B. Swensrud........ Trustee $16,500 None None $406,083
- ----------------
* Ms. Ramo and Messrs. Bodurtha, London and Perold were elected to serve as
Trustees of Government Mortgage Fund on April 15, 2002.
9
PART C
OTHER INFORMATION
Item 15. Indemnification.
Section 5.3 of the Declaration of Trust of Merrill Lynch U.S. Government
Mortgage Fund (the "Registrant") provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties, and as counsel fees) reasonably incurred by him in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been such a trustee, officer, employee or agent, except with respect to any
matter as to which he shall have been adjudicated to have acted in bad faith,
willfull misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise payment
by such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
good faith and reasonable belief as to the best interests of the Trust, had
been adjudicated, it would have been adjudicated in favor of such person. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no Person may
satisfy any right of indemnity or reimbursement granted herein or in Section
5.1 or to which he may be otherwise entitled except out of the property of the
Trust, and no shareholder shall be personally liable to any Person with
respect to any claim for indemnity or reimbursement or otherwise. The Trustees
may make advance payments in connection with indemnification under this
Section 5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification moneys for
actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must
be limited to amounts used, or to be used, for the preparation or presentation
of a defense to the action, including costs connected with the preparation of
a settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to Trustees,
officers and controlling persons of the Registrant and the principal
underwriter pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person or the principal underwriter in connection with the shares
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
C-1
Item 16. Exhibits.
(1)(a) -- Declaration of Trust of the Registrant, dated July 20, 1984.(a)
(1)(b) -- Certification of Amendment, dated December 20, 1991, to Declaration of Trust.(b)
(1)(c) -- Instrument establishing Class A and Class B shares of the Registrant.(b)
(1)(d) -- Certification of Amendment, dated October 13, 1994, to Declaration of Trust and
Instrument establishing Class C and Class D shares of the Registrant.(c)
(1)(e) -- Certification of Amendment, dated April 18, 2000, to Declaration of Trust.(d)
(2) -- Amended By-Laws of the Registrant.(e)
(3) Not applicable.
(4) Form of Agreement and Plan of Reorganization between the Registrant and The Asset Program
Inc. (the "Asset Program") on behalf of Mercury U.S. Government Securities Fund ("Mercury
Fund")(f)
(5) Portions of the Declaration of Trust, as amended and supplemented, and the By-Laws of the
Registrant defining rights of stockholders of the Registrant.(g)
(6)(a) -- Management Agreement between the Registrant and Fund Asset Management, L.P.(h)
(6)(b) Supplement to Management Agreement between the Registrant and Fund Asset Management,
L.P.(i)
(7)(a) -- Form of Distribution Agreement between the Registrant and FAM Distributors, Inc. (the
"Distributor").(j)
(8) -- None.
(9) -- Custody Agreement between the Registrant and The Bank of New York.(k)
(10)(a) Form of Amended and Restated Class B Shares Distribution Plan of the Registrant. (l)
(10)(b) -- Form of Amended and Restated Class C Shares Distribution Plan of the Registrant.(l)
(10)(c) -- Form of Amended and Restated Class D Shares Distribution Plan of the Registrant.(l)
(10)(d) -- Merrill Lynch Select PricingSM System Plan pursuant to Rule l8f-3.(m)
(11) -- Opinion and Consent of Sidley Austin Brown & Wood LLP, counsel for the Registrant.
(12) -- Opinion of Sidley Austin Brown & Wood LLP, counsel for the Registrant and Asset Program.*
(13) -- Not applicable.
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(14)(b) -- Consent of Deloitte & Touche LLP, independent auditors for Asset Program.
(15) -- Not applicable.
(16) -- Power of Attorney (included on the signature page of this Registration Statement).
(17)(a) -- Prospectus dated December 19, 2001, and Statement of Additional Information dated
December 19, 2001, of the Registrant.
(17)(b) Annual Report to Stockholders of the Registrant.
(17)(c) Semi-Annual Report to Stockholders of the Registrant.
(17)(d) Prospectus dated May 29, 2002, and Statement of Additional
Information dated May 29, 2002, of Mercury Fund, a series of
Asset Program.
(17)(e) Annual Report to Stockholders of Mercury Fund, a series of Asset Program.
C-2
---------------
(a) Incorporated by reference to Exhibit 1(a) to the Pre-Effective
Amendment to the Registrant's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("Registration Statement"),
filed on July 24, 1984, and refiled with Post-Effective Amendment No.
12 on December 21, 1995 pursuant to the Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") requirements.
(b) Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment
No. 8 to the Registration Statement filed on August 8, 1984, and refiled
with Post-Effective Amendment No.12 on December 21, 1995 pursuant to
EDGAR requirements.
(c) Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment
No. 11 to the Registration Statement, filed on October 12, 1994.
(d) Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment
No. 18 to the Registration Statement, filed on November 29, 2000.
(e) Incorporated by reference to Exhibit 2(b) to Post-Effective Amendment
No. 19 to the Registration Statement, filed on December 19, 2001.
(f) Included as Exhibit I to the Proxy Statement and Prospectus contained
in the Registrant's registration statement on Form N-14.
(g) Reference is made to Article II, Section 2.3 and Article III, V, VI,
VIII, IX, X and XI of the Registrant's Declaration of Trust, filed as
Exhibit 1(a) to Post-Effective Amendment No. 12 to the Registration
Statement; and to Articles I, V and VI of Registrant's By-Laws, filed
as Exhibit (2)(b) to Post-Effective Amendment No. 19 to the
Registration Statement.
(h) Incorporated by reference to Exhibit 6 to Post-Effective Amendment No.
10 to the Registration Statement, filed on December 23, 1993.
(i) Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment
No. 11 to the Registration Statement, filed on October 12, 1994.
(j) Incorporated by reference to Exhibit 5 to Post-Effective Amendment No.
12 to the registration statement on Form N-1A, filed on July 5, 2000,
of Merrill Lynch Adjustable Rate Securities Fund, Inc. (File No.
33-40332).
(k) Incorporated by reference to Exhibit 9 to Pre-Effective Amendment No.1
to the Registration Statement filed on August 21, 1984, and refiled
with Post-Effective Amendment No. 12 on December 21, 1995 pursuant to
EDGAR requirements.
(l) Incorporated by reference to Exhibit 13 to Post-Effective Amendment No.
14 to the Registration Statement on Form N-1A of Merrill Lynch
Adjustable Rate Securities Fund, Inc. (File No. 33-40332), filed on
September 28, 2000.
(m) Incorporated by reference to Exhibit 14 to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A of Merrill Lynch
New York Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust filed on January 25, 1996.
* To be filed by Amendment
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through use of a prospectus which is
part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, as amended, the reoffering prospectus will contain information called
for by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by other items
of the applicable form.
C-3
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, an
opinion of counsel as to certain tax matters, within a reasonable time after
receipt of such opinion.
C-4
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 24th day of July, 2002.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND
(Registrant)
By: /s/ Terry K. Glenn
----------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Bradley J. Lucido or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Terry K. Glenn President and Trustee July 24, 2002
- ----------------------------------------- (Principal Executive Officer)
(Terry K. Glenn)
/s/ Donald C. Burke Vice President and Treasurer July 24, 2002
- ----------------------------------------------- (Principal Financial
(Donald C. Burke) and Accounting Officer)
/s/ James H. Bodurtha Trustee July 24, 2002
- -----------------------------------------------
(James H. Bodurtha)
/s/ Joe Grills Trustee July 24, 2002
- -----------------------------------------------
(Joe Grills)
/s/ Herbert I. London Trustee July 24, 2002
- -----------------------------------------------
(Herbert I. London)
/s/ Andre F. Perold Trustee July 24, 2002
- -----------------------------------------------
(Andre F. Perold)
/s/ Roberta Cooper Ramo Trustee July 24, 2002
- -----------------------------------------------
(Roberta Cooper Ramo)
/s/ Robert S. Salomon, Jr. Trustee July 24, 2002
- -----------------------------------------------
(Robert S. Salomon, Jr.)
/s/ Melvin R. Seiden Trustee July 24, 2002
- -----------------------------------------------
(Melvin R. Seiden)
Trustee July 24, 2002
- -----------------------------------------------
(Stephen B. Swensrud)
C-5
EXHIBIT INDEX
(11) Opinion and Consent of Sidley Austin Brown & Wood LLP
(14)(a) Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(14)(b) Consent of Deloitte & Touche LLP, independent auditors for Asset Program
(17)(a) Prospectus dated December 19, 2001, and Statement of Additional Information dated
December 19, 2001, of the Registrant
(17)(b) Annual Report to Stockholders of the Registrant.
(17)(c) Semi-Annual Report to Stockholders of the Registrant
(17)(d) Prospectus dated May 29, 2002, and Statement of Additional Information dated May 29,
2002, of Mercury Fund
(17)(e) Annual Report to Stockholders of Mercury Fund
C-6
Exhibit 11
SIDLEY AUSTIN BROWN & WOOD LLP
CHICAGO 787 SEVENTH AVE. BEIJING
---- NEW YORK, NEW YORK 10019 ----
DALLAS TELEPHONE 212 839 5300 GENEVA
---- FACSIMILE 212 839 5599 ----
LOS ANGELES www.sidley.com HONG KONG
---- ----
SAN FRANCISCO FOUNDED 1866 LONDON
---- ----
WASHINGTON, D.C. SHANGHAI
----
SINGAPORE
----
TOKYO
July 24, 2002
Merrill Lynch U.S. Government Mortgage Fund
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch U.S. Government Mortgage Fund
(the "Fund"), in connection with the proposed acquisition by the Fund of
substantially all of the assets and the assumption by the Fund of
substantially all of the liabilities of Mercury U.S. Government Securities
Fund ("Mercury Fund"), a series of The Asset Program, Inc. ("Asset Program"),
and the simultaneous distribution to Mercury Fund of newly-issued shares of
beneficial interest of the Fund, having an aggregate net asset value equal to
the aggregate net asset value of Mercury Fund, reduced by the amount of
liabilities of Mercury Fund assumed by the Fund (collectively the
"Reorganization"). This opinion is furnished in connection with the Fund's
Registration Statement on Form N-14 under the Securities Act of 1933, as
amended (the "Registration Statement"), relating to shares of beneficial
interest, par value $0.10 per share, of the Fund (the "Shares") to be issued
in the Reorganization.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale
of the Shares. In addition, we have examined and are familiar with the
Declaration of Trust of the Fund, as amended, the By-Laws of the Fund, as
amended, and such other documents as we have deemed relevant to the matters
referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and
Asset Program set forth in the joint proxy statement and prospectus
constituting a part of the Registration Statement (the "Proxy Statement and
Prospectus"), the Shares, upon issuance in the manner referred to in the
Registration Statement, for consideration not less than the par value thereof,
will be legally issued, fully paid and non-assessable shares of beneficial
interest of the Fund, except that shareholders of the Fund may under certain
circumstances be held personally liable for the Fund's obligations as
described in the Registration Statement under the caption "Comparison of the
Funds - Limitation of Liability."
This opinion letter is rendered solely to and for the benefit of the Fund
in connection with the matter described above; accordingly, it may not be
quoted or otherwise delivered to or relied upon by any other person (including,
without limitation, any person who acquires the Shares from the Fund) or used
for any other purpose without our prior written consent.
In rendering the foregoing opinion, we have relied, without independent
investigation or verification, as to all matters involving the laws of the
Commonwealth of Massachusetts, upon the opinion of Bingham McCutchen LLP.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting a part thereof.
Very truly yours,
/s/ SIDLEY AUSTIN BROWN & WOOD
2
Exhibit 14(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Investment Company Act File
No. 811-4077 on Form N-14 of Merrill Lynch U.S. Government Mortgage Fund (the
"Fund") of our report dated October 12, 2001 appearing in the August 31, 2001
Annual Report of the Fund, and to the references to us under the caption
"COMPARISON OF THE FUNDS - Financial Highlights - Government Mortgage Fund"
and "EXPERTS" appearing in the Proxy Statement and Prospectus, which is part
of such Registration Statement.
/s/ Deloitte & Touche LLP
New York, New York
July 19, 2002
Exhibit 14(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Investment Company Act File
No. 811-4077 on Form N-14 of Merrill Lynch U.S. Government Mortgage Fund of
our report dated March 14, 2002 appearing in the January 31, 2002 Annual
Report of Mercury U.S. Government Securities Fund, and to the references to us
under the caption "COMPARISON OF THE FUNDS - Financial Highlights - Mercury
Fund" and "EXPERTS" appearing in the Proxy Statement and Prospectus, which is
part of such Registration Statement.
/s/ Deloitte & Touche LLP
New York, New York
July 19, 2002
[Proxy Card Front]
THE ASSET PROGRAM, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Susan
B. Baker as proxies, each with the power to appoint his or her substitute, as
applicable, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the shares of common stock of Mercury
U.S. Government Securities Fund ("Mercury Fund"), a series of The Asset
Program, Inc. ("Asset Program"), held of record by the undersigned on August
6, 2002 at a Special Meeting of Shareholders of Asset Program holding shares
of Mercury Fund to be held on October 8, 2002, or any adjournment thereof.
This proxy, when properly executed, will be voted in the manner herein
directed by the undersigned shareholder. If no direction is made, this proxy
will be voted "for" item 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposal as marked, or if not marked, to vote "FOR" the
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 the card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-888-418-4448 or through the internet at http://www.proxyvote.com.
(Continued and to be signed on the reverse side)
2
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and
Plan of Reorganization between Merrill Lynch U.S. Government
Mortgage Fund and Asset Program.
FOR / / AGAINST / / ABSTAIN / /
2. In the discretion of such proxies, upon such other business as
properly may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. 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
person.
Dated:
----------------------------------------
X
----------------------------------------------
Signature
X
----------------------------------------------
Signature, if held jointly
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.